Bank Loan: The retail loan sector in India saw a significant drop in the last quarter of December 2024. Banks and financial institutions have become more cautious when it comes to lending to first-time borrowers (New-to-Credit – NTC), making it tougher for them to secure loans. Let’s explore the reasons behind this shift and whether banks might change their approach in the future.
Gen Z Hit Hardest
The tightening of lending standards has particularly affected Gen Z (those born after 1995), especially individuals looking to obtain credit cards or personal loans. A report from TransUnion CIBIL indicates a notable decline in loan availability for first-time borrowers, which has had a ripple effect on the overall credit market.
The report reveals that loan approvals for first-time borrowers dropped by 21%, while approvals for individuals with prior credit histories only decreased by 2%. This suggests that banks and financial institutions are exercising greater caution when it comes to new customers.
Challenges for First-Time Borrowers
Around 40% of first-time loan seekers are interested in credit products related to consumption, like credit cards and personal loans. However, due to the stringent policies of banks, obtaining these loans has become increasingly challenging.
Gen Z represents 41% of all new borrowers and is the demographic most impacted by this shift. As a result, securing their first loan or credit card has become more difficult, which could hinder their financial growth and purchasing power.
Why Are Banks Tightening Lending Policies?
In the current climate of financial uncertainty, banks are looking to minimize their risks. TransUnion CIBIL’s CEO, Bhavesh Jain, stated, “Banks have tightened the loan approval process for first-time borrowers as part of their risk-management strategy.”
He also mentioned that by effectively utilizing data analytics and new technologies, banks can better integrate new borrowers into the system.
TransUnion CIBIL’s Credit Market Indicator (CMI) has dropped to 97, marking the lowest point since December 2021. This decline indicates that the cautious approach of banks has led to a reduction in credit availability in the market.
Sectors with significant debt are feeling the impact too.
The credit crunch isn’t just affecting small loans; larger loan sectors are also experiencing challenges.
Home loans have dropped by 9%.
The rate of credit card issuance has fallen by 32%.
The growth rate for personal loans has decreased from 24% to 14%.
Auto loan growth has plummeted from 14% to just 4%.
It’s evident that banks are now more careful about lending. This cautious approach is contributing to the slowdown in loan growth across the board. On a brighter note, there are some encouraging trends despite the downturn. The percentage of new loans taken out by women has risen to 37%, compared to only 27% previously. Additionally, the number of new borrowers in rural areas has climbed to 32%, up from 23%.