In India, millions of first-time borrowers face a catch-22: without a credit history, they can’t get a loan; without a loan, they can’t build credit. The Reserve Bank of India has now stepped in to change this.
If you have ever applied for a loan, you know just how crucial a credit score can be in securing approval. This 3-digit number often serves as a gateway between borrowers and their aspirations – from homeownership to higher education to starting a small business. The recent clarification by the Union Minister of State in the Ministry of Finance highlighted a key update from the RBI’s directive issued earlier this year. The RBI explicitly states that loan applications cannot be rejected solely because of no credit history.
What does the update mean for first-time loan borrowers?
This is more than just a regulatory update; it signals that India’s lending ecosystem is evolving to reflect the needs of its borrowers – a major step towards greater financial inclusion.
Discourses around credit often confuse the two related but distinct concepts – credit score and credit history. A credit score is a numerical snapshot, representing a borrower’s credit behaviour into a single benchmark. On the other hand, a credit history encompasses something much broader – it details the entire record of debts availed, timely repayments, and instances of defaults (if any) over time.
While the apex bank has clarified that the absence of a credit score itself cannot be the grounds for loan rejection for first-time borrowers, credit history would still play an important role in assessing the repayment capability of the borrower.
From a consumer’s perspective, this move is welcoming and transformative. Millions of professionals, gig workers, small entrepreneurs and residents of semi-urban and rural areas manage their finances prudently, but remain invisible because of ‘no credit’ history. This created a paradox: credit was inaccessible without a score, and a score couldn’t be built without credit.
The RBI has removed this barrier and levelled the playing field. Borrowers who were previously rejected due to a lack of a credit score can now be assessed using alternative indicators such as income stability, digital transaction patterns, utility bill payments, etc. The result, fairer access to credit, an opportunity to build a financial footprint, and wider participation in India’s growth story.
Impact on lenders
For lenders, this opens up opportunities to expand into markets that were previously underserved. However, they will have to make cautious efforts in building alternative credit assessment frameworks that are scalable, robust, and regulatory-compliant. Fintechs play a crucial role in this. With tech-driven underwriting, they can incorporate non-traditional data such as rental history, digital payments, and employment records into risk models that complement bureau data. For example, regular rent or electricity bill payments could weigh as much as a credit card bill in assessing repayment ability. This approach will help broaden loan accessibility and maintain portfolio quality via disciplined risk evaluation.
India is moving toward a hybrid lending model where credit scores remain valuable but are no longer the only measure of creditworthiness. Incorporating borrowers’ credit history from alternative sources will complement traditional data and help foster a more inclusive lending ecosystem.
(Author is CEO and Co-Founder, BASIC Home Loan)
