TransUnion CIBIL data shows that 29% of so-called new-to-credit applicants received loans in the June quarter of 2022 and 2021, while only 23% did so in 2023.
When someone applies for a loan or credit card, the lender checks the person’s credit score with the credit bureaus. TransUnion CIBIL data pertains to loan accounts opened within 90 days of inquiry for loans for homes, commercial vehicles, construction equipment and education and within 30 days of inquiry for all other loans.
Lenders are tightening risk frameworks and chasing down prime customers who lack credit scores as banks have no way of assessing their repayment capacity.
Although customers with existing credit records also saw a decline in approvals in the June quarter, the change was less than that of the new-to-credit category.
To be sure, approval rates across most loan categories – home loans, loans against property, auto loans, personal loans, among others – fell in June compared to a year ago.
Experts said this could be a result of banks adopting a cautious approach on such borrowers, especially as small-ticket personal loans have started seeing increased defaults.
“Typically, when lenders want to tighten their risk filters, new-to-credit customers are the first to be filtered. Subsequently, lenders’ preference is towards salaried customers and borrowers with high bureau scores,” said Anil Gupta, senior vice president and co-group head, ICRA Ltd.
Lenders can also tighten their risk filters by reducing the loan-to-value ratio or increasing the income up to the equated monthly installment (EMI) limit, Gupta said.
As a result of lower approvals of loan requests, the share of new-to-credit customers in overall loan originations declined by 400 basis points (bps) year-on-year (y-o-y) to 15% in the April-June period . The share of customers below Prime has declined by 100 bps, while the share of customers at Prime and above has increased by 600 bps.
Some are reading lenders’ caution as a measure to protect themselves from the potential consequences of post-Covid lending excess.
“It is about tightening the underwriting norms in banks and even NBFCs (non-banking financial companies),” said Bhavik Hathi, managing director, Alvarez & Marsal.
According to Hathi, there was a race to increase loan books due to increase in liquidity after Covid. Since banks were staying away from corporate loans, the impact on retail and especially the unsecured category was less visible.
“Possibly, there has been some degree of excessive leverage in this process. When customers receive so many calls from banks and NBFCs, even those who were not planning to take loans or borrow small amounts may have stopped taking loans. To repay their loan.
Defaults on equated monthly installments (EMIs), also known as bounce rates, on the National Automated Clearing House (NACH) platform are still below the Covid-19 high of 40-45% in volume terms. The bounce rate has been around 29% since April, increasing by 100 bps in August before returning to 29% in September.
Others said lenders are constantly improving their risk filters to match the changing environment and there is no let-up in demand from new-to-credit customers.
Ajit Veloni, Senior Director, CRISIL Ratings Ltd., said, “New-to-credit customers offer a huge opportunity in terms of risk-adjusted returns to lenders who are able to build the processes and models required to tap this segment. Are capable.”
Given the dynamic macro environment, Veloni believes that lenders will need to continually refine their underwriting models to better screen borrowers and, therefore, manage asset quality and credit costs. “So, this will really be an ongoing process rather than a one-time process,” he said.
In the broader context, he does not believe that a decline in approval rates for these customers would impact financial inclusion and only if it were a long-term structural change. Valoni classified this decline as possibly more transitory in nature as lenders dynamically recalibrated strategies and fine-tuned underwriting.
