Credit Squeeze Hits First-Time Borrowers Hardest: Exploring Safer Lending Routes

Retail credit growth witnessed a noticeable moderation in the quarter ending December 2024. According to a recent report, this slowdown has had a disproportionate impact on new-to-credit (NTC) customers—individuals seeking formal credit for the first time. As lenders reassess their risk appetite, fresh applicants are finding it increasingly difficult to secure approvals.

Lenders Become Selective Amid Rising Defaults

The Reserve Bank of India (RBI) has responded to a rise in defaults, particularly in small-ticket unsecured personal loans, by tightening lending regulations. The central bank increased risk weights on personal loans, credit card exposures, and loans made to non-banking financial companies (NBFCs).

This regulatory intervention comes at a time when the broader economic environment is also showing signs of a slowdown. The dual impact has led to more stringent due diligence processes by lenders, especially when assessing new loan applications.

NTC customers, lacking a proven credit history, are viewed as higher-risk applicants. In a credit-constrained environment, banks and NBFCs are prioritising existing customers with established repayment records over new entrants to the credit system.

Navigating the Credit Crunch—What NTC Borrowers Can Explore

For NTC borrowers in urgent need of credit, online financial marketplaces can provide a ray of hope. These platforms aggregate various loan products, including both unsecured loans from more accommodative lenders and secured loans backed by personal assets such as gold, property, mutual funds, shares, and insurance policies.

Secured loans carry inherently lower risk for lenders, making them more accessible for borrowers with limited or no credit history. With collateral in place, lenders can offer more favourable terms and be more flexible with credit score requirements.

Strengthening Loan Applications Through Existing Relationships

NTC borrowers can also improve their chances by approaching banks with whom they have an existing relationship, particularly salary account holders or long-term banking partners. These institutions already have access to some financial history, which may work in the borrower’s favour.

Applying with a co-signer or guarantor who has an established credit history can also boost approval prospects. Some organisations offer employer-based loan schemes, which NTC borrowers should consider exploring as an alternative credit source.

Secured Credit Cards—A Step Towards Building Credit

Another option worth considering is a secured credit card. These are issued against a fixed deposit, making them accessible even to those with no credit history. Despite the collateral, secured cards function much like standard credit cards and offer similar benefits.

By using the secured card responsibly and paying bills in full by the due date, NTC customers can begin building a positive credit history. Payments on credit cards are reported to credit bureaus, playing a key role in establishing a healthy credit profile over time.

Common Pitfalls New Borrowers Should Avoid

One of the biggest mistakes new borrowers can make is applying indiscriminately without checking whether a lender serves the NTC segment. Submitting applications to institutions that do not consider NTC applicants often leads to rejections, which are then recorded on the applicant’s credit profile.

Additionally, making multiple loan applications in quick succession is viewed negatively by lenders. Such behaviour signals desperation and can further reduce approval chances. NTC applicants should be strategic, focusing on lenders known to work with first-time borrowers and spacing out their applications.

Conclusion

In a tightened credit environment marked by cautious lending and regulatory vigilance, new borrowers face a challenging path. However, with the right approach—such as considering secured loans, leveraging existing banking relationships, and using secured credit cards—NTC customers can begin their credit journey and build a strong financial foundation.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions. 

Investments in the securities market are subject to market risks, read all the related documents carefully before investing.