Beyond credit scores: Next inclusion phase must reach first-time borrowers

As reported recently by this newspaper, India’s retail credit market is undergoing a significant shift after the pandemic. According to the data cited by TransUnion Credit Information Bureau (India) Ltd (Cibil), the share of first-time borrowers in the overall credit market has been declining steadily over the past five years. While the absolute number of new borrowers is rising, the market is growing much faster. As lenders are becoming increasingly risk-sensitive, access to formal credit is gradually shifting towards customers with proven repayment records and credit scores. While this has supported asset quality, the declining share of first-time borrowers raises concern about formal credit inclusion.

 

The challenge becomes more significant because large sections of potential borrowers remain outside the formal credit ecosystem. As seen in the 11th round of the National Bank for Agriculture and Rural Development’s Rural Economic Conditions and Sentiments Survey, around 22 per cent of the surveyed rural households still depend solely on informal lenders. Similarly, a recent report by the NITI Aayog, TransUnion Cibil and MicroSave Consulting found that despite substantial progress in financial inclusion, nearly two-thirds of credit-eligible women remained outside the formal credit system. According to the latest report by Small Industries Development Bank of India, 17 per cent of the surveyed micro, small and medium enterprises (MSMEs) had not taken any form of credit, while 8 per cent relied on informal sources. The dependence on informal finance was particularly pronounced among micro enterprises, with 12 per cent borrowing from informal lenders.

 

These gaps in formal credit access are accompanied by the changing nature of entry-level borrowing. Traditionally, products such as two-wheeler loans, agricultural loans, and small-ticket personal credit acted as gateways into the formal financial system. Today, the financing of consumer durables, especially loans for mobile phones, has emerged as the principal entry point for new-to-credit customers.

 

Addressing gaps in lending will require lenders to rethink how creditworthiness is assessed, especially for first-time borrowers. A 2024 study by the National Bureau of Economic Research found that alternative data from digital transactions was effective in predicting creditworthiness for borrowers with no credit history. Many possess digital footprints like banking transactions, digital-payment records, payments of utility bills, records of goods and services tax, and other indicators of cash flows that can help assess repayment capacity. In this regard, the Reserve Bank of India’s Universal Lending Interface (ULI), launched in 2024 and which had taken on board 89 lenders by February this year, has the potential to transform credit assessment by enabling consent-based sharing of verified financial information across lenders.

 

Bringing more new-to-credit and underserved households into the formal credit system is central to deepening financial inclusion. By improving financial literacy, strengthening credit awareness, expanding the hybrid field-and-digital outreach, and adopting alternative credit assessment mechanisms, lenders can accelerate entry into the formal financial ecosystem. Credit scores are an important tool for assessing risk, but India’s next phase of financial inclusion will require looking beyond just that single metric to recognise the repayment potential of those who have never had the opportunity to borrow formally and reduce informal borrowing.