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NBFCs better than banks at minimising NPAs? Unbelievable, but true!

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NBFCs avail 50% funds as market borrowing and the rest they acquire from banks. This makes funds cheaper for them.

Rachit Chawla

Non-banking financial companies (NBFCs) have taken strong roots in the Indian financial sector. NBFCs target niche segments of the population and mostly help small businesses or salaried employees with their momentary needs. After banks and insurance companies, NBFCs hold the number three position in the Indian financial system—while banks could manage to grow credit at 5.1% in the final quarter of the last fiscal year, NBFCs could register a credit growth of 250% more than banks, i.e. 13%. According to a recent study by RBI, NBFCs are much ahead of commercial banks in managing NPAs, and their asset quality is also far better than banks. Unprecedented growth The demands and aspirations of India’s middle-class are growing speedily, and gadgets like laptops, smartphones and LED TVs are common needs of almost every household, especially in the urban culture of the country. Besides, life is difficult for many without a personal vehicle—if not a car, a motorised two-wheeler is a must for families in metros and large cities. Their monthly income doesn’t allow them to purchase such items at one go, and taking a personal loan from a commercial bank is lengthier as well as a costlier affair.

So, NBFCs are the best alternatives for them to borrow money through quick and simple procedures. On the other hand, empowered with data analytics, advanced profile-check algorithms, smart credit rating system and fast verification tools, NBFCs can successfully meet the demands and expectations of their customers. It is worth noticing that NPAs and gross bad loans of the NBFC sector reduced from 2.7% to 2.3%, and from 4.9% to 4.4%, respectively, during September 2016 to March 2017. These improved figures clearly indicate that NBFCs are impressively effective in the exploitation of their resources despite a double-digit annual growth in the balance sheet of 2016-17.

Decreasing NPAs

One of the reasons that enable NBFCs optimise their assets is intelligent selection and execution of digital technology—they learnt a lot from the 1990s debacle and bounced back with practical implications of the technology to ensure a better journey in the financial system of India. Today, a majority of NBFCs use artificial intelligence, pattern analysis, predictive intelligence and other customised algorithms to study the repayment behaviour of potential customers. These technologies help them completely assess the credibility and financial status of an individual that decides his/her credit score. They disburse the loan to people with good credit score and complete verification.

Through strict underwriting process, NBFCs are able to make a detailed check of loan seekers profiles and credit history, and process transaction-related documents digitally and perfectly. Real-time bank statements, PAN and eKYC check, bureau reports, and information on social networking sites help them finalise the credit score and calculate the associated risk factors. Moreover, highly automated processes bring down the entire turnaround time for disbursing a loan, from customer enquiry to money transfer. Apart from this, most NBFCs take post-dated cheques from customers as security instrument, because every loan seeker knows that cheque bouncing is a crime and strict actions can be taken against the deliberate offence.

Add-on benefits

However, technology is not the only factor that helps NBFCs in minimising NPAs—there are various other structural, operational and strategic incentives that enable them curtail the ratio of NPAs. Conventionally, NBFCs avail 50% funds as market borrowing and the rest 50% they acquire from banks. This kind of practice makes funds cheaper for them. Another important point here is that, usually, owners/managers have real stakes in the company, which saves them from the unnecessary pressure of external stakeholders and allows them to take quick decisions. Advanced technology, focused approach and more autonomy are the factors that have helped NBFCs minimise NPAs.

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