With their immense involvement and contribution in the economy, NonBanking Financial Companies (NBFCs) have emerged as an alternative to mainstream banking. Be it infrastructure, transportation, employment generation and wealth creation, their contribution across the sector is visible. However, the year 2019 brought several challenges for the sector and an urgent need to hold the positives became evident. On the basis of experts’ opinions on the challenges faced by NBFCs last year, Rashi Aditi Ghosh of Elets News Network (ENN) explores the role of technology in keeping the sector at a pace and sync with the market environment for sustainability.
Why NBFCs are Significant to the Economy?
NBFCs provide credit to the micro, small and medium enterprises (MSME) segment and contribute significantly to financial inclusion. With their deep understanding of micro-markets, NBFCs over the years, have been able to emphasize on the lower end of the spectrum through product customisation.
NBFCs on the Spotlight: Why they need to grow?
The 2019 budget announced the growth aspiration of achieving a $ 5 trillion economy in 2024. However, the Economic Survey for 2018-19 highlighted the current NBFC crisis as a key challenge that could choke credit growth and impede the achievement of this milestone.
Liquidity Risk: A Reality Check
Talking about the liquidity risk in the sector, Anand Aggarwal, Chief Information Officer, Capital Trust says, “Liquidity is one of the main concerns bothering NBFCs that are not well capitalised or do not have good balance sheet, otherwise funding is available through at a higher rate as compared to the previous year. Lenders have become selective and technology and process robustness have become extremely important. However, with government focus, the situation seems to be improving and banks have started disbursing funds to financially sound and technologically innovative NBFCs.” A PWC report suggests that the, “NBFC liquidity situation appears to have manifested itself in the current economic crisis through the slowdown in the auto, real estate and infrastructure sectors, where the NBFC presence has been significant. Therefore, a healthy and growing NBFC sector is an important pillar for reaching the 2024 GDP milestone, as well as propelling India towards developed nation status by improving social indicators such as employment rate, per-capita income and percentage of population below the poverty line.
Is technology up-gradation in times of liquidity risk a wise option to choose?
“It is an opportunity to plan for technology upgrades without having to face any business pressures. NBFC can use the existing liquidity crisis to upgrade their technology platforms and implement new processes. It is an opportunity to build the next-generation systems to be ready when the market gathers steam. We cannot afford to wait for any event before upgrading technology. It is a continuous improvement process that has to permeate the entire organization. The world is changing extremely fast, the consumers’ expectations and the associated risks are shifting as quick as a click of a mouse and we have to move to fulfil the expectations, before anybody else,” says Mandeep Chaudhary, Managing Director, KNAB Finance.
How Did Technology Perform for NBFCs in 2019?
Jaya Vaidhyanathan, CEO, BCT Digital
Across the NBFC sector, asset-liability management (ALM) is at the nascent stage and needs to be structured at par with scheduled commercial banks. The RBI’s latest ALM guidelines and its rules enforcing new monitoring mechanisms have fuelled an urgency among NBFCs to adopt technology for liquidity risk management in order to avoid sudden shocks like those seen over the last year or so. In today’s volatile marketplace, the interest rate risk by itself must be closely linked to funds transfer pricing, intraday liquidity and overall capital management. There is a need for a holistic approach using a robust ALM framework to protect earnings and capital while reducing complexity and ensuring compliance.
Ram Kewalramani, Co-Founder & Managing Director, CredAble
With tighter regulations and increased cost of compliance, the cost of borrowing has increased and NBFCs are making their hay by focusing on niche markets and developing bespoke financial offerings. It is imperative for NBFCs to be digitally agile and sharpen their offerings in the natively digital age. As digital transactions and capabilities proliferate it will allow NBFCs to lower their cost of operations, on customer acquisition, serving its customers or de-risking their portfolio while trying to overcome the increasing formal credit penetration in a growing economy.
The new-age CFO (Most probably a millennial or a gen X’r), expect a lot of innovation. NBFCs need to revisit their traditional lending models, develop “technologically exponential” business models which will help them meet new demands in enabling credit on demand. Innovation is no single person’s prerogative.
Mandeep Chaudhary, Managing Director and Vineet Gupta, CEO of KNAB Finance Warren Buffet once said, “Only when the tide goes out you discover who’s been swimming naked.” It has been difficult, but like other industries, financial services also have their crests and troughs. It happened across the Globe in 2008, when we saw many going underwater and it will happen again and again and again… The key is to protect ourselves from the Black Swan, which can be through capital preservation or maintaining liquidity, or retaining talent, or be closer to the customer or most importantly, through all of the above. We should be prepared to manage the unexpected. Internally, the dust kicked up by transformative economic changes that ruled 2019 like IBC and GST will settle down. The uncertainties on the Global arena will keep on pushing us out of our comfort zones. The geopolitical developments including the relationships between China, and the US or the Middle East, and others can unsettle the business environment anytime. Companies who will be able to manage and efficiently allocate capital, talent and customers will survive.
