In recent months, Indian lenders have turned noticeably more cautious in extending credit, especially to first-time borrowers. According to a new report by TransUnion CIBIL, the share of new-to-credit (NTC) loans plunged to just 16% in Q1 (April–June) FY26, signalling tighter risk appetites and potential headwinds for financial inclusion.

This article examines the decline in NTC loan share, explores its drivers, assesses implications for different stakeholder groups, and suggests possible remedies to balance growth with risk control.

The Decline in New-to-Credit (NTC) Loans: Trends and Context

The Q1 FY26 data show that only 16% of loan originations were classified as new-to-credit, down from 18% in the same period last year and 20% in 2023.
This decline raises concerns from the standpoint of inclusion: as CIBIL puts it, “an increase in NTC percentage indicates higher financial inclusion.”

Beyond NTC share, a few linked trends are noteworthy:

The growth in credit-active consumers slowed to 9% in Q1 FY26, compared to 15% in the year-ago quarter.
Score migration showed increasing stress: 25% of movements were downgrades (vs. 23% earlier), and upgrades declined to 29% (from 31%).
In younger cohorts (e.g. new loan originations from the youth), growth slowed to ~6%, down from ~9% in the previous period.
The segments of two-wheelers and credit cards saw upticks in stress, though overall asset quality in many retail segments improved.

These patterns suggest that while credit growth broadly continues, lenders are becoming selective, especially against fresh or riskier clients.

Drivers Behind the Pullback

Why are lenders pulling back from new-to-credit segments? There are several interlinked reasons:

1. Rising Risk Perception and Stress Migration

As the score migration data show, a larger share of borrowers are getting downgraded, and fewer are being upgraded. This signals potential weakening in borrower quality.
Lenders, thus, may be shifting toward safer, known customers and reducing exposure to untested borrowers.

2. Macro and Economic Uncertainty

In the current economic environment, many lenders are likely factoring in uncertainties, rising interest rates, inflationary pressure, slower consumption growth, or external shocks.

For instance, Reuters reports that retail credit growth has already been slowing, with banks becoming cautious in extending personal, durable, and consumer credit.
Moreover, NBFCs face headwinds in deposit growth and rising risk weight norms, which squeeze their capacity for aggressive lending.

3. Regulatory and Capital Constraints

Unsecured or low-collateral lending is inherently riskier, attracting higher risk weights under regulatory frameworks. Lenders may favor collateralized or lower-risk segments to maintain capital efficiency.
Also, central bank signals to tame exuberant unsecured lending and strengthen provisioning may push institutions toward caution.

4. Cost of Customer Acquisition and Underwriting

Acquiring and underwriting first-time borrowers is costlier—there is little credit history to lean on, raising credit assessment, monitoring, and default risks.
Given tighter margins and elevated competition, lenders may prefer lower cost, safer renewals or known relationships rather than venturing into first-time credit segments.

5. Delinquencies in Fintech / Digital Lending

Recent reports suggest rising delinquencies in fintech-based personal loans, especially among small-value, algorithm-driven portfolios.
This experience likely reinforces caution among all lenders in allocating aggressively to new, thin-file customers.

Impact Across Stakeholders

Below is a table summarizing how different stakeholders are affected by the decline in NTC share and the broader credit tightening.

The table below outlines key stakeholders in the lending ecosystem and delineates the main impacts they face as new-to-credit disbursements shrink and credit underwriting becomes more cautious.

