Hi everyone,  

Welcome to the 148th edition of The Pattern, a weekly where we dive into the latest from the world of economy, technology and finance. Let’s get started. 

"The youth of today are the leaders of tomorrow." – Nelson Mandela.

In this case, they will lead the credit growth of tomorrow!

According to a recent CIBIL report, Gen Z (born between 1997 and 2012) form 41% of new-to-credit (NTC) consumers in India. Among them, women account for 37%, and 32% come from the rural sector. 

The NTC consumers who are ready to shape India's credit landscape have a different game plan in terms of borrowing. Instead of following the footsteps of the previous generations and utilising big-ticket loans to build assets, they're leaning toward short-term credit such as instant personal loans, credit cards, and BNPL. 

"Gen Zs prefer consumption loans for their 'here and now' needs," says Bhavesh Jain, MD and CEO of TransUnion CIBIL.  

This trend reflects in their preference for flexibility and immediate consumption needs. They're finding a middle ground—living in the moment but not taking too many risks. 

But there's a speed bump.   

While Gen Zs are driving the credit growth, something quietly shifted. As per the CIBIL data, by December 2024, NTC borrowing saw a sharp 21% decline. This means lenders are tightening their grip, especially on consumption-led credit products like credit cards and personal loans. Additionally, there has been a dip of 2% within borrowers with established credit histories. 

New credit card distributions have declined 32% compared to the previous year. Home loans have dropped by 9%, and personal loan growth has slowed from 24% to 14%. Consumer durable loans, like electronics and household appliances, have also seen a noticeable decline. These shifts indicate a broader pullback in lending, particularly in consumption-led credit categories. 

What we can derive from this pattern is that lenders are swiping left on risk.  

"The acquisition strategies that lenders have adopted, considering the risk-adjusted returns of unsecured lending products, have disproportionately impacted the New-to-Credit segment, which consists of first-time borrowers", added Bhavesh Jain . 

With the rise of delinquencies and economic uncertainty, banks are now prioritising risk management, putting rapid expansion in the backseat. Since Gen Z heavily relies on these short-term loans, they've been hit the hardest. For many, these small loans were the first step into the formal financial world. It's their first step to building a credit score and applying for larger loans later. 

This blocks Gen Z's entry to the formal credit system. 

And this trend inflates not just individual borrowers but has broader implications for the economy, slowing down demand across key consumer sectors such as electronics, fashion, and other consumption-driven services.  

When young consumers are unable to finance purchases or build credit histories, a ripple effect is created. It not only hinders their financial mobility but also affects retail growth and overall consumer sentiment. In the long run, this could dampen the pace of economic activity in segments that have been traditionally driven by younger, credit-dependent consumers. The Credit Market Indicator backs this slowdown. It dropped from 95 to 91 in a year—indicating a tightening credit environment.  

And yet, amid this crunch, there's a little ray of progress. Delinquency rates among below-prime borrowers have improved. Personal loans that were more than 90 days past due dropped from 4.85% to 4.54% . 

This might be an improvement but lots more is wanted. It's the right time to rethink how we should evaluate creditworthiness and promote financial inclusion for the next generation. 

That's where Account Aggregators (AAs), alternative data, and AI step in and move beyond traditional credit scoring.   

With AAs, lenders can monitor real-time financial data such as income patterns, spending behaviour, and savings trends among new lenders. They can combine that with alternative data like rent payments or e-commerce transaction history to get a fuller picture beyond just a credit score.  

AI is the glue here. It can help analyse patterns, customise loan offerings and early warning systems, and even help young borrowers with real-time alerts. It's smarter, faster, and more inclusive. This is how we can safely and sustainably bring Gen Z back into the credit loop. 

Gen Z is the economy's present and future spenders, earners, and borrowers, so it would be a fool's act if lenders overlooked this particular segment. Lenders must take a different approach to ensure sustainable growth. They should strike the right balance between risk management and financial inclusion.  

If the entry points to formal credit remain restricted, future economic momentum may be compromised.

Reading List:  

1. Banks may wait for liquidity cues to cut rates on special deposit plans  

2. Bank lending growth halves in February amid retail and NBFC slowdown  

3. Taking relentless action on wilful defaulters: FM Nirmala Sitharaman  

4. Meeting RBI's priority sector targets to be easier for banks      

Thank you for reading. If you liked this edition, forward it to your friends, peers, and colleagues. You can also connect with me on X here and follow FinBox on LinkedIn to always get all updates. 

Cheers, 

Mayank