‘New, young loan seekers show better creditworthiness’

Of the new-to-credit consumers who were given loans in January 2019, as much as 72.30% had a credit score of 700 plus — prime category — in January 2020, said TransUnion CIBIL.

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While banks and other lending institutions are too cautious in lending to new and young customers, figures reveal that new-to-credit (NTC) consumers tend to prove lower risk and build a higher credit score when they are given credit opportunities. In other words, they are making timely repayment without defaulting on their loans, showing higher creditworthiness.

Of the NTC consumers who were given loans in January 2019, as much as 72.30 per cent had a credit score of 700 plus — prime category — in January 2020, said TransUnion CIBIL. When compared to this, of the ‘below prime’ existing-to-credit consumers (Cibil score of 300-699) who were given credit in January 2019, only 47.29 per cent had a score of 700 plus in January 2020, the credit information bureau added. A majority of India’s population is under 40 years of age and this group is most likely to seek their first ever loan or credit card from banks and credit institutions.

However, bankers think twice before extending credit to new customers even as the credit industry witnessed a significant shift over the last decade, with increasing numbers of first-time borrowers seeking credit opportunities from institutional lenders.

“Credit institutions are often cautious when lending to NTC consumers as there is no credit history to assess their probability of default on the loan. However, CIBIL analysis shows that NTC consumers tend to prove lower risk and build a higher score when they are given credit opportunities,” CIBIL said.

Score analysis of consumers who were granted credit in January 2019 shows that a significant proportion of these NTC consumers were scored as prime-consumers (those with a score of 700 and above) after a one-year period.

Insights based on share of enquiries of applications by NTC consumers show that two-wheeler loans (46 per cent) account for the highest number of enquiries from NTC borrowers, followed by consumer durable loans (28 per cent) and home loans (25 per cent).

“On a monthly basis, approximately 24 per cent of enquiries are made for loan applications by individuals who do not have any pre-existing credit history on our bureau, whereas the number of loan accounts opened by NTC borrowers stands at 16 per cent, clearly indicating the opportunity of providing access to credit to this segment,” said Rajesh Kumar, MD and CEO, TransUnion CIBIL.

“Our analysis clearly shows that if provided credit opportunities, NTC consumers can prove to be good borrowers and form a profitable customer base for credit institutions. By using the NTC Score, credit institutions can significantly scale profitable growth by tapping into the NTC market,” he added.

Significantly, the rural and semi-urban population together contribute to more than 54 per cent of enquiries coming from the NTC segment. Lenders must explore the unique potential of using data insights and solutions to identify and service credit requirements of this large consumer segment in order to tap profitable growth and support financial inclusion, CIBIL said.

“In order to cater to this demand in NTC segment, lenders will need to adopt data driven lending processes supported by advanced analytical solutions like CreditVision NTC Score to get a deeper understanding of the consumer profile while increasing approval rates within the lender’s current risk tolerance,” Kumar said. The demand for retail credit products has steadily risen in recent months following the shock from the Covid-19 pandemic last year. Although year-on-year growth across key credit metrics is yet to reach pre-pandemic levels, there has been positive momentum for credit demand.

This February, retail credit demand (as measured by inquiry volumes) was back to 91 per cent of the levels observed in

February 2020, and was significantly up from the low levels observed during the early months of the pandemic.

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