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Non-banking financial companies (NBFCs) have made strong roots in the Indian financial sector targeting niche segments of the population, mostly catering to small businesses or salaried employees with their momentary needs.
After banks and insurance companies, NBFCs come at the third spot in the Indian financial system, while banks could manage to grow credit at 5.1 percent in the final quarter of the last fiscal year, NBFCs could register a credit growth of 250 percent more than banks - i.e., 13 percent. According to a recent study by the Reserve Bank of India (RBI), NBFCs are much ahead of commercial banks in managing non-performing assets (NPAs), and their asset quality is also far better than banks.
Sector witnessing an unprecedented growth
The demands and aspirations of India’s middle-class segment are growing speedily and gadgets like laptops, smartphones, and LED TVs are the common needs of almost every household in the urban culture of the country. Besides, life is difficult for many without a personal vehicle, if not a car; a bike is a must to have for families in metros and large cities. Their monthly income doesn’t allow them to purchase these items in one go and taking a personal loan from the 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 are successful to meet the demands and expectations of their customers.
It is worth noting that gross bad loans or NPAs in the NBFC sector reduced from 2.7 percent to 2.3 percent and from 4.9 percent to 4.4 percent 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 2016-2017.
Factors responsible for decreasing NPAs
One of the most valid reasons that enable NBFCs to optimise their assets is the intelligent selection and execution of the digital technology, they have learned a lot from the 90s 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 the potential customers. These technologies help them to 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 make a detailed check of loan seekers profiles and credit history and process transaction-related documents digitally and perfectly. Real-time bank statement, PAN number and e-KYC check, bureau reports and information on social networking sites help them a lot in finalising the credit score and calculating the associated risk factors. Moreover, the highly automated process brings down the entire turnaround time for disbursing a loan from customer enquiry to money transfer. Apart from this, most of the NBFCs take post-dated cheques from their customers as security instrument because every loan seekers know that cheque bouncing is a crime and strict actions can be taken against the deliberate offence.
But, technology is not the only factor that helps NBFCs in minimising the NPAs. There are various other structural, operational, and strategic incentives also that enable them to curtail the ratio of NPAs.
Conventionally, NBFCs avail 50 percent funds as market borrowing and the rest 50 percent 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 the external stakeholders and allow them to make quick decisions. Hence, advanced technology, focused approach, and more autonomy are the factors that have leveraged the NBFCs in minimising the NPAs.