The role of 3Cs in reducing retail NPAs in India | The Financial Express

The role of 3Cs in reducing retail NPAs in India

For any financial institution involved in the lending activity, it is imperative to understand the borrower’s character. Whether the individual is honest or has been difficult to deal with in the past, institutions need to understand their behaviour before considering their request.

The role of 3Cs in reducing retail NPAs in India
For any financial institution involved in the lending activity, it is imperative to understand the borrower's character. (Image: IE)

By Ritesh Srivastava

Over the past month, India’s banking regulator has come out with various consumer debt collection guidelines. From barring recovery agents from resorting to intimidation of borrowers and calling the borrowers before 8 am and after 7 pm to not allowing an NBFC from outsourcing recovery, the regulator has been forthcoming on safeguarding consumers. However, taking a step back and evaluating how a creditor, be it a bank or NBFC, can lend a borrower money without any hassle, the 3C’s of credit basis on which lenders process the loan could effectively also help streamline the collection much better.

The 3Cs of collection: Character, Collateral and Capacity

For any financial institution involved in the lending activity, it is imperative to understand the borrower’s character. Whether the individual is honest or has been difficult to deal with in the past, institutions need to understand their behaviour before considering their request. Parallelly, institutions should scrutinise the collateral provided in addition to their capacity to repay the loan. The lender can gauge whether a borrower can handle the debt by assessing the borrower’s income and existing obligations. 

However, how do the 3Cs help both the lender and the borrower?

Intent to Pay

The answer is simple. If all the 3Cs of credit are good, a lender can lend money quickly, and the borrower’s loan requests will be approved quickly. While many loans are dispersed based on 3Cs, we still see NPAs rising. Why is that so? This is because another significant determinant is missing from the picture: intent. Intent, as the word suggests, refers to the intention of the borrower to repay the loan. With the surge in retail GNPA from 1.8% to 2.5% between 2019 and 2021, the criteria for the ideal borrower should be broadened with the inclusion of ‘intent’.

Seeking debt relief

Regardless of methods to reduce NPA, some defaults will happen. In such situations, the best option is to provide debt relief rather than a debt waiver. As per findings from a research paper, debt relief of distressed beneficiaries will likely improve loan repayment behaviour. Further, a debt waiver granted to all borrowers, without considering who is distressed, can waste scarce fiscal resources and be counter-productive by increasing loan defaults. 

Hence, debt relief is a rather better option compared to a cookie-cutter debt waiver for all. Enhancing loan performance saves resources in addition to reducing loan defaults. That said, with loan performance of distressed borrowers improving by only 16%-20%2, the collection continues to be a primary concern for lenders.

Not only Collection but also gauging Intent

A McKinsey report notes that some of the most significant advances brought about by analytics and machine learning are in customer segmentation and provide the basis for more effective collection processes and strategies. Hence utilizing Data Analytics, Big Data and ML-based platforms help increase reach and contact with the client’s portfolio. Resulting in increased conversions of customer contact, it also reduces collections efforts and costs by proper scoring and eliminating redundant steps. That said, technology still fails to gauge an important aspect in ensuring collections efficiency – Intent, which is a reflection of the Character.

Also read: 65% of banks expect MSME NPAs to increase in second half of 2022 says survey

In today’s age of digitisation and analytics, we still continue to witness increase in collection harassment cases. It is here in, where more humane approach is the need of the hour. Hence debt relief as a mechanism not only aids institutions enhance their collection efficiency but also provides flexibility for consumers to repay debt. This further aids building their credit worthiness.

Conclusion

With the boom in retail lending, loan defaults are bound to happen. Hence, we must ensure that necessary regulatory protocols for credit and collection mechanisms are instituted. This can be accomplished by having a lending criterion that is robust enough to gauge the borrower for credit eligibility. Furthermore, there is a critical need to alter the current collections landscape by further regulating it and by encouraging new-age digital solutions within its ambit that are humane at the core. Intrinsically, debt relief companies work on a pull mechanism, ensuring that the borrowers with a resolve to eliminate their debt are the ones getting enrolled. A well-structured debt relief program can help the larger lending ecosystem by marrying the established intent from distressed borrowers and the operational expertise of debt relief companies, essentially making it a win-win proposition.

(The author is founder and CEO, FREED. Views are personal.)

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First published on: 08-11-2022 at 11:43 IST