Better Asset Liability Management by NBFCs – Need of the hour

NBFCs (Non Banking Financial Company) play a crucial role in enabling credit delivery to the last mile. NBFCs typically specialize based on either the demographic they serve, need they finance or the product they offer. NBFCs strive to close the large missing middle between creditworthy customers and the ones that banks are actually able to serve. The NBFC sector is growing fast – as per RBI data, retail loans of NBFCs grew at a robust 46.2% during 2017-18 on top of a growth of 21.6% during 2016-17. In parallel, as RBI has stepped up NBFC cleanup more aggressively, the number of NBFCs has reduced each year over last 5 years – meaning the pie is getting bigger but the eaters may remain the same. As NBFCs become larger and more critical components of Indian financial system, their risks need to be evaluated more closely. A critical piece of NBFC business that has not been given the importance it deserves is its Asset Liability Management or ALM.

 

What is Asset Liability Management or ALM?

NBFCs typically borrow from banks or debt markets (e.g. bonds or commercial papers which Mutual Funds buy. These mutual funds are funded by large corporates or even individuals who are seeking more returns than FDs or government bonds). Imagine an NBFC which borrows by issuing a 3 month commercial paper to a mutual fund house carrying 8% annualized interest. It lends to end customers at say 17% and incurs cost of say 4% in doing that. Looks like a good business model right? Not necessarily! It depends on the duration of end customer loans the the NBFC is financing. Assume the NBFC is lending to its end customers for 3 year duration. So if it raises Rs 100 cr from the debt markets at 8% for 3 months, it has to repay Rs 102 cr at the end of 3 months (the “Liability”). But soon after raising the Rs 100 cr, it would have lent it out to end customers for a 3 year duration (these loans are “Assets” for them, which will yield interest over 3 years). So, on the Liability side you have Rs 100 cr principal due to be paid in 3 months, but the Asset will return the principal only over 3 years. How do you repay the Liability in the next 3 months? This is an example of Asset Liability mismatch. If not managed well, the NBFC may default on its Liability. And if the NBFC is large, it may cause the Mutual Fund investors to panic and move the money out, making it harder for other NBFCs to borrow, and hence making them default on their obligations as well, due to a systemic risk aversion & liquidity crunch. In words of RBI,

“The importance of liquidity transcends individual institutions, as liquidity shortfall in one institution can have repercussions on the entire system.”

This problem is very real and was at the core of the recent IL&FS crisis. IL&FS borrowed large amounts of money which had to be repaid within 1 year (Liability) but it used that money to finance infrastructure projects of long duration of more than 5 years (Asset). It defaulted on some of the Liabilities which triggered a market panic.

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One pillar of ALM is calculating the mismatches between liabilities becoming due and expected inflows from assets over different time buckets. E.g. 7 days, 14 days, 30, 60, 90, 180, 270, 365 days etc. 30 day mismatch would represent the mismatch between repayments due to lenders over next 30 days vs the repayments expected from end customers over next 30 days. The idea is to calculate this for each time bucket and ensure caps on the mismatches at each time bucket as well as ensure a cap over the cumulative mismatch.

RBI Guidelines

RBI in it’s recent notification on 24th May 2019. came up with draft guidelines for ALM management by NBFCs. Here are the salient points from the directions:

1. RBI has recommended to measure the ALM mismatches at more granular time buckets. First bucket starts from 1-7 days. Measuring at more granular time buckets helps identify liquidity issues early.

2. There should be a cap on the cumulative negative mismatch in 1-7 day bucket (10% cap), 8-14 days (10% cap), and 15-30 days (20% cap). This means for e.g. that in next 1-7 days, if Rs 100 cr is due to be repaid, then at least Rs 90 cr should be expected in terms of inflows or equity capital that the NBFC has.

3. Introduction of Liquidity Coverage Ratio (LCR) – applicable NBFCs should have high quality liquid assets which cover requirements for next 30 days by 2024 (progressively increasing requirements from 2020 to 2024).

