With a record-low GDP, businesses shutting down, and job losses across the board, the stage is set for India’s NBFCs to leap into the fray.
NBFCs have traditionally targeted small, medium, and micro-sized enterprises and high-risk segments for credit lending. In the current pandemic-fuelled scenario, these segments are in dire need of credit to continue operations.
But with the entire economy weighed down by a heavily protracted cash flow due to the constraints imposed by the pandemic, how can NBFCs rise to the occasion and ensure smooth credit provisions to the sectors that need them the most?
This is a timely and essential issue that will be addressed after getting through some preliminaries.
What is an NBFC?
A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares, stocks, bonds, debentures, or securities issued by the Government or local authority or other marketable securities of a similar nature.
This makes it sound like an NBFC is quite similar to a bank, but there are some key differences.
- NBFC cannot accept demand deposits;
- NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;
- Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in the case of banks.
Therefore, NBFCs are (generally, except a few cases) not in the business of accepting deposits but instead rely on providing credit advances and acquisitions.
To maintain this model of business, NBFCs are, in general, comparatively less regulated, have less stringent lending regulations and lending criteria, and are thus capable of quick credit disbursal with minimum documentation requirements.
These factors make NBFCs incredibly conducive to providing business loans for small businesses, retail loans, and loans for commercial real estate. In particular, the base interest rate for NBFCs is not regulated by the RBI but is instead dependent on the Prime Lending Rate (PLR), which is determined by the NBFC, and therefore affords greater flexibility in setting interest rates.
Therefore, NBFCs are extremely capable of providing quick loans with minimum documentation at interest rates that can be customized based on the customer’s requirements.
As rosy as this sounds, the model of an NBFC is tacitly averse to any form of stagnation in the economy and requires the smooth flow of capital to function as most NBFCs do not have a “war chest” of deposits to fall back on during times of duress.
This has recently had a regressive effect on NBFCs, as we shall see now.
How have NBFCs been affected by the pandemic?
According to reports from the RBI, the lion’s share of credit deployment in 2019 by NBFCs has been in the sectors of retail and industry loans ( ₹ 4,74,899 crore & ₹ 13,33,811 crore, respectively).
With retail loans already shrinking by 2.46% in late March and the ratio of bad retail loans set to increase by 2.1% towards the end of FY20, the reliance of NBFCs on retail loans is quickly becoming untenable.
Similarly, over 80% of Indian businesses reported a decrease in cash flow due to the pandemic, and we can extrapolate that this will lead to problems with loan repayment to NBFCs.
These factors have ostensibly led to efforts by NBFCs to shore up their assets by borrowing nearly ₹8.07 trillion from Indian bankers. Additionally, Moody’s in a report has stated that NBFCs will experience a “worsening of asset quality” due to their focus on high-risk segments such as commercial real estate and retail.
With all these factors working against NBFCs, how can they bounce back from this deteriorating situation?
Back to basics
NBFCs were, in a way, an answer to the slow-moving and heavily regulated nature of Indian banks. They could customize lending policies, erect better risk management capabilities, cater to specific customer segments, and leverage technology to optimize operations.
This led to a 16% share in the total credit market for NBFCs in 2017; NBFCs even outperformed banks in new credit deployment, and things were looking up.
NBFCs, due to their streamlined and quick credit disbursement and minimal regulations, have always been the more comfortable and faster option for credit; and they must double down on this aspect to get themselves back on track.
In a report, PwC stated that one of the reasons for the meteoric rise of NBFCs was their ability to “leverage technology advances for improved efficiency and enhanced experience.” This has traditionally helped NBFCs penetrate new low-tier markets, cut down on costs, and manage risk better.
The ability of NBFCs to act quicker and offer customized credit is one of their unique characteristics that differentiates them from a traditional bank, and during these challenging times, it could well be the antidote to their problems.
So how can NBFCs bounce back from their troubles?
Leveraging technology for KYC & onboarding
KYC verification and customer onboarding have traditionally been a thorn in the side of financial institutions; due to exorbitant costs, long turnaround times, and low levels of customer satisfaction.
The presently available technology is capable of automating both KYC verification and customer onboarding using Video KYC. Now, since NBFCs have always prided themselves on leveraging technology to improve efficiency, customer onboarding is an area that’s ripe for automation.
- 90% reduction in onboarding costs
- 99% reduction in TAT
- 20% increase in efficiency
- 120 hours saved per customer
- Increased customer acquisition
Additionally, video-based KYC methods allow NBFCs to increase their reach, penetrate further into low-tier cities, and increase their customer base due to the completely digital and remote nature of onboarding.
These factors are likely to off-set the costs of running an NBFC while the economy recovers from the pandemic, and will help NBFCs supply much-needed credit to small businesses.
Banks who have adopted video KYC have reported several millions of accounts opened via video-based methods, indicating that customers are enthusiastic about remote onboarding. NBFCs must heed these indicators and also broadly adopt video KYC so that they can better play their role as providers of quick credit.
Now that we’ve established video KYC as a possible remedy for the dire situation of NBFCs, which video KYC service should you avail?
Trusted and award-winning Video KYC solution
SignDesk provides digitized onboarding solutions to over 50 major banks and has been awarded the Global Banking and Finance Review’s best KYC/ digital onboarding product for 2020 in India.
Our video KYC solution has helped several banks and NBFCs reduce onboarding costs and significantly lower TAT with advanced facial matching and document verification technology.
Every NBFC requires a fast and efficient onboarding method that’s easy for customers to use, and video KYC is the perfect blend of all these aspects. Our video KYC solution optimizes onboarding and even provides customized solutions according to client requirements.
Are you ready to expedite KYC and onboarding at lowered costs? Book a demo with us now to see how we can help!