According to data from TransUnion CIBIL, loan approval rates for new customers have dropped from 35 per cent in December 2020 to 24 per cent in December 2022. As a result, several non-banking financial companies (NBFCs) are adjusting their business strategies to focus more on existing-to-credit customers and mitigate asset quality stress.
Poonawalla Fincorp, for example, is prioritising the existing-to-credit segment as part of its risk management process. Managing Director Abhay Bhutada emphasised the company's commitment to this segment, highlighting its large potential market.
The new-to-credit segment accounted for 16 per cent of loan origination volume in December 2022, down from 22 per cent in December 2020. This decline in loan approval rates has continued into the March quarter, with lenders tightening underwriting standards, particularly for unsecured personal loans.
Experts point out that the delinquency rate in the personal loan segment rose to 9 per cent in the December quarter, surpassing the pre-Covid level of 5 per cent. Lenders have become more conservative in extending credit to new-to-credit clients due to the absence of repayment history and challenges in assessing their cash flow.
Underwriting loans for the new-to-credit segment poses challenges, primarily because comprehensive and reliable alternative data on borrowers is often unavailable. Lenders limit their exposure to this segment due to perceived risk and uncertainties associated with these customers.
New-to-credit borrowers often lack knowledge of responsible borrowing practices, loan terms, and the consequences of defaults on their credit history. Additionally, they may not be eligible for certain pre-approved programmes for smaller-ticket loans offered by credit bureaus.
Macroeconomic factors, such as inflation and interest rate hikes, have made the new-to-credit segment more vulnerable. Regulatory norms around digital lending have also resulted in tighter credit standards and a renewed focus on lower-risk customer segments, prompting lending institutions to adjust their business strategies.
Overall, the industry is navigating the challenges of the new-to-credit segment by adopting a cautious approach and placing greater emphasis on existing-to-credit customers.