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NBFCs and beyond: The smart way to get loans for SMEs

Emergence and importance of NBFCs 

SMEs (Small and Medium Enterprises) in India account for 30% of the entire production volume and generate 55 million jobs. These are the official documented figures however there is a large amount of undocumented, unreported amount of business that happens every day in the nation that shapes its economic identity. SMEs are important part of the economy and their ability to get loans is an important determinant to how well they do which in turn has a direct impact on the nation’s economic prosperity. Traditionally, SMEs would approach banks to offer them loans. That particular scenario is rapidly changing due to the emergence of NBFCs (Non-Banking Financial Companies) in the scene.

What are NBFCs and what are their advantages

A NBFC is a setup which has the ability to lend money and engage in a few banking activities as well. But a NBFC doesn’t own a banking license. So they are not allowed to take deposits from the populace. Their range of services (outside lending) generally involve underwriting, retirement planning services and consultation on mergers. NBFCs are fast growing in India due a number of advantages that they offer. 

These are a few advantages that NBFCs offer over traditional banking institutions.

1) Use of technology: NBFCs rely on technology to execute a significant portion of the legwork that is imperative for any loan disbursement process. Employing technology also means that NBFCs can support more customers, in a more effective manner by the use of automation in their process. This also helps better the customer experience.

2) Faster decision making or lesser turnaround time (TAT):  NBFCs have a faster decision making process due to the employment of technology and because of better processes. The latter is because of lending being their primary business. The faster decision making also comes from the experience that NBFCs carry in making a sound credit judgment about applicants.

3) Use ofalternate data: NBFCs rely on alternate data to evaluate a loan application. This alternate data includes information about credit card transactions, point of sale transactions, social media activity, browsing patterns, email receipts etc. This leads to more innovative analysis to happen on the applicants’ data and allows for greater flexibility in the adjudication of credit heath.

4) Less scrutiny and regulation- While this raises some important issues that we will examine later, the less regulated space that NBFCs operate in allows SMEs to secure loans more easily than they would, from a bank. NBFCs can allow for lesser collateral and a less healthy credit score to be approved for a loan.

5) Smoother application process- Banks have a lot of business sectors and a bunch of financial offerings. Money-lending is the prime business driver for NBFCs. Hence, NBFCs have better aligned processes and a more dedicated workforce for the lending operation. As a result, the process to apply to a NBFC is generally easier and the turnaround time is quicker.

6) Financial consultation- Many popular NBFCs (this is a concept that has come from the West) offer financial consultation with the lending services. This financial consultation is provided to help the SMEs succeed in their chosen business field, which makes the investment more profitable.

7) Less or no hidden charges- NBFCs are innovating to get rid of those hidden charges (called premiums or special fees) that quickly discourage SMEs from proceeding with a loan application. These hidden charges are actually completely avoidable if the right credit check mechanism is used.

8) Smoother credit check- NBFCs have to be nimbler in the entire loan approval process. Many NBFCs today are employing sophisticated credit checks to shorten the entire process. This is becoming increasingly popular with the advent of FinTech (financial technology).

Importance of checks and balances

NBFCs are not new in any aspect. In the US for example, NBFCs (or rather NBFIs, as they are known there) are very commonplace. They came into the limelight of notoriety after the crash of 2008. That has called for stricter regulations in place and better credit checking to be done. The sub-prime mortgage loans were given out to entities with shady credit scores and without the right regulations in place, the lenders were able to get away with lending to sub-prime loan seekers. This information has had a direct impact on the global scene of NBFCs (and in India) where with their growth, there is also the need to have the right checks and balances.

NBFCs and FinTech – a great match for SMEs

It is in this regard where technology offers compelling solutions for NBFCs. The checks to make sure that the applicants have a healthy credit score are important while the time needed to process an application needs to be less, to beat the competition. Automated integration with credit checking entities like CIBIL or Equifax comes of immense value. The entire process of going through pages over pages of documentation is immediately lessened with one simple data fetch from the credit bureaus that tell the NBFC of the credit score of the applicant. This is one of major benefits of technology which is why many NBFCs are turning to FinTech to automate some of their lending processes. New age NBFC companies like Prest Loans are doing extremely well in this segment by using alternate data and innovative analytics technology to pull up valuable insights from those data points. They are also gradually cultivating a culture of symbiosis, by helping the SMEs grow with their own growth. This further sharpens the technology they use and makes them better lenders than their banking counterparts.

NBFCs will continue to be a great help to SMEs in securing sure and timely loans. As the SME sector grows, NBFCs will have to scale up to meet the increasing credit demand and disburse loans, backed with the right checks and balances.

Prest Loans is a leading RBI registered NBFC based in Delhi. “Prest” means ‘to stands for’ or be Ready. It also means advance of money or loan. Prest Loans is a new age FinTech NBFC that provides all kinds of loans to support and encourage small and mid-sized businesses.