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Time for NBFCs to re-think their credit collections approach

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In the last decade, the financial sector in India has seen a paradigm shift in credit growth with Non-Banking Financial Companies (NBFC) acting as the key catalysts in this growth. As per data from the RBI, on March 31, 2021, the NBFC sector (including HFCs) had assets worth more than INR 54 trillion, equivalent to about 25% of the asset size of the banking sector. Over the last five years, the NBFC sector assets have grown at a cumulative average growth rate of 17.91 percent. It was reported that, between FY’11 and FY’21, while the adjusted non-food bank credit growth decelerated by 2.15% on a CAGR basis, the flow from domestic sources, including, funding from NBFCs and HFCs grew by a CAGR of 8.27%. India has over 9650 NBFCs registered across 12 categories. Their importance in the financial services ecosystem for addressing the credit needs of a large segment of society is quite visible.

NBFCs have the advantage of specialized industry knowledge, a deeper understanding of customers, easier accessibility, lower transaction costs, and faster decision-making abilities. They have helped expand the financial inclusion initiatives across India. 

For India to achieve its ambitious goal of becoming a USD 5 trillion economy by 2024, it needs to invest in core sectors such as infrastructure, healthcare, manufacturing, and technology innovation aggressively. To facilitate this growth, NBFCs can act as catalysts by extending faster, easier, and affordable credit access to individuals, proprietorships, and Medium & Small Enterprises (MSME), which have difficulty in getting loans from other channels. While NBFCs continue to do a brilliant job at increasing credit growth, the inherent risks in this segment need to be mitigated adequately. 

As mentioned earlier, NBFCs are important drivers to the Indian lending economy, implying that they are the largest net borrowers of funds from the financial system with gross payables of INR 9.37 trillion as of September 2021. NBFCs are responsible for loan growth but are also burdened with excess loans because they carry risks such as excess leverage, the concentration of risks in one sector, focus on niche funding, and the burgeoning of bad loans. With a lot at stake, any wrong step can result in significant losses not only for that particular NBFC but also impact the entire connected ecosystem. 

The pandemic-induced lockdowns and the gradual revert to normalcy in businesses had resulted in a sharp decline of inquiries from the consumer credit side of businesses. Home loans were revived with the support provided by the Government in the form of stamp duty reduction and supportive property prices. The RBI had also announced a moratorium on EMI/Interest payments for six months between March 2020 and August 2020. The banks had a mandate from the RBI to maintain a minimum cash reserves ratio (CRR) and a statutory liquidity ratio (SLR). However, the required broader level of support for the NBFCs was missing. NBFCs that followed strict corporate governance and maintained sufficient cash reserves and liquidity, survived the pandemic and other hardships. However, many NBFCs that were over-leveraged and did not maintain adequate liquidity are facing the stress of NPAs. NBFCs that benefitted from the regulatory arbitrage in the past and did not keep sufficient liquidity have become cash-flow negative with rising defaults in interest payments. 

According to a report, gross NPAs of banks have swelled up to 7.48% and may rise to 9.8% by March 2022, the highest in the last five years. This data is also reflected in a report by The RBI which states that 11.29% to 19.5% of NBFCs may not be able to comply with a minimum regulatory capital requirement (CRAR) of 15% under stress tests. The collapse of India’s leading NBFC players – Infrastructure Leasing & Financial Services (IL&FS) and Dewan Housing Finance Corporation (DHFL) in 2018 and 2019, where exposure to riskier asset quality was a key factor, had led to ripple effects in the economy.

The Reserve Bank of India had introduced a Prompt Corrective Action Framework (PCA) for Scheduled Commercial Banks in 2002 to enable supervisory intervention at appropriate times and initiate and implement remedial measures promptly, to restore its financial health. The PCA Framework for NBFCs came into effect from October 1, 2022, based on the financial position of NBFCs on or after March 31, 2022. To ensure uniformity in income recognition, asset classification, and provisioning norms, all lending institutions have clarified a portion of the existing guidelines applicable across all lending institutions, including NBFCs. With all the additional regulatory guidelines, it is expected that Gross NPAs for NBFCs might increase by 300 basis points. However, while NPA’s would increase consequently, the provisions as a percentage of such NPAs is likely to reduce to some extent. This has reinforced the need to build in robust mechanisms to mitigate credit risk, use a more data-driven approach for identification of likely delinquencies earlier and strengthen the loan collections and debt recovery capabilities.

While regulations and operating guidelines are important, NBFCs also need to transform their operating processes and use the advancements in technology to their advantage across the credit lifecycle. With a huge amount of data available, NBFCs can benefit from the rich analytical insights to identify patterns during pre-delinquent stages, deploy highly mature risk assessment models, and incorporate data-driven decision-making as a part of their core processes. With the tremendous focus today on speeding debt recoveries, reducing collection costs, and minimizing NPAs, NBFCs need to shift away from the archaic manual effort-driven processes and embrace highly evolved debt recovery and collections technology platforms that do not only drive efficiencies but also bring down the overall cost. The poor customer experience on account of ill-conceived debt recovery approaches during the pandemic has received a lot of criticism. This has highlighted the need for implementing a well-designed framework to enhance customer experience while boosting debt recoveries.

Credgenics, the award-winning debt recovery, and loan collections platform provides lenders with sophisticated capabilities to streamline and automate their end-to-end loan collections capabilities. The AI-powered debt resolution platform enables lenders to ascertain the chances of recovery for each case with the cost, time, and effectiveness of various channels. Credgenics debt recovery platform also recommends the best collection strategies and helps lenders digitize their entire recovery process. Credgenics facilitates lenders to leverage a comprehensive multi-channel digital debt collections ecosystem including AI-enabled multi-lingual chatbots and humanoid voice bots. The leading SaaS collections platform is supporting more than 60 leading banks and NBFCs in improving their debt collections by 15-20%. With Credgenics, lenders can recover as much as 70-80% of bad debts at a rate that is 5X faster than traditional modes.

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