Why lenders must learn to navigate the middle class’s aspiration engine

Is India's middle class borrowing its way into prosperity or into peril?

A 26-year-old marketing executive in Gurgaon just bought an XUV700 worth ₹18 lakhs. Her monthly salary is ₹45,000. The car loan approved in 20 minutes through a mobile app will consume 40% of her take-home pay for the next seven years.

She's not alone.

Across India, millions are making similar calculations, betting their future income against present desires. This isn't reckless borrowing or predatory lending.

The EMI Psychology: How digital platforms are rewiring spending habits

The change is something more fundamental: the emergence of credit as the primary tool for social mobility in modern India. Enough has been written about ‘status anxiety’ -- mostly observed among the working middle class -- and reckless spending on ostentatious goods/experiences is one of the big ways it manifests.

Amazon’s changing UI is another manifestation of this larger trend. The first price indicator a buyer sees on the product page is not the product’s actual cost but its monthly EMI. This is meant to psychologically induce buyers to spend money they perhaps don’t have because a monthly EMI feels about 6 times lighter than paying for the product upfront.

It is not just another UI update Amazon has made to its product cataloguing. It is indicative of how the aspirational economy functions. Enable EMI, make things that could be slightly unaffordable, affordable.

The pattern is not limited to urban India anymore; it has swept deeper into the roots of rural India too.

The evolving credit geography

Walk through any Tier-2 city today and you'll see the physical manifestation of this shift. Gleaming car showrooms where customers discuss EMIs instead of prices. Electronics stores promote zero-interest schemes more prominently than product features. Real estate projects marketed with financing options rather than location benefits.

Semi-urban and rural consumers now account for 60% of credit originations. This geographic spread tells us something profound: aspiration has gone mainstream, reaching places where formal credit was historically unavailable.

For decades, this was the fundamental constraint holding back rural India. Without a credit history, families couldn't access formal loans. Without formal loans, they couldn't build a credit history. Local moneylenders filled the gap, but their rates often trapped borrowers in cycles that prevented genuine economic progress.

Technology broke this loop. Today, mobile device data creates credit profiles where none existed before. A farmer's mobile wallet transactions, a shopkeeper's UPI payments, and a teacher's app usage patterns all become inputs for credit assessment. The smartphone revolution did more than just connect rural India to the internet; it also connected them to formal credit.

But the story becomes more complex when you examine what's happening in urban centres. The same technology that enables inclusion has shifted borrowing behaviour among existing
customers. Loan approval times have compressed from weeks to minutes. The friction that once encouraged deliberation has disappeared.

Urban middle-class borrowers have responded predictably. Urban India is borrowing bigger now. Home loans above ₹1 crore grew 9% annually despite representing only 4% of originations. Auto loans above ₹10 lakhs constitute 22% of the market. The data suggests people are upgrading their lifestyle ambitions faster than their earning capacity.

Dreams outpacing paychecks – the income-aspiration gap

An average middle-class income has remained relatively stable around ₹10.5 lakhs annually for over a decade. Yet the cost of maintaining middle-class status has risen substantially. Quality education, healthcare, housing, and transportation all require significantly more capital than they did a generation ago.

Credit has become the solution to this gap.

Household debt now stands at 23.9% of GDP, with nearly one-third supporting consumption rather than asset creation. This isn't necessarily problematic; consumption drives economic growth, but it represents a fundamental shift in how families manage finances.

The psychological aspect deserves a little attention, too. Social media has created lifestyle benchmarks that exceed most people's immediate financial capacity. When Instagram showcases experiences and purchases that cost more than monthly salaries, credit becomes the invisible enabler of keeping up with digitally amplified expectations.

The result of this easy enabler is clearly visible in the data. Net financial savings have declined to 5.3% of GDP, the lowest level in nearly five decades. Indian households are optimizing for present consumption over future wealth accumulation, using credit to bridge the difference between aspiration and current income.

