5 problems borrowers face in India that NBFCs can solve
India’s lending landscape is fragmented and typical to the core. It is not subject to any sort of standardization with the credit contours varying wildly, from the cash-affluent HNIs to the humble wage-earners. This landscape includes enterprises, the successful business chains, the 51% micro, small and medium enterprises and the ubiquitous one-man businesses. These smaller entities generally don’t have many financial documents to prove their creditworthiness. In the face of all this, the common borrower faces many problems when applying for a loan.
Problems faced by borrowers
1) The problem of putting up collateral- Small scale businesses and entrepreneurs would have routine problems putting up collateral. While bigger companies can put up their offices and infrastructure the smaller entities can put up their homes or land. It is not easy to convince a bank to disburse a loan on house that was built several decades ago or is not built exactly as per approved plan or in Govt approved locality.
2) The problem of credit health- The credit rating agencies in India (CIBIL, CRIF, Equifax, Experian, Highmark – NBFC companies like www.prestloans are generally member of all these companies) have been operating under the mechanism that worked for them in western markets. They seek out information on salary, assets and try pulling more details through one’s PAN card number. While that might work for urban, salaried professionals, that approach doesn’t yield the right credit rating for someone from a different background, people with no credit history and income setup.
3) The problem of repeated lending- A business by definition is risky. Failures are as common as getting rejected from a job interview. However, there is acute record of the former, which rears its head when banks seek out to do their research. Even if the businesses were low-profile and their closure did not liquidate much assets, a business failure raises some eyebrows very quickly.
4) The problem of due process- Banks have a fixed set of processes and regulations in place. A loan application form needs a certain number of signatures, a certain list of documents and a certain amount of protocol that needs to be followed to the letter. It is not possible for say, a weaver or a tea seller who has no financial literacy, to understand these processes or hire a consultant to do these things for him. These sort of things discourage borrowers and often lend the banks, incorrectly, an air of high-handedness and resulting unapproachability.
5) The problem of time- Banks also take a certain amount of time to process a loan application form. There are approvals that are taken from multiple departments while the application form ricochets off its mysterious walls. For a borrower outside, each waiting day can elevate worry, cause loss of business opportunity and also cause ‘locking’, where the borrower can only wait and not ask for any more loans (if he asks for multiple loans to different banks, the credit health takes a major hit). This is severely problematic in a world where the need to secure finance can be very immediate.
How can NBFCs help?
Non-Banking Financial Corporations (NBFCs) indeed come to the rescue of the borrowers and help them get loans, while eschewing these five pesky situations.
NBFCs have the specialization (since they only primarily lend to grow their business, banks do a lot of other things) to understand a loan application in terms of the business idea, the family history (old families in villages etc. would have a lot of undocumented assets like livestock, land, ancestral property), the urgency and the amount. NBFCs also consult the borrower on the amount of the loan and help them tweak it, if necessary. On the contrary, a bank might reject an application for INR 5 lakh but might pass the application if it were for INR 1 lakh. But rarely would a bank come back to the applicant and tell them to re-apply for a lower amount. A NBFC on the other hand, can provide such specialized consultation.
A NBFC can also provide a list of partners that can help a borrower achieve digitization or standardization that will help them document their business in a better way. NBFCs are more flexible than banks in terms of due process. They can prioritize loan applications and work for the borrower to make an exception.
NBFCs today, also adopt modern technology to achieve workflows in a much faster way. They also evaluate credit health more intelligently and have the underlying technology to capture the various nuances of a loan application which a traditional bank may miss out on.
NBFCs will help the lending landscape in India to grow. The Financial Stability Report (https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/0FSR_30061794092D8D036447928A4B45880863B33E.PDF) from RBI does corroborate that fact. NBFCs have the know-how, the eagerness and the right processes to serve borrowers in a better way.
Prest Loans (www.prestloans.com) is one such digital lending NBFC that is dedicated to make a change to this landscape. Get in touch with us today and know more about how we can work together to secure easy and assured finance for you and help you ‘grow your business’!