It is evident that, in the last couple of months, the Non-Banking Financial Companies (NBFCs) have witnessed an acute liquidity crisis, and a bid to support the lending situation both centre and the Reserve Bank of India (RBI) has taken several measures. While the big-ticket NBFCs (AAA category) are in a better position to deal with the current problems, the smaller ones have been impacted largely. Analysing this crunch and the challenges, Rashi Aditi Ghosh of Elets News Network (ENN) explores what is in the store for NBFCs in 2020. What is their survival strategy?
What the crunch is all about?
Lending around the NBFC-MFI sector is facing several challenging situations in the country. The default and discrepancy created due to IL&FS and later inflated because of DHFL has aggravated the situation.
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.
A report titled- ‘Fit-for-future NBFCs: A key pillar of the $5 trillion economies’ co-created by ASSOCHAM and PWC quotes, “With the traditional sources of capital drying up, several NBFCs are raising capital through securitisation of assets for lack of other quick and viable fund-raising options. NBFCs focused on infrastructure and real estate lending are experiencing stress in their loan books as evidenced by the growing level of non-performing assets (NPAs). Additionally, NBFCs are facing stiff competition from new-age FinTechs which have been capturing a greater market share with their technology-heavy low-cost operating models and by setting new gold standards for customer experience.”
Here we speak to some new-age NBFCs and corporate sector representatives who offer services to the sector to get their vision for 2020. Going digital seems to be one of the strongest strategies for survival and growth. Besides, NBFCs are facing stiff competition from new-age FinTechs which have been capturing a greater market share with their technology-heavy low-cost operating models and by setting new gold standards for customer experience.
“In 2020, in my view, NBFCs will have no choice but to leverage technology heavily to keep costs and Non-Performing Assets (NPAs) low. Alternative credit scoring tools/models – social profiling, psychometric tests etc, RPA, Bots and Data analytics will play a major role this year. These tools will help in better customer credit profiling, reduce cost, launch new products quickly and help in bringing transparency and improving customer servicing. The key drivers for these would be changing customer needs and behaviour,” says Anand Aggarwal, Chief Information Officer, Capital Trust. In addition, data security is also one of the most talked-about focus areas, when it comes to setting the outlook for 2020.
“Our Vision 2020 is to focus on the launch of new business lines, multiple online platforms, enhanced customer relationships and advanced analytics. The organisation would have superior phygital capabilities through further leverage of the cloud, mobility, ESB and data lake platforms. There will be an emphasis on information security due to increasing technology risks,” says Gururaj Rao, CIO, Mahindra Finance.
Developing new channels of growth by exploring partnerships with aggregators, e-commerce companies, FinTechs and the MSME marketplace and developing capabilities to build these partnerships can offer great benefits to the NBFC-MFI sector.
“The outlook for 2020 may be cautiously optimistic, however, to ensure reasonable traction on growth, NBFCs need to pioneer innovative ways to raise capital essentially through co-lending partnerships, & innovative capital raising methods. The theme for 2020 would be largely “Strategic Partnership “based vs going the whole hog alone. No more lone wolves in NBFCs especially in 2020,” says Ram Kewalramani, Co-Founder & Managing Director, CredAble.
“2020 could potentially be a watershed moment, with the Government taking a series of robust fiscal measures to generate demand and ease the liquidity pressure, leading to green shoots appearing sometime in Q3 potentially. A slew of measures have been in the right direction, namely public sector banks to lend further to NBFCs, introducing partial credit guarantee scheme, end-use of restrictions on external commercial borrowings, loan co-origination with banks and financial institutions, introduction of liquidity coverage ratios among others,” he adds.
Apart from the existing challenges, the sector should also dive-in and explore new vistas for better growth opportunities and sustenance ground.
“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 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,” says Mandeep Chaudhary, Managing Director of KNAB Finance.
“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, regulatory reporting etc. Chatbots would become mainstream allowing customers to self-service themselves, easily enabling customers to manage their accounts 24×7,” added Chaudhary.
Explaining the role of technology in terms of NBFCs a bit more, Joseph Jayakumar, Director, Amstar Technologies says, “One of the most exciting innovation trends in 2019 will be the continued movement to predictive financing. For the first time, the financing industry can consolidate all internal and external data, building predictive profiles of customers and members in real-time.
With consumer data that is rich, accessible and financially viable to deploy, NBFC’S can not only know their customers but also provide advice for the future.” Other than Artificial Intelligence, he termed Voice and Vernacular – The next frontier in NBFC Technological upgrade, Video KYC – a great enabler, Blockchain – The Gamechanger, Cloud Integration – bringing in Ease and Efficiency, Automation which can help in actualizing speedy outcomes, Chatbots & Robo-Advisors, Social Profiling Score, Biometrics – Fingerprint, Face and Iris Recognition as the technologies with brighter future in the NBFC-MFI gamut.
He also recommended a few practices such as Faceless/Paperless e-KYC and faster loan processing and disbursal, from the ‘Agility and Scalability’ perspective for the sustenance of NBFC players in the market long run.
Building-up the Basics
Apart from technological upgradation, NBFCs do need to level-up their grip on their basic areas of function that involves catering to the banking necessities of the underbanked segment through financial inclusion.
“There is still a large unbanked population in India who doesn’t have access to formal banking channels. MSME contribute significantly to India’s Gross Domestic Product and this is a sector where delinquencies are extremely low and huge potential for growth but limited access to funds from traditional banks and Financial Institutions,” says Anand Aggarwal, Chief Information Officer, Capital Trust.
“NBFCs with wide coverage and deep penetration in rural India can play a pivotal role in serving these areas by partnering with various players in BFSI and consumption space with innovative products like Micro ATM, Cash deposit/collection, selling home appliances, bundling insurance life and health,” adds Aggarwal.
When it comes to setting up an outlook for 2020, technology, data-security and synergies definitely make it to the topmost favourite segments in the NBFC industry. However, strengthening the basic areas of functioning is still in the priority list of the industry, as suggested by the experts.
While, the sector seems optimist about the New Year, a tap on the ongoing challenges are also a matter of concern.