Non-banking financial companies (NBFCs) are targeting niche product segments to distinguish themselves at a time when the competition among lenders has intensified, say experts. These segments include loan against shares, employee stock option funding, small business loans and various types of small-ticket loans with a short tenure.
“Historically, the reason NBFCs have thrived in India is that they have been the innovation frontier for the financial services sector. They have constantly innovated, created new categories, which have been taken by banks, and grown,” said Piramal Capital and Housing Finance managing director Jairam Sridharan.
“Product segments like housing originally started off as an NBFC product, but all banks do it in a really big way now. Another example is car loans, which was dominated by NBFCs, but now it is a banking-driven sector. The same applies to gold loans and microfinance lending. Only a few like commercial vehicle finance have still transitioned to becoming a bank product as yet,” he said.
In a bid to enhance presence, non-bank lenders are also targeting distribution channels and customer segments that banks typically do not address. For instance, a rural finance-oriented NBFC may go to rural areas, tie-up with local fertilizer retailer and use that as a point to distribute their products. NBFCs are also more willing to partner with financial technology companies to disburse loans when banks have been hesitant, say experts.
While lending to the under-banked segment poses an asset quality risk, non-bank lenders’ cash flow-based loan underwriting process holds them in good stead. On the other hand, banks continue to follow a balance sheet-based underwriting and asset-based underwriting method.
Additionally, NBFCs utilise a multi-dimensional approach while underwriting loans and this enables them to lend to a wide range of customers, say bankers.
“Unfortunately, there is a very similar level of underwriting that happens in banks irrespective of the size of the loan. The same set of documents apply to customers. There is no customization of requirement depending on the ability of the customer to provide documentation. So, documentation quality is a very big differentiator between banks and NBFCs,” Manish Lunia, co-founder, FlexiLoans Technologies, said.
“For many years, NBFCs have identified that bank statements are very good surrogates to how much income the customer has. At the same time, the credit bureaus are becoming tighter by the day. You have a combination of a bank statement or a GST data, which is available very easily these days through both account aggregators and customers providing access to these statements, wherein cross checks are done at the click of a button. The credit bureaus are also available real-time. The assessment improves the width through which NBFCs give loans versus banks,” he said.
An NBFC loan is typically costlier than a bank loan. Nevertheless, loans from these entities witness traction among under-banked as they provide an alternative to local money lenders, say experts.
“We focus on the bottom-of-the-pyramid ‘Aam Aadmi’ and provide credit in an affordable way to those that lack access to capital. From milk vendors or grocery store owners to the last-mile delivery agents – all are offered credit for buying a two-wheeler, business loan, used vehicle and fuel finance, among other products,” YS Chakravarti, MD and CEO of Shriram Finance, said. “Today, 95% of the MSMEs operating in the country belong to the informal sector and find it hard to access finance. Shriram Finance is catering to this segment…”