Joseph Jayakumar, Director, Amstar Technologies
While the Traditional based lenders have adopted a ‘One Size Fits All’ approach, evaluating all types of customers against a single-window credit policy, resulting in the exclusion of a large population of creditworthy customers. It was a huge opportunity missed by the NBFC segment which saw something was amiss wherein Fintech giants were adopting and building robust models on AI combined with ML and advanced analytics like Chatbot Elle by HDFC Bank etc.
The challenges in 2019 for NBFC lenders was to adopt a differential yet personalized approach in incorporating segment-definitive guidelines, empowered by alternative data sources or even apply scorecard-based credit rating decisions. Another hurdle was in during the testing and deploying solutions in collaboration with Fintech Software as a Service (SaaS) providers as automation to back-end, front end and middleware software applications made the process delayed due to multilayered apps and authorizations.
Scope of Technology for New-Age NBFCs
Technology that is already helping other BFSI segments in bringing a solution to their challenges can also ensure better efficiency around the NBFC sector. New-age technologies such as big data analytics, artificial intelligence and mobility solutions can help in strengthening governance and risk management controls “A standardized system driven by Artificial Intelligence with an independent and targeted governance framework (adhering to RBI regulations and supported by specialist firms) can make an ocean of difference in the financial health of an NBFC. BCT Digital, a division of Bahwan Cybertek Group, with its mission to address this complex whitespace has launched its product rt360 – Asset Liability Management specifically addressing NBFC’s and HFC’s. Built on a future proof architecture, such a specialist application can help banks and NBFCs proactively monitor and manage their liquidity requirements. Beyond this, it can also leapfrog them to the next level of compliance,” says Jaya Vaidhyanathan, CEO, BCT Digital.
Areas of Technological Intervention
Technology integration: The level of technology integration between banking and NBFC systems would largely determine the success or failure of the co-lending arrangement. A standard protocol needs to be established for communication between banking and NBFC systems.
Technology capability: Ensuring that the technology architecture is flexible enough to support integration with marketplace ecosystem partners to facilitate hassle-free onboarding and payment disbursals.
SLA-driven processes: With the use of digital technologies such as eKYC, e-signature, Aadhaar-based verification and dynamic underwriting models, loan disbursals are happening within 30 minutes. It is imperative to align loan processing/disbursal processes to meeting such aggressive SLAs. “There are multiple technologies — RPA, Chatbots, 5G, Cloud, AI/ML, NLP to name a few that are impacting the overall customer journey and operational processes. We can expect significant improvements in the turnaround time for any customer interaction. The Robotic Process Automation (RPA) would get adopted widely across KYC, disbursements, repayments, financial reco, regulatory reporting etc. Chatbots would become mainstream allowing customers to self-service themselves, easily enabling customers to manage their accounts 24×7.
Speech recognition-based systems using NLP (natural language processing) would make it easier to handle the multi-lingual customer base. Mobile data (4G/5G) and cheaper smartphones enable video interaction, allowing for easier KYC and credit assessments without the need for in-person interactions. Alternative credit assessment models would continue to evolve as AI/ML becomes easier and cheaper to implement in the coming decade,” Mandeep Chaudhary, Managing Director, KNAB Finance.
Synergistic alliances with FinTechs
The FinTech segment has seen a meteoric rise over the last 5 years, with approximately 1,800 FinTechs founded in the period mainly to fulfil the unmet needs of the underserved retail segment. The size of FinTech transactions is estimated to reach $ 137.8 billion by 2023 with a CAGR of 20 percent. (Source: PWC) “Having been in the IT Training and Software Consulting Business from 2005, we have understood the pulse of the market as per ad-hoc demands based on each vertical. While the NBFC sector akin to the Banking Sector was more keen on having a centralized CRM and Digital Hyper Journal Ledger which was pioneered by large scale players like Infosys, WIPRO, SUBEX systems etc the impetus was more on transparency and platform sustainability even in tier 2 and tier 3 cities as well where NBFC’s have an upper hand over-organized retail or merchant banking.,” says Joseph Jayakumar, Director, Amstar Technologies.
According to Jayakumar technologies that will change the face of NBFC are
- IoT- Internet of Thing, Artificial Intelligence (AI), RPA (Robotic process analytics) and ML (Machine learning)
- TToT- Today’s Technology of Tomorrow which includes Blockchain, Ethereum and Hyperledger Fabric, Chatbots, Analytics, API(Application program interface)
- IBM Watson, IBM Qradar, Oracle Flex cube
- Hyper and Private Cloud and Big Data Analytics
- Data privacy and security across layers and platforms and migration from CRM servers
- Periodic Accounting and payroll software updates
Conclusion: While the liquidity condition in the market improves for the NBFC sector, it is imperative for NBFCs will establish a strong governance and risk management practices to restore stakeholder/investor confidence and reduce overall borrowing costs. Additionally, NBFCs have scope for improving their bottom line by optimising their operating expenses through digitisation and automation initiatives. Finally, the ability of NBFCs to develop strategic partnerships with key ecosystem players and leverage technology to meet the demands of new consumers will determine the future course of the industry.