New borrowers face credit squeeze, turn to secured loans and credit cards

Retail credit growth moderated in the quarter ended December 2024. The impact of this slowdown was especially felt by new-to-credit (NTC) customers, according to a recent report by TransUnion CIBIL.

 

Lenders turn cautious

 

A rise in defaults, particularly in small-ticket unsecured personal loans, prompted the Reserve Bank of India (RBI) to tighten lending norms. “There was an uptick in defaults among borrowers with little or no credit history,” says Adhil Shetty, chief executive officer (CEO), BankBazaar.

 

The RBI increased risk weights on personal loans, credit card exposures, and lending to non-banking financial companies (NBFCs). “Banks became cautious and this led to a reduction in lending, especially to borrowers without an established credit history,” says Inderbir Singh Jolly, CEO, PL Wealth Management. 

 

Slower economic growth has compounded the issue. “Broader economic factors have led lenders to enhance due diligence while evaluating loan applications,” says Bhavesh Jain, managing director and CEO, TransUnion CIBIL.

 

Lenders tend to be cautious towards NTC customers in all environments but more so when they are reducing the supply of credit. “Limited credit history among first-time borrowers makes it challenging for lenders to accurately assess their repayment capability,” says Jain.

 

Banks and NBFCs are focusing on existing, credit-tested borrowers over NTC applicants in the current environment.

 

How to beat the credit squeeze

 

NTC customers who need credit on short notice should try their luck at online financial marketplaces. “There they can evaluate both unsecured loans (from lenders still offering credit to NTC customers) and loan options against existing assets like gold, property, and securities (mutual funds, stocks, insurance, bonds, etc.),” says Gaurav Aggarwal, chief business officer, unsecured loans, Paisabazaar.

 

Collateral-backed loans carry lower risk, allowing lenders to take a more relaxed view vis-a-vis credit scores of NTC customers.

 

Shetty suggests that approaching banks with whom one holds their salary account or has a long-standing relationship with can improve chances of approval. According to Jolly, applying with a co-signer or guarantor (who already has a credit history and a decent score) can also improve chances of getting a loan. He further suggests exploring employer-based loans.

 

NTC customers should also consider applying for a secured credit card. “These cards have similar features and benefits as their regular counterparts, except that they are issued against a fixed deposit, which is placed as collateral,” says Aggarwal.

 

Having obtained a credit card, NTC customers can use it to build their credit score. Credit card bills are reported to credit bureaus and impact credit scores. At the same time, customers don’t pay any interest if they pay the full amount by the due date.

 

Mistakes to avoid

 

NTC borrowers must confirm whether a lender caters to their category before applying. “If you apply to lenders who do not lend to NTC applicants, your application is likely to be rejected,” says Aggarwal.

 

Some NTC applicants, after facing initial credit rejections, intensify their efforts to secure credit approval. “Avoid making multiple loan applications within a short span. This is regarded as credit negative by lenders and could further reduce the chances of credit approval,” says Aggarwal. 

 

Jolly adds that opting only for high-cost or unsecured loans may label the applicant as high-risk. Unstable employment also acts as a deterrent. “Lenders look for stable employment to ensure repayment,” says Jolly.

 

Shetty warns that incorrect or inconsistent information in application documents can lead to rejection. 

Tips to help new customers build credit score

  Timely payment of loan EMIs and credit card dues can help customers build a strong credit score

  Control your credit utilisation (utilisation of credit card should not exceed 30 per cent of the credit limit)

  Have a balanced mix of secured and unsecured credit products 

Regularly monitor your credit report as errors can pull down your credit score