Stakeholder	Main Impact / Risk	Possible Response
New / young borrowers	Reduced access to credit, especially first-time loans; higher interest or rejection risk	Build credit history via alternate data (utility, telecom), save & show repayment track
Lenders (banks/NBFCs)	Lower growth in retail portfolios, increased reliance on existing customers, pressure on margins	Better credit scoring models, improved risk analytics, diversification
Fintech / digital lenders	Higher repayment stress in fresh cohorts, reputational risk	Tighter underwriting, more stringent verification, better collections
Financial inclusion / policy goals	Slower progress in bringing underserved segments into formal credit system	Encouragement via subsidies, credit guarantee schemes, regulatory nudges
Economy / consumption	Weaker consumer credit may slow demand in durables, auto, discretionary segments	Focus on collateralized lending, targeted stimulus, credit support to firms

The table captures how both the supply side (lenders) and demand side (borrowers) are squeezed by the pullback in new-to-credit lending. For policy makers and inclusion advocates, this presents a delicate balance: ensuring prudent credit growth without denying access to deserving, credit-poor segments.

From the borrower side, reduced opportunities may push some into informal or predatory borrowing channels. On the lender side, growth constraints may compel them to lean more on existing clients or safer segments, potentially creating concentration risk.

Broader Trends and Corroborating Evidence

The decline in NTC share is not an isolated phenomenon; it aligns with several broader trends in Indian credit markets:

Retail Credit Squeeze: A Reuters report notes that as major banks reported rising bad loans in April–June, they tamped down on retail credit growth (e.g. personal loans, credit cards) to avoid further stress.
Shift to Safer Lending Modes: Many lenders are shifting toward collateral-backed lending (such as mortgages or vehicle loans) or focused segments where risk assessment is easier.
Pressure on Non-bank Lenders: NBFCs, in particular, must contend with funding cost pressures, stricter risk weights, and regulatory scrutiny.
Digital / Fintech Stress: As mentioned, fintech-driven small-ticket loan portfolios are seeing rising delinquency rates, underlining the danger of loosening credit to under-documented borrowers.
Financial Inclusion vs. Risk Appetite: Policymakers and credit bureaus often push for higher inclusion; yet, lenders are balancing this against the practical risks of default and capital erosion.

Hence, the NTC dip is consistent with a cautious credit environment emerging across sectors.

Policy and Institutional Remedies: Charting a Middle Path

Given the importance of bringing underserved individuals into formal credit, but acknowledging legitimate risk concerns, several steps can help restore balance:

1. Alternate / Nontraditional Data Models

Using nontraditional data (utility payments, telecom, rental history, social behaviour) to assess thin-file borrowers can reduce information asymmetry and improve underwriting without excessive risk.

2. Credit Guarantee / Subsidy Backstops

Governments or development agencies may offer partial credit guarantees or risk-sharing for first-time borrowers. This can reduce downside risk for lenders and incentivize issuance to NTC segments.

3. Graduated Access / Tiered Credit Products

Instead of high-ticket credit, smaller, incremental credit exposure (starting with micro-loans, then gradually increasing) allows new borrowers to build track record, reducing default risk.

4. Strengthening Collections and Monitoring

Investment in early warning systems, predictive models, and robust collections infrastructure can contain losses even in fresh-credit cohorts.

5. Regulatory Nudges & Incentives

Regulators can encourage inclusion via priority sector classifications, differential capital charges, or regulatory incentives for lenders servicing underbanked groups.

6. Financial Literacy & Responsible Borrowing

Educating prospective borrowers about repayment discipline, budgeting, and credit responsibility helps reduce default risks when credit is extended.

Taken together, these measures can help strike a balance between safeguarding lender health and advancing the inclusion agenda.

Conclusion

The sharp decline in the share of new-to-credit loans to 16% in Q1 FY26 reflects a growing risk aversion among Indian lenders. Underlying this pullback are concerns around rising stress, cost of underwriting, regulatory capital pressures, and experiences of delinquencies in fresh credit portfolios. While this trend protects lenders’ balance sheets, it carries risks: stalling financial inclusion, worsening credit access for youth or underserved groups, and potential informal borrowing.

Policymakers, regulators, and lenders must navigate this tension carefully. Deploying alternate data, offering credit guarantees, fostering tiered credit access, and improving risk analytics can help revive NTC lending in a prudent manner. In the long run, sustainable credit growth will depend not just on the quantity of loans disbursed, but on how wisely and inclusively they are extended.

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