'First-time applicants may witness longer approval times or higher rejection rates and requests for more documentation.'
Indian banks are likely to become more cautious in issuing credit cards, as the West Asia conflict and the fall in stock markets have made them more risk-averse, according to media reports.
They are expected to further tighten their underwriting standards.
Key Points
- Banks are tightening credit card issuance due to macroeconomic uncertainty and RBI's higher risk weights on unsecured lending.
- Approval processes may become stricter, with higher credit score requirements, lower limits, and increased documentation demands.
- New-to-credit users, gig workers, and those with unstable income or high utilisation are likely to face higher rejection rates.
- Maintaining repayment discipline, stable income flows, and limited credit enquiries can significantly improve approval chances.
- Secured cards, FD-backed cards, and cautious product selection can help users build credit while avoiding hidden fee traps.
Why are norms being tightened
Experts say there has been a gradual tightening over the past year, driven by both regulatory intervention and rising risk sensitivity.
"Following the Reserve Bank of India's higher risk weights on unsecured lending in late 2023, lenders have shifted from aggressive customer acquisition to more calibrated sourcing," says Adhil Shetty, CEO, BankBazaar.
"The focus has moved towards stronger borrower profiles, with closer scrutiny on income stability, leverage, and repayment behaviour," adds Shetty.
Whenever unsecured credit expands rapidly, he notes, a phase of tightening typically follows.
Growing macroeconomic uncertainty could lead to further tightening of underwriting standards.
"Lenders regard unsecured lending, particularly credit cards, as intrinsically susceptible to fluctuations in the economy," says Shams Tabrej, co-founder & CEO, Ezeepay.
"Banks prioritise asset quality over ambitious expansion in response to any signs of stress, such as possible revenue disruptions, rising living expenses, or unstable markets," adds Tabrej.
The impact
During such a phase, credit assessment becomes more disciplined.
Banks may raise the minimum acceptable credit scores, especially for new-to-credit applicants.
"First-time applicants may witness longer approval times or higher rejection rates and requests for more documentation," says Tabrej.
Even after a card is approved, it may come with lower initial credit limits to reduce early-stage risk.
"More first-time applicants may be offered secured cards or entry-level product options, instead of full-fledged unsecured cards," says Tabrej.
Segments that will be affected more
New-to-credit customers, workers in the gig economy or informal sector, self-employed individuals with variable income, and customers with weak or inconsistent credit records are likely to be most impacted.
Those with multiple recent credit enquiries may also see higher rejection rates.
"Customers already carrying high credit utilisation levels, typically above 30 to 40 per cent, are likely to face tighter filters," says Shetty.
On the other hand, salaried individuals with steady incomes and customers with a clean repayment history are likely to be less impacted.
"Consumers with an existing relationship with the bank have much higher chances of card approval," says Santosh Agarwal, CEO, Paisabazaar.
What vulnerable applicants should do
New-to-credit customers should use digital payment platforms to create a transaction trail.
"Maintaining a stable bank balance and regular income inflow can strengthen their profile," says Vijay Anand MV, head of strategy, Zolve.
"Starting with short-term, low-cost credit products, such as microloans or buy-now-pay-later (BNPL) products, and repaying them on time can help," says Tabrej.
Ensuring every payment is made on time is critical for new entrants.
"Applying selectively to credit products and avoiding multiple applications in a short span can improve the odds of approval," says Anand MV.
Shetty adds that each enquiry remains on the credit report for up to 12 months and can temporarily pull down the score.
Financial and KYC (know your customer) records should be accurate and up-to-date.
Those with a weak credit history should pay off outstanding loans and avoid further delinquencies.
They should also adopt the methods described above.
Even three to six months of healthy credit habits can materially improve the odds.
Products that ease entry
A fixed deposit (FD)-backed card or a low-limit entry card can help build an early repayment track record.
"A secured credit card could be an ideal entry point since it offers guaranteed approval due to collateral backing. By using it in a responsible manner, customers can build their credit score in a few months," says Agarwal.
She informs that several FD-backed cards are available in the market that have low FD requirements, making them accessible to a wider demography.
Add-on cards are ideal for young earners or family members who can rely on the primary cardholder's strong credit profile.
Young salaried individuals may apply for cards from the bank with which they have their salary account.
This is effective since the bank already has visibility on their income flows.
Watch out for red flags
During periods of tighter underwriting, secured cards, high-fee cards, or products with complicated reward structures tend to become more visible.
"This is because such cards are easier to approve or are more profitable," says Rahul Sheth, vice president, BUSINESSNEXT.
Customers must be watchful about being handed a poor-quality card.
"If the rewards are too complex, expire quickly, or come with multiple conditions, that's a red flag," says Sheth.
He cautions that a high annual fee without clear or easily usable benefits is another red flag.
Agarwal emphasises that customers should review how much value each point delivers, exclusions, and caps on earnings before choosing a card.
Application rejected? Follow this plan
Dos
- Pay every bill on time
- Those with an existing card should keep credit utilisation below 30 per cent
- Check eligibility in advance, apply where chances of approval are higher
Don'ts
- Avoid too many card or loan applications within a short period
- Do not shut down old credit accounts
- Avoid even minor errors in documentation
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Feature Presentation: Ashish Narsale/Rediff
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