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Diderot's Curse and the BNPL Trap: Why India's middle class may be walking into a debt crisis
In 1769, French philosopher Denis Diderot received a luxurious scarlet dressing gown. At first, it delighted him. But then he noticed that everything around it—his old chair, desk, and rug—seemed shabby in comparison. One by one, he replaced them until he was mired in debt. This story, known as the 'Diderot Effect," remains a parable for how one act of consumption can trigger a cascade of financial decisions, often with ruinous outcomes.
Fast forward to modern India, where a digital version of this effect is taking shape. This time, it's not scarlet robes but smartphones, kitchen renovations, weekend getaways, and online shopping sprees—all made seemingly affordable by Buy Now, Pay Later (BNPL) apps and instant small loans. These easy credit tools promise convenience and inclusion, especially to millennials and Gen Z professionals eager to live aspirational lives. Yet, behind the glitter of financial empowerment lies a troubling spiral of overleveraging, especially for India's burgeoning middle class, which lacks the structural safety nets that cushion such risks in the West. The growth numbers are staggering.
According to CRIF High Mark data, personal loans of ₹10,000- ₹50,000 value grew at an annualised rate of 19% for the 2021-2024 period. BNPL offerings by fintech firms like LazyPay, ZestMoney (now defunct), and Paytm Postpaid have exploded in reach. But this rapid expansion masks a darker reality: a growing chunk of borrowers are falling behind on payments.
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RBI's Financial Stability Report Dec 2024 shows that 11% of the borrowers originating a personal loan under ₹50,000 had an overdue personal loan, and over 60% of them had taken out more than three loans during 2024-25 so far. Moreover, nearly three-fifths of customers who took out a personal loan in Q2: 2024-25 had more than three live loans at the time of origination.
Loan delinquency
TransUnion Cibil reports show that the rising delinquency rates for BNPL products rose to 4.8% from 3.6% within a year. Most of these defaults are concentrated among borrowers under 30—a demographic already grappling with underemployment, wage stagnation, and high rental costs in cities.
Unlike traditional credit cards or personal loans, BNPLs often fly under the radar. They don't always show up in credit reports immediately, and multiple platforms can extend concurrent credit to the same borrower without any central visibility. This creates a dangerous illusion of affordability. A consumer may think they're paying only ₹2,000 per month on a new iPhone—but when stacked with deferred payments on furniture, groceries, vacations, and even tuition, the monthly outflow quietly balloons.
This trend becomes even more alarming when paired with India's lack of universal healthcare and weak social protection. A 2022 report by Azim Premji University found that 68% of middle-class households had no health insurance, and over half would fall into poverty if faced with a major hospitalisation. In this vacuum, medical BNPL has emerged as a fast-growing segment, with platforms like QubeHealth and SaveIn offering deferred payment options at clinics and hospitals. For a family already juggling four EMIs, a sudden ₹60,000 emergency loan for surgery can push them into a tailspin.
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The regulatory response has so far been cautious but piecemeal. RBI has cracked down on unregulated digital lending apps and discouraged pre-approved credit lines without user consent. But BNPL providers—many operating through NBFC partnerships—still operate in a regulatory grey area. With no unified reporting framework and lax income verification, users can easily borrow beyond their repayment capacity. The illusion of financial empowerment masks a systemic failure to track and contain household debt.
Moving ahead
So, what's the way forward? Structural fixes like universal healthcare, formal job creation, and large-scale financial literacy are imperative, but they take time. What India needs right now is a set of practical, near-term interventions, both by consumers and regulators, to curb the looming crisis.
On the consumer side, individuals must begin treating BNPL for what it is: a form of unsecured debt, not a lifestyle hack. Before clicking 'pay later," users should track their cumulative EMIs across platforms using credit aggregator tools like OneScore or CRED.
A good rule of thumb is to ensure no more than 30% of monthly income is locked into repayments. Stacking credit across apps may feel manageable initially, but when salaries are delayed or unexpected expenses arise, this house of cards collapses swiftly. Regulators, too, must move decisively. The RBI should mandate real-time reporting of BNPL loans to credit bureaus and enforce a central dashboard where consumers can view all liabilities. Income-based eligibility limits—particularly for first-time or subprime borrowers—must be imposed to prevent overleveraging. Most urgently, coercive collection practices—already on the rise via WhatsApp threats and public shaming—must be met with heavy penalties.
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India's middle class today is not buying goods—it's buying identities, dreams, and status symbols in instalments. But as Diderot discovered, the cost of one indulgence can quickly multiply when there are no checks. If we don't build those guardrails now, a generation of Indians may find themselves trapped, dressed in aspiration, and drowning in debt.
Kiran J Mahasuar is assistant professor, co-chairperson – Strategy, Innovation & Entrepreneurship Area, IMT Ghaziabad
