The Non-Banking Finance Companies or NBFCs have played a pivotal role in meeting the financial needs of individuals and business that have traditionally remained un-served or underserved by the banks. However, with time, the regulations for NBFCs have become stricter, the cost of borrowing has increased and NBFCs are focusing on niche markets and personalised products and services to explore new areas of business. Also, technology and digital transformation have become an integral part of the NBFC ecosystem.
First, two years of economic meltdown and then Covid-19 pandemic has created havoc in the industry. Besides that, NBFCs were asked alongside the banks by RBI to provide moratorium to the borrowers. However, the sector itself didn’t receive the relaxation benefit from its lenders, adding woe for NBFCs. In the meantime, several new technological implementation has been seen in the sector in order to create more efficiency.
So far, there has been a lot of changes in the Indian NBFC sector in the last few years. Autofintechs spoke to Rachit Chawla, CEO & Founder, Finway FSC to learn about the changes and disruptions the sector is witnessing.
Edited excerpts below.
Q. First with two years of economic meltdown and lately the Covid-19 pandemic, have created havoc in the NBFC sector. How the Indian NBFC sector is reviving (if at all) from this crisis?
The only way for the NBFC sector to revive is to leverage technology and focus on digital transformation. Because of the moratorium, there is a lot of confusion at the moment regarding the credit status of the borrowers. Machine learning models can be implemented to identify patterns that would help distinguish between bad loans and safe loans.
Once the NBFCs find out who their creditworthy customers are, they can cross-sell more. Also, with time, we’ll eventually discover a vaccine and the pandemic would subside. Borrowers will be able to pay the EMIs on time once again. People will find new jobs and their credit scores would improve. The only difference would be that having gone through hell, the lending sector would have become leaner and more robust.
Q. Is the Indian government and regulatory authority’s stance adequate for the NBFC sector’s own revival? What should be the government’s stance to make the sector future-proof?
In terms of cash reserves, there is adequacy in terms of the push from the government also, it is a positive element. This only at the ground level of risk management and risk assessment where the NBFCs and banks are not willing to take any risk or any leveraging. That is the reason why their cash reserves are an all-time high.
When the RBI is reducing the reverse repo rate still banks, are willing to take the reduction in reverse repo rate but they are still not willing to fund the auto sector. So, if the government can also focus on the risk-sharing or maybe some policy then it can come easily in a revival stage.
The government’s stance is should be to ensure that there is enough demand created for the sector through enough liquidity as well as few incentives for the consumers to buy product from the auto sector as well as becoming a party with NBFCs financial institutions in terms of accessing the risks and taking part in it so that the cycle which is stopped at the moment can start running.
Q. The startups have been a key growth driver for the Indian economy in the last couple of years, but hit by the pandemic hard. How is the sector planning to revive and grow in the post-lockdown phase?
The startups need to focus on adapting to the new norm and focusing on innovation to revive growth in the post-pandemic phase. The transition might be slightly uncomfortable but it is the need of the hour. The winemakers are producing sanitizers and fashion brands are producing PPE kits.
Unless the situation gets better and things return to normal, innovation is the only way to survive. The pandemic has created many problems and the primary role of a startup is to be a problem solver. That is what the startups need to focus on if they want to survive and thrive.
Q. What and how the key takeaways from RBI’s latest Monetary Policy Report that can benefit startups in the long run?
RBI’s latest monetary policy has included startups under the Priority Lending Sector (PSL), recognizing that startups are major contributors to the country’s economy and that they provide income opportunities to a major chunk of our population. This is a welcome decision for the startups who can now borrow the capital they need even with average or below-average credit scores, which usually is the issue with startups that prevents them from securing loans from banks.
Q. As the government is trying to boost consumption with its new measures, do you think encashing your LTC and spending on goods is a good idea?
Whether or not you should encash your LTC depends totally on your financial situation. In my opinion, you shouldn’t simply encash your LTC simply for the sake of claiming the LTC amount. Remember that you’re only getting tax-exemption; you’re not getting the goods and services for free. Though, if you have expenses planned out for the next six months, then taking the LTC may be advantageous for you.
Q. What is the present status of the fintech sector in India, especially in light of the devastating Coronavirus impact?
There is no denying that the Covid-19 pandemic has been very detrimental for the fintech sector in India. To relieve the pressure on borrowers, the RBI made it necessary for the NBFCs and banks to provide moratorium to the borrowers. However, the NBFCs did not get any sort of moratorium from their lenders, which created a major liquidity issue.
However, this situation has also forced a technological transformation upon the sector which could be a blessing in disguise. In the time to come, the fintech sector could end up becoming leaner and more robust.
Q. What are the key trends changing the Indian fintech sector?
The major trends shaping the Indian fintech sector are as follows:
- The cashless transaction or invisible payments.
- Increase in transparency and efficient communication between lender and borrower.
- Offering multiple financial services from a single platform.
- Leveraging new technologies like blockchain, Big Data, AI and ML to assess and mitigate risks in a much better way and make the transaction process smoother.
Q. How AI is helping the fintech sector?
AI can be used by the fintech sector to process and analyze the huge amount of information about the customers. The results derived from the analysis help to decide the products that the customers might be interested in. It further helps with automated customer support.
Given how the customer base is increasing rapidly, it is not feasible to have human resources catering to every individual customer when an AI can do that more efficiently and a significantly lower cost. It also helps with fraud detections and claims management among many other things.