Financial intermediation by NBFCs has increased significantly in recent years, contributing to the financial services sector’s explosive growth. The expansion of access to financial services, boosting competition, and diversification of the financial industry are all made possible by non-banking financial companies (NBFCs). As they can absorb shocks and disperse risks during times of financial difficulty, they are increasingly seen as an important component of the banking system.
Digital escrow services have helped NBFCs revolutionise the lending industry by accessing unserved and underserved areas and meeting the varied financial demands of enterprises, particularly micro and small businesses services. The NBFCs have been helped by digital escrow solutions to offer financial services instantly to businesses. Fintech and microfinance have grown significantly in India in recent years. According to Inc42’s most recent report, “State of Indian Fintech Ecosystem Q3 2022,” the size of the digital lending market is expected to witness an exponential growth from $270 Bn in 2022 to $670 Bn between 2022 and 2030 at a CAGR of 22%.
Digital escrow aiding challenges faced by NBFCs
The main difficulty that lending NBFCs encounter is ensuring that the loan money is utilised for the desired purpose by the borrowing NBFCs. The way in which the borrowers use their borrowed money is hidden from and beyond the lenders’ awareness and control. The on-lending proceeds are frequently mishandled by the borrowing NBFCs. Rather than disbursing loans to borrowers, they use the borrowed money for operations costs, and as a result, the lending NBFCs’ security coverage is undercollateralized.
Similarly, the co-lending concept entails the cooperation of two or more NBFCs to provide loans to borrowers. According to a ratio decided upon by both parties, they co-lend the loan. However, here, handling disbursals and repayments for various co-lending use cases emerges as a significant difficulty.
Also Read: 8 smart tips to manage money effectively as a college student
Digital escrow offers a solution in these situations by combining disbursal & collecting accounts on a single platform. It manages various LSP disbursements and repayment through a single account and dashboard and provides partner NBFCs with easy access and data. The fund disbursal is also accelerated as under digital escrow financial services, there is no dependency on a single bank. Digital escrow enables NBFCs to profile their consumers and confirm and validate their identities before approving a loan by performing real-time government data checks and identification checks using KYC and e-KYC.
Digital escrow solutions allow NBFCs to use an existing account or open a new one specifically for the borrower NBFC with the help of all major banks. Access to the disbursal statement, balance, and reconciliation information for the borrower NBFCs is also made available. Further, digital escrow services give NBFCs control over the collecting path with split repayment flexibility.
Advantages of digital lending
NBFCs have benefited from the use of digital escrow solutions in tackling MSME credit-related issues. The quickness of loan acceptance is one of the most evident benefits. Particularly for small-ticket loans, which are most popular among MSMEs with little or no credit history, digital loans have much faster turnaround times than traditional loans. An unsecured digital loan can be approved in as little as a day, with a turnaround period of just a day or, in some cases, minutes.
With digital loans, the procedure is more simplified and effective for both NBFCs and borrowers because manual form filling is replaced with digital data capture, automated account analysis, and in-person visits are unnecessary. Further, to improve credit underwriting knowledge, digitally accessible data provided and analysed by digital escrow technologies offers MSMEs a more realistic picture of a borrower’s creditworthiness and related risk. The granularity and completeness of bank statements have increased with growing formalisation and digitization, allowing lenders to produce far more in-depth insights about borrower behaviour.
To conclude
NBFCs play a significant role in emerging nations like India, where access to bank financing remains difficult for a sizable portion of the population and enterprises. Due to higher risk and lower profits, commercial banks do not provide services to certain market groups which are aided by nonbanking financial institutions, including NBFCs. Digital escrow solutions have turned out to be a beneficial force for NBFCs, not just because of the fast services offered but also due to their compliance with the new norms of digital lending guidelines.
Furthermore, the growth of digital escrow providers has supplemented in enabling funds to MSMEs through NBFCS by offering integrated stacks like trusteeship services, instant identity checks, seamless transaction processing & management, etc.
(By Ashwin Chawwla, Founder & Managing Director, Escrowpay)
