Recent findings indicate that a significant 41% of fresh borrowers in India belong to the Gen Z demographic, defined as individuals aged between 18 and 30. Financial analysts are raising concerns over what they describe as “silent debt”, small, often overlooked financial liabilities that accumulate from various sources. The changing economic landscape for younger generations is markedly different from that of their predecessors, with easier access to credits and loans due to digital advancements and a heightened consumer culture.

Understanding Silent Debt and Its Implications

Ramneek Singh Ghotra, Chief Growth Officer at Finvasia, elaborates on the concept of silent debt, which encompasses smaller, unsecured loans that do not fit the mold of traditional borrowing. Examples include credit card balances and dues from Buy Now, Pay Later (BNPL) products. The rise in credit card usage is notable, with over 110 million active cards reported.

The proliferation of digital credits has resulted in nearly INR 97,000 crore being distributed through BNPL platforms in the first half of FY25. This surging trend has consequences for young borrowers, particularly as these debts increasingly become part of formal credit histories, thereby influencing future borrowing capabilities.

Behavioral Drivers Behind Increased Borrowing

The desire for instant gratification and social acceptance plays a pivotal role in the borrowing behavior of young individuals. Many feel pressured to adopt modern consumer habits, such as acquiring the latest technology or keeping pace with peers on social media. The availability of flexible credit options, including BNPL and easy EMIs, further diminishes apprehensions about spending, fostering a “buy now, pay later” mentality. However, while these financial tools can facilitate lifestyle goals, experts caution about the long-term repercussions they may have on significant financial objectives like saving for education or achieving financial independence.

Identifying Signs of Financial Distress

Ghotra identifies several warning signs that suggest borrowers may be heading toward financial trouble. These indicators include only meeting the minimum payment on credit cards, managing multiple repayment dates, and using additional loans to pay off existing debts.

An increase in credit utilization above 30% or consistent overdrafts can also signify financial strain. Monitoring one’s debt-to-income ratio is crucial; exceeding a ratio of 30 to 35% may suggest diminished financial flexibility. Declining credit scores, often the result of late or missed payments, can further increase borrowing costs in the future.

Strategies for Financial Management

To enhance their financial well-being, Ghotra recommends a straightforward approach: consolidate existing debts, prioritize repayments by addressing higher-interest debts first, and create a budget that curtails new borrowing while building an emergency fund. Regularly reviewing credit reports can help borrowers stay informed about their financial responsibilities and their impact on borrowing potential.

Impact of Silent Debt on Financial Futures

The concern remains whether silent debt could pose a risk to financial stability if its rise continues unchecked, particularly as regulatory measures tighten concerning unsecured lending. Yet, optimism persists among experts like Sachin Jain, Managing Partner at Scripbox, who highlights the resilience and adaptability of the younger generation.

As career prospects improve and income levels rise, it is anticipated that their approach to borrowing will become more prudent and well-considered. For many in Gen Z, acknowledging and managing silent debt is essential to ensuring that present consumption does not jeopardize future financial security.

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