Banks have reduced their share of unsecured retail lending to new-to-credit (NTC) customers by 12-17 percentage points between FY19 and FY25, reflecting an increased conservatism and lower risk appetite, according to a BCG report, released on Monday.
Banks Scale Back NTC Lending
The retail unsecured book includes personal loans, credit cards, consumer durables loans and two-wheeler loans.
In the previous fiscal, 16 million NTC customers were added, the “second lowest in recent years” the report said.
“The current year may reflect risk aversion by lenders. However, the economy will require a large share of small-ticket, NTC lending to proliferate. At the current rate, it will take over a decade to bring them under formal financing,” BCG said in the report.
In the retail secured segment, private banks reduced their share by 10 percentage point to 5% and public sector banks pared it by 3 percentage points to 2% between FY19 and FY25.
The report said NTC default rates are marginally higher than existing-to-credit (ETC) customers.
Defaults and Underwriting Concerns
The retail vintage delinquency rate of NTC customers stood at 5.1% while that of ETC customer was 4.9% in FY25, data showed. The pandemic was an exception – the delinquency rates in FY21 surged to 7.4% for NTC customers, while existing customers saw a delinquency rate of 4.4%.
“Lenders need to re-look at their NTC lending strategy. ETC delinquency rate in retail has been rising sequentially. A judicious mix of NTC and ETC in new loan originations with robust underwriting may be required,” the report said. It also highlighted that underwriting standards for new-to-credit portfolios vary across lenders.
NBFCs show a wide performance spread between top and bottom quartiles, in both the retail and MSME segments. This may indicate inconsistent credit filters and higher sensitivity to underwriting rigor, the report said.
On the other hand, public sector banks in the bottom quartile showed higher delinquency in retail lending as compared to MSMEs, highlighting the need to revisit credit filters and underwriting standards.