While 29% of so-called new-to-credit applicants received loans in the June quarter of 2022 and 2021, only 23% did so in 2023, TransUnion Cibil data showed.

When someone applies for a loan or a credit card, the lender checks the person’s credit score with the credit bureau. The TransUnion Cibil data pertains to loan accounts opened within 90 days of enquiry for loans for homes, commercial vehicles, construction equipment and education and within 30 days of enquiry for all other loans.

Lenders are tightening risk frameworks and chasing prime customers, with those lacking credit scores falling behind as banks have no way to assess their repayment capacity.

Although customers with existing credit records also saw a decline in approval in the June quarter, the change was narrower than seen in the new-to-credit category.

To be sure, approval rates of most loan categories—home loan, loan against property, auto loan, personal loan, among others—in June fell from a year ago.

Experts said this could be a result of banks turning cautious on such borrowers, especially after small-ticket personal loans have started exhibiting increased delinquencies.

“Typically, when lenders want to tighten their risk filters, the new-to-credit customers are the first ones to be filtered off. Subsequently, the preference of the lenders is towards salaried customers and borrowers with higher bureau scores,” said Anil Gupta, senior vice president and co-group head of Icra Ltd.

Lenders, Gupta said, may also tighten their risk filters by reducing the loan-to-value ratios or increasing the income to equated monthly instalment (EMI) threshold.

As a result of fewer approvals of loan requests, the share of new-to-credit customers in overall loan origination in the April-June period has shrunk 400 basis points (bps) year-on-year (y-o-y) to 15%. The share of below-prime customers has declined by 100 bps, while that of prime-and-above has increased by 600 bps.

Some are reading lenders’ caution as a measure to protect themselves against a possible fallout of the post-covid lending binge.

“It is more about tightening the underwriting norms at banks and even NBFCs (non-banking financial companies),” said Bhavik Hathi, managing director at Alvarez & Marsal.

According to Hathi, post-covid, there was a rush to grow the loan books owing to increased liquidity. Since banks were staying away from corporate loans, retail and the unsecured category in particular was the low-hanging fruit.

“Probably, there has been some amount of over-leveraging in the process. When customers get so many calls from banks and NBFCs, even those who were not planning to take loans or borrow smaller amounts might have ended up taking credit,” he said, adding that as inflation and unemployment levels remain high, it could get difficult for them to repay loans.

Default on equated monthly instalments (EMIs) mandates on the National Automated Clearing House (NACH) platform, also known as bounce rate, is still lower than the covid-19 highs of 40-45% in volume terms. The bounce rate has been around 29% since April, with August reporting a 100 bps increase before returning to 29% in September.

Others said that lenders are constantly improving their risk filters to match the changing environment and that there is no dearth of demand from new-to-credit customers.

“New-to-credit customers offer a sizeable opportunity in terms of risk-adjusted returns to lenders who are able to build the necessary processes and models to tap this segment,” said Ajit Velonie, senior director, Crisil Ratings Ltd.

Given the dynamic macro environment, Velonie believes lenders will need to continuously refine their underwriting models to better screen borrowers and hence, manage asset quality and credit costs. “So, this will really remain an ongoing rather than a one-time process,” he said.

On a broader context, he does not believe that a decline in approval rates for these customers would impact financial inclusion and would have been so only if it were a long-term structural shift. Velonie categorized this drop as possibly more transitory in nature as lenders dynamically realign strategies and fine-tune underwriting.