Preference for proven credit rating hits first-time borrowers harder

Consumer durable financing has emerged as the primary gateway to formal credit as lenders increasingly favour borrowers with established repayment records

With lenders increasingly preferring customers with an established repayment history, the share of first-time borrowers as a proportion of the overall credit market has been declining consistently for the last five years. Consequently, consumer durables financing, particularly for mobile phone loans, has replaced traditional products such as two-wheeler and agriculture loans as the main entry point into formal credit for new-to-credit customers. 

While pointing out this post-pandemic shift in the country’s retail credit market, Bhavesh Jain, managing director and chief executive officer of TransUnion CIBIL, India’s largest credit bureau, also said, “That does not mean fewer people are entering the financial system in absolute terms. It means the overall credit market is expanding much faster than the rate at which new borrowers are being added.” 

Banks and lenders, he added, today prefer borrowers with a credit history because trust and repayment behaviour have become central to underwriting. 

“Pre-Covid, new-to-credit customers largely entered the formal system through agriculture lending, priority-sector lending, and two-wheeler loans,” Jain pointed out. “Post-Covid, the biggest gateway into formal credit has become consumer durables financing, especially mobile phone financing,” he noted. 

At the centre of this shift are non-banking financial companies (NBFCs), Jain said. “NBFCs are leading this transformation because they are financing the consumer durables ecosystem at scale,” he said. 

“They are deeply embedded in financing devices and smaller-ticket consumption,” he explained. Fintechs, meanwhile, are more focused on personal loans, he added. 

Gold loans dazzle 

The other defining trend in the last few quarters has been the rise of gold loans, which now form the second-largest retail loan category at close to ₹20 trillion. Home loans remain the largest (around ₹44 trillion). 

“Over the last four to six quarters, gold loans have grown sharply in both value and volume,” Jain said. “If I simplify it, broadly, almost every second retail loan in the country today is effectively a gold loan.” 

Gold loan, he added, is no longer just one of the retail products. “It has become the product." The remarkable thing, he said, is that gold loans have achieved this despite having very small average ticket sizes and much shorter durations. 

While the average home loan ticket size is around ₹37-38 lakh, for gold loan, it is around ₹2 lakh. 

Not only that, gold loan as a product, once perceived to be a South Indian phenomenon, has now spread across the country. “Today, it is a pan-India phenomenon. Be it Uttar Pradesh, Rajasthan, Gujarat, or Punjab — everybody is borrowing and lending against gold,” Jain said. Even the borrower profile is diverse. One in five gold loan borrowers is a Gen Z, and 40 per cent are women. 

That said, Jain flagged emerging risks in the segment. “When gold prices move 30-40 per cent within a few months, it has a direct impact on LTVs (loans to value) and risk management, especially in small-ticket lending,” Jain said, adding that borrowers taking multiple small-ticket gold loans are emerging as a relatively riskier category. 

A borrower taking five separate ₹50,000 gold loans may cumulatively represent meaningful leverage even if each individual loan is below the stricter assessment threshold, he said. 

Repayment up 

Having said that, Jain emphasised that the repayment culture in India has improved dramatically over the past decade, especially in the last five post-Covid years. “Retail and MSME (micro, small, and medium enterprise) delinquency levels are at decade lows," he said, adding that in a global environment filled with uncertainty, maintaining retail and MSME delinquency below 2 per cent is a remarkable achievement. 

He attributed part of the improvement to what he called “self-induced financial discipline” among borrowers. “One of the most important shifts in the last five years, especially post-Covid, is the rise of self-induced financial discipline,” Jain said. “Today, when borrowers pull their CIBIL reports, many of them take corrective action immediately,” he said, adding that one-third of the time a borrower checks a credit report, there is an actual payment made within the next 90 days. 

However, he flagged segments that warrant continued attention, including micro-loan against property and affordable housing, where delinquency levels remain elevated relative to the broader market. Commercial vehicle financing is another area of concern. "The segment has not deteriorated materially, but unlike other retail products, it has not benefitted from the same level of improvement,” he said. Commercial vehicles remain vulnerable to external shocks because fuel prices, logistics costs, supply chain disruptions, and global uncertainties directly affect the economics of transportation businesses, he explained. 

Jain also welcomed the Reserve Bank of India’s move toward weekly credit reporting, from fortnightly reporting, describing it as one of the most progressive changes in the country’s credit infrastructure. 

“The RBI’s move is an extremely progressive step because it directly benefits consumers,” he said. “The fresher the credit data, the better the lending decisions. Weekly reporting allows the ecosystem to respond much faster to changes in borrower behaviour and repayment patterns,” Jain said. 

According to him, India is steadily moving toward risk-based pricing as borrowers become more aware of the importance of maintaining healthy credit profiles. “Millions of Indians now proactively check their own credit reports and scores because they understand the value of maintaining a strong repayment history,” he said, adding that 180 million Indians have already checked their own CIBIL reports and scores. “That itself tells you how credit awareness is expanding in the country.”