4. Use of more comprehensive metrics for capturing the liquidity situation. This is along the classic adage “If you can’t measure something, you cannot improve it”

While the above guidelines are for NBFCs with asset size more than Rs 100 cr, systemically important Core Investment Companies and all deposit taking NBFCs, we believe that all NBFCs must follow them. Adopting these would mean keeping more cash at hand and may mean little higher borrowing costs as longer term debt is costlier. Hence these may affect profitability negatively, but it makes the lending businesses more resilient to market liquidity changes.

In our view, the RBI guidelines are prudent and necessary to ensure stability of the financial system. In fact, these is only the starting point – more closer scrutiny and more frequent recommendations from RBI on the same are needed.

How we manage ALM at Credy

The core of the ALM problem is a large mismatch between Asset and Liability tenors. The sustainable way to solve it is to have funding source that matches in duration with your asset duration, and a little higher if possible. Even before the recent crisis we have been very clear that using short term funding to fund longer terms loan is a risk that cannot be hedged. And the best way to deal with risks that cannot be hedged is to not take them. Here are some salient points of ALM at Credy,

  1. We finance end customer loans for average duration of 9-10 months and have made sure our funding is always matched with end customer loans or higher than that. As mentioned above, this prudence may come at the cost of slightly modest profit margins, but it ensures the a lender does not go belly up, compromising the trust of all stakeholders, including the end customers.
  2. In addition, we have internal guidelines on leverage ratio which ensures that we have sufficient equity at all times, over and above the positive mismatch in all ALM tenor buckets.
  3. Heavy use of data and automation in treasury to maximize  return on capital deployment and save cost leakage via PnL bleed on idle assets. At any given point capital should be optimally deployed – either generating returns or providing the right amount of buffer against risks taken.

As the demand for credit keeps increasing, NBFCs who manage risks and ALM well stand to gain significantly. What are your thoughts on the RBI ALM guidelines? Please leave comments, we will be happy to discuss.

What to do if your Credit Score reduces?

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What to do if your credit score reduces? A low credit score can cause rejection of loan applications and can increase your interest costs. But there is no reason to panic or stress. It can be fixed, without any cost. You will have to follow a disciplined approach of continuous improvements and monitoring.

Here are 5 proven ways of preventing your score from reducing further and improving it over time –

1. Don’t take any more loans

Your net worth is the assets you have (cash, investments, property etc) MINUS your liabilities (personal loan, credit card bill etc). Reducing credit score is typically accompanied by a reduction in net worth. Don’t reduce it further by taking more loans. Keep a target credit score – apply for an additional loan only if you hit that target (say 720). Applying for a loan also reduces credit score because banks / financial institution will make a query for your credit report with credit bureau (e.g. CIBIL) which reduces your score. Loans also have interest and processing fee charges which can sometimes be quite high.

2. Reduce credit card expenses

Credit card utilisation (i.e. % of your credit card limit that you have used up) is an important part of your credit score. As your utilisation % increases, your credit score reduces. This is because financial institutions see you as credit hungry and start avoiding giving more loans or credit cards to you. Move your credit card expenses to debit card till your score improves. This will reduce your utilisation % and will increase your credit score.

3. Repay overdue EMIs

Delays on loan EMI is the biggest reason for credit score to reduce. For every EMI or credit card payment that you miss, the bank / financial institution reports this to 4 credit bureaus (CIBIL,    Experian, Equifax & CRIF) which shows in red or orange colour on your credit report. Repay your late EMIs or credit card bills at the earliest. This would mean cutting some other avoidable costs and requires discipline. Remember, your credit history cannot be changed – it will be with you for your entire life. Don’t paint it with red colours. If you are late on Credy EMI, pay here – https://www.credy.in/pay. Part payment is allowed.

