If you've ever thought about taking a loan against your house or shop, you need to read this. What was once considered the safest way to borrow money in India is now turning into a crisis that's catching both lenders and borrowers off guard. Thousands of small business owners who put their properties on the line are now struggling to repay, and the ripple effects are being felt across the entire financial system. The alarm bells are ringing louder each month as more shopkeepers, restaurant owners, and small entrepreneurs fall behind on their payments. What makes this particularly concerning is that these aren't big corporate defaults—these are everyday people risking their homes and the places where they earn their daily bread. This isn't just a problem for banks and lending companies—it could affect your ability to get a loan in the future, even if you have property to offer as security.
Small loans taken against property in India are becoming a big headache for lending companies. These are called LAP loans—where someone borrows money by keeping their house or shop as security with the lender. For years, these loans were considered safe because they had property backing them. But now, more and more borrowers are failing to pay back on time, and lenders are getting worried. The problem is worst with very small LAP loans, typically between ₹2 lakh and ₹10 lakh, taken by shopkeepers, small business owners, and self-employed people who don't have steady monthly salaries. While the LAP loan business grew by 32% in FY25, experts say growth will slow down to about 27–29% in FY26 because so many borrowers are struggling to repay. These small business owners depend on daily sales and earnings, which have become unpredictable due to rising costs and a slowing economy. When their income drops or becomes irregular, they find it impossible to pay their monthly installments, causing delayed payments to pile up across many lending companies.
The real reason behind this mess is connected to another crisis: unsecured microfinance loans. Many of these small business owners first took regular small loans without any collateral for expanding their shops or businesses. When they couldn't repay those loans on time, they took bigger loans against their property to manage the shortfall or pay off earlier debts. This created a dangerous cycle where they kept piling on more debt. With irregular income and no savings to fall back on, even loans backed by property become impossible to repay when business slows down. To make things worse, many lending companies were in a rush to grow their loan books in recent years. They gave out loans quickly without checking borrowers carefully enough. Now that borrowers are defaulting, these lenders have to set aside more money to cover bad loans, and they've become much more cautious about giving fresh property loans to informal workers and small business owners.
For lending companies, this growing trouble with property loans means lower profits, higher costs to cover bad debts, and possible questions from regulators—especially since some lenders recently asked for easier rules on these loans. For borrowers, things are getting tougher: stricter checks before approval, lower loan amounts compared to property value, higher interest rates, and slower processing times. While bigger property loans to salaried professionals are still doing okay, the stress in small property loans is an important warning sign that small businesses and self-employed people across India are facing serious money troubles.
The Real-World Impact: Stories from the Ground
Walk into any small market in tier-2 or tier-3 cities, and you'll hear similar stories. A textile shop owner in Surat took a ₹5 lakh loan against his shop to buy inventory, but when demand dropped, he couldn't sell enough to make his monthly payments. A small restaurant owner in Nagpur used her property to get ₹8 lakh for renovations, but rising vegetable prices and fewer customers meant she's now three months behind on payments. These aren't careless borrowers—they're hardworking people caught between rising costs, falling sales, and unpredictable income. The tragedy is that many of them risk losing the very property they worked years to build, not because they were reckless, but because the economy shifted faster than their businesses could adapt. When lending companies eventually take over these properties to recover their money, entire families can be left without a roof over their heads or a place to run their business.
Why This Should Worry Everyone
Even if you've never taken a property loan, this crisis affects you. When lending companies face losses from bad loans, they become cautious with everyone—meaning even good borrowers with stable income find it harder to get loans. Interest rates go up for everyone because lenders need to cover their losses. Small businesses that employ millions of people across India start shutting down, leading to job losses. Local economies in smaller towns suffer when shops close and business activity slows down. And here's the scary part: if enough small property loans go bad, it could trigger a domino effect similar to what happened with microfinance, where the entire lending system freezes up. Banks and NBFCs might stop lending to small businesses altogether, choking off the oxygen that keeps India's informal economy alive. What starts as a problem for a few thousand shopkeepers could end up affecting millions of workers, suppliers, and families connected to these small businesses.
What Happens Next?
The future of property loans depends on two things: whether lenders can fix how they check and approve borrowers and whether small businesses can survive in a slowing economy. If more borrowers keep defaulting, small property loans could become a major risk for the entire lending industry. Right now, the rising problems with loans against property show one thing clearly: lenders need to be more careful, check borrowers more thoroughly, and keep a close watch on who's repaying and who's falling behind—especially among people working in the informal sector without regular salaries.
The Wake-Up Call We Can't Ignore
India's small property loan crisis is more than just numbers on a spreadsheet—it's a warning signal that our small business ecosystem is under severe stress. When hardworking shopkeepers, restaurant owners, and small entrepreneurs start losing their properties because they can't repay loans, something is fundamentally broken in how we support the backbone of our economy. The solution isn't just about lenders being more careful or borrowers being more responsible. We need a bigger conversation about how to protect small businesses during economic slowdowns, how to make loan terms more flexible when incomes are irregular, and how to prevent families from losing everything they've built over one bad business year. For policymakers, this is the moment to step in with support measures. For lenders, it's time to show empathy alongside business sense. And for all of us as a society, it's a reminder that when our neighborhood shops struggle, we all lose something valuable. The question now is, will we act before this warning becomes a full-blown disaster, or will we wait until thousands more families lose their homes and livelihoods? What do you think needs to be done? Share your thoughts in the comments below.