Credit card utilization doubled from ₹1.4 lakh crores in 2020 to ₹2.92 lakh crores by 2024. This growth reflects both expanded access and changing consumption patterns. Lenders wish to increase revenue through these cards, so they have heavily invested in marketing and selling as many cards as possible. More people have cards, and existing cardholders are using them more extensively. But when the foundation is weak, each delayed repayment can threaten to undo years of progress made by underwriting and inclusion measures.

Credit card payments overdue have jumped 44% in just one year, with nearly ₹34,000 crore remaining unpaid for over three months as of March 2025. Despite this repayment stress, usage is booming - Indians swiped ₹1.9 lakh crore in May 2025 alone, driven by lifestyle features like cashbacks and no-cost EMIs that tempt people to live beyond their means. With interest rates between 42-46%, unpaid dues create a dangerous spiral affecting credit scores and future financial opportunities.

The lending industry has evolved sophisticated approaches to serve this demand. Digital platforms have made customer acquisition more efficient and risk assessment more precise. Co-lending models allow banks to provide capital while NBFCs handle specialized distribution, creating scale economies that benefit everyone involved.

The Credit Market Indicator shows demand moderating among consumers aged 35 and below, which might seem counterintuitive given the growth narrative. But this moderation reflects industry maturation rather than market saturation. Lenders are becoming more selective, using better data to identify borrowers who can productively utilize credit.

Growth vs. Prudence in the aspiration economy

This selectivity is crucial because not all credit serves the same economic function. A farmer using seasonal financing to optimize crop yields creates economic value that supports debt service while building long-term productivity. A student financing skill development enhances earning potential. A small business owner accessing equipment loans increases income capacity.

These productive uses of credit can be considered as strong economic indicators, enabling wealth creation that justifies the borrowing cost. They represent the aspiration economy at its best, and credit enabling genuine progress rather than simply shifting consumption from future to present.

The challenge lies in distinguishing between productive and consumptive uses of credit, particularly when the same loan product can serve either purpose. A personal loan might fund a professional course that increases earning capacity, or it might finance a vacation that generates memories but no economic return.

The marketing executive with her XUV700 embodies this ambiguity. The car could enable career opportunities that justify its cost, or it could represent lifestyle inflation that constrains future financial flexibility. The outcome depends on factors beyond the loan approval algorithm: her career trajectory, the broader economic environment, and her financial management discipline.

On a national scale, this individual uncertainty aggregates into economic policy questions. When GDP growth adjusts from expected 7.2% to actual 5.4%, the mathematics of widespread debt service change significantly.

Reducing repo rates, cheaper credit, and higher economic activity may appear sustainable during high-growth periods but may require recalibration when the economy’s motivation shifts to curbing inflation.

The Big Picture

The aspiration economy has delivered remarkable social outcomes. Millions of families have accessed middle-class lifestyles that would have required decades to achieve through savings alone.

Arguably, the psychological benefits of homeownership, reliable transportation, and quality education create improvements in life satisfaction and upward social mobility.

The technology enabling this transformation continues to evolve. Enhanced data analytics help identify borrowers who will deploy credit most productively. A good example of this is embedded finance credit. One not-so-spoken benefit of embedded finance is that it offers precisely sized loans to specific needs, curbing inflated credit rollouts.

The next phase of India's credit story will likely be characterized by increasing sophistication in matching credit products to customer needs and capacity.

The question today isn't whether this credit expansion is good or bad; it’s a lot more complex than being reduced to that. The right question for people working in this industry is whether the economy can generate sufficient income growth to support the debt loads being accumulated.

The aspiration engine represents an experiment, in my opinion. An entire middle class is leveraging credit to accelerate their economic progress. And the experiment is remarkable in its scale and ambition.

Right now, the outcome remains unwritten. Every loan decision, every EMI payment, every financial choice by millions of Indians contributes to a story that could redefine how emerging economies think about the relationship between credit, consumption, and prosperity.

The aspiration engine is running at full speed. Whether it remains the reality or a bubble waiting to burst depends on how skillfully we navigate the road ahead.

Until next time.

Cheer,

Rajat