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Compromised function of insulin-secreting pancreatic β cells is central to the development and progression of Type 2 Diabetes (T2D). However, the mechanisms underlying β cell failure remain incompletely understood. Here, we report that metabolic stress markedly enhances macroautophagy-independent lysosomal degradation of nascent insulin granules. In different model systems of diabetes including of human origin, stress-induced nascent granule degradation (SINGD) contributes to loss of insulin along with mammalian/mechanistic Target of Rapamycin (mTOR)-dependent suppression of macroautophagy. Expression of Protein Kinase D (PKD), a negative regulator of SINGD, is reduced in diabetic β cells. Pharmacological activation of PKD counters SINGD and delays the onset of T2D. Conversely, inhibition of PKD exacerbates SINGD, mitigates insulin secretion and accelerates diabetes. Finally, reduced levels of lysosomal tetraspanin CD63 prevent SINGD, leading to increased insulin secretion. Overall, our findings implicate aberrant SINGD in the pathogenesis of diabetes and suggest new therapeutic strategies to prevent β cell failure. Impaired beta-cell insulin secretion is a key pathological feature of type 2 diabetes. Here, the authors describe metabolic stress induced lysosomal degradation of newly formed insulin granules, independent of macroautophagy, as a potential mechanism for beta-cell dysfunction.