This playbook is now outdated. We are facing a sea change.

· Household financial borrowings are exceeding household deposits for the first time in history – with a materially different disposition now towards consumption and leverage

· Leverage build-up in pockets among NTC customers, higher defaults observed.

· Income instability: The income stability of less value adding jobs is at an all-time low given technology driven automation. Premium segments remain resilient, but leverage buildup and rising default rates are pronounced in more vulnerable groups

· Credit team churn: Significant turnover in credit teams has left pre-COVID models outdated and poorly maintained. The generation that built the models three to four years ago (during and before Covid) is not the generation that is today maintaining and running the models

· Outdated policy teams: Policy teams are focused on broad, static directives and have not transitioned to leveraging data science for nuanced decision-making (for e.g., what segments to cut vs. grow)

· Growth incentivised in short term: Management has been lulled into taking adhoc growth targets without thinking through the target balance sheet and risk portfolio they are trying to create over next two to three years. Hence, the resultant portfolio is emergent rather than deliberate

Adding to this complexity, geopolitical uncertainties have the potential to impact domestic economic stability, particularly for middle- and lower-income segments already navigating financial strain.

In addition to these economic headwinds, the regulatory landscape has toughened. The Reserve Bank of India recently raised risk weights on unsecured loans and loans to non-banking financial companies. Rising defaults are adding to the challenge, especially as some borrowers have stayed afloat only through an abundance of accessible credit, which may soon dry up.

To thrive amid these challenges, lenders need to draw on hard-won lessons from past financial crises. During the global financial crisis, lenders who segmented their portfolios and adopted a target portfolio approach succeeded. This approach is more essential than ever. Narrow profit engines reliant on single business lines will not cut it in today’s high-stakes environment. Instead, lenders must build multiple profit streams across finely tuned segments to stay resilient, ensuring that no single downturn in one segment can impact the portfolio.

Yet within this brewing storm lies the opportunity. Big lenders with ample capital reserves have a golden chance to grab market share from smaller, less-resilient players. Strong, well-capitalised institutions can shore up their defences, tightening underwriting standards and revamping collections with an eye on the future. A new playbook needs to be adopted.

· Diversify portfolio: Build diversity in product portfolio - access more profit streams/value pools

· Refine risk models: Implement micro or hyper risk segmentation to recalibrate risk exposure and enhance underwriting precision

· Enhance fraud models: Implement new fraud models at an organisation wide level – to deal with new and emerging threats

· Institutionalise stress testing: Adopt ‘always-on’ stress testing at the micro-segment level to proactively identify vulnerabilities

· Leverage dual-credit and fraud detection: Enhance portfolio health by integrating advanced credit and fraud detection systems

· Enhance underwriting with alternative data: Integrate alternative data sources to strengthen underwriting, particularly for new-to-credit borrowers

· Enable real-time data interaction: Build systems using GPT and Artificial Intelligence (AI) to facilitate dynamic, real-time dialogue between management and organisational data

· Revamp organisational structures: Undertake bold but necessary changes to roles and talent mixes to align with the demands of the evolving credit cycle

· Establish model maintenance teams: Create dedicated departments for continuous model updates

· Upskill policy teams: Train teams in data science and transition from text-based directives to actionable pseudo-code or direct coding

· Modernise collections: Invest in digital tools, data science, and AI to streamline collections and improve efficiency

It is a high-stakes game where only the sharpest and most strategic players will thrive. The clock is ticking—now is the time for lenders to draw their battle lines and fight for the future.

Using the playbook of the past to underwrite the risk of today is like sailing a fishing boat into stormy waters— unprepared for the turbulence ahead.

This article is authored by Yashraj Erande, India leader, Financial Institutions Practice, and global leader, Fintech Practice, and Abhinav Bansal, managing director & partner; APAC and India leader, Risk Practice, BCG.