A number of non-banking financial companies (NBFC) are reducing their exposure to the new-to-credit segment to keep the asset quality stress under check. According to data from TransUnion CIBIL, loan approval rates to new customers fell to 24% as on December 2022 from 35% in December 2020.
Poonawalla Fincorp is largely focusing on existing-to-credit customers as a part of its business strategy. “We are largely focusing on the existing-to-credit segment in line with our risk management process. We will not shift focus away from this segment as the total addressable market is large,” said managing director Abhay Bhutada.
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The new-to-credit segment comprised 16% of loan origination volume in December 2022, compared with 22% in December 2020. The trend of declining loan approval rate sustained in the March quarter too, with lenders tightening their underwriting standards, especially in the risk-prone unsecured personal loan segment, said experts.
The delinquency rate in the personal loan segment was 9% in the December quarter, higher than the pre-Covid level of 5%. Vintage delinquency is calculated as a percentage of accounts of over 30 days past due in six months from origination.
“The market analysis and customer inquiry data suggest that the loan inquiry volume by the new-to-credit segment has accelerated for riskier products like personal loans and consumer durable loans for depreciating assets,” says Rajesh Sharma, managing director, Capri Global Capital. “Financial institutes have gone more conservative on lending to new-to-credit clients in the absence of an existing repayment history and informal cash flow assessment.”
Underwriting loans for the new-to-credit segment is challenging for various reasons. Unlike for existing-to-credit borrowers, the assessment of risk in the new-to-credit segment is challenging due to the unavailability of reliable and comprehensive alternative data on borrowers.
Lenders often limit their exposure to this kind of customers due to factors like perceived risk and uncertainties associated with this segment, said bankers.
New-to-credit customers typically lack the discipline on responsible borrowing practices, loan terms and conditions, and the impact of defaults on their credit history. Also, these borrowers cannot participate in various bureau-imputed pre-approved programmes for smaller-ticket loans.
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“The new-to-credit segment has undergone a sea change due to macroeconomic factors like inflation and rate hikes, making these customers more vulnerable,” said Sanjiv Shrivastav, chief risk officer, IIFL Finance.
“Regulatory norms around digital lending have also resulted in tighter credit norms, renewed focus on lower risk customer segment by lending institutions, leading to a shift in business strategy.”