4. Improve budgeting

Lot of times the credit score reduces because of financial stress. It could be because of medical reason, loss of job, expensive life events like marriage or unexpected emergencies. You should find ways to reduce costs (by avoiding unnecessary expenses) and increasing income (for e.g. via husband/wife, working additional shift etc). This sounds easy but is hard to implement. It will not show results overnight. You will need to have the discipline for some time (at least 6 months). Once you meet your target credit score, you can relax for some time and resume some expenditures that you stopped. But remember to continuously monitor your credit report.

5. Monitoring Continuously

There is a famous saying – if you can’t measure something, you can’t improve it. Similarly, if you can’t monitor something, you can’t tell if your efforts of improvement are working. You should check your credit report at least once a quarter. You should check the following:

  • If all information is correct. Sometimes financial institutions report wrong data. If that is the case, you should immediately point it out to them and ask them to correct within 30 days.
  • If your score has reduced, the reason for the reduction in the score

Credy is soon launching Credy Watch – a way to monitor your credit report, get tips on improvements, flag any potential errors on your report as well as help you track changes over time. Look out for updates!

Profile Feature: Credy Champion Krisha!

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Journey before Credy

I started off my career with a corporate job. As part of my regular work there, I developed data-visualization based interactive websites/web-apps for financial institutes and energy companies. I always had a penchant for innovation through work which led me to get introduced to the startup community. Eventually, I got an opportunity to work for an early stage startup which was based on hyperlocal shopping. I was the first person to join there, after the founders and hence, got many opportunities to learn in couple of years.

How did Credy happen?

I was looking for a more challenging role with exposure to many more aspects of a startup and Credy being a Fintech intrigued me. I came to know about it through  Angellist.

Interview experience with Credy

There were two rounds of interview followed by a programming assignment and further individual conversations with the founders – all of this took around 10 days. Overall it was good as I got to know about the company and work in detail.

Thoughts before joining Credy?

The very first thing I observed at Credy was the smooth blend of startup dynamics and professionalism. I had mixed thoughts during the interview but eventually, I liked the process. I was quite impressed by the technology products they had developed to support the lifecycle of a loan, and all of that in just about a year or so.

I received two offers on the same day – one from Credy and another from a security-based bigger startup. But my clear choice was Credy for I knew that I would be working with a great team, plus I would get to work for a Fintech which is interesting.

First Day at Credy

Was great! After the joining formalities were complete, I went on to learn about the projects, understand my core responsibilities, know teammates, set up my machine and observe the culture around.

The learning curve at Credy

Every project I have worked on so far has been unique. The work culture here encourages us to have an end-to-end understanding of the business, constantly improve our skills and innovate through it. I’ve had good learning while working on the project in which we built an SDK for our partners to offer a seamless integration of Credy’s loan application process on their platforms. It was a direct client facing project and offered multiple opportunities to learn.

Experience at Credy

One of the experiences worth noting is that even the simplest of my ideas or suggestions are respected. Also, everything I work on has an impact on business and that enables me to handle any project with a good sense of responsibility.

Most interesting project?

The social login/signup project. At first, it looked simple but as we dived into the implementation, some unidentified scenarios popped up and the logic had to be revamped to accommodate our criteria of customers. We did rigorous validation of all possible cases and the end result was good. Our customer base multiplied many folds after the feature went live. I am thankful for the efforts put by my teammate Ranvir to make it a success.

Funny moment at work

For testing or debugging my code, sometimes I add funny logs and later remove before pushing the code. Logs like “Yay”, “No way”, “I’m here Broh!”, “I’m sane” is a common sight there. 🙂

The first job you ever held at Credy

My first job here was to optimize the loan application form for the web-app. The goal was to reduce customer interactions and enhance user experience to improve customer acquisition.

The best co-worker with whom you enjoyed working and why

Everyone at Credy is talented, I believe. I particularly enjoyed working with our customer support executives while building the CredyBot. Their insights and experiences about their interactions with customers were worth listening. We worked on the suggestions given by them to implement a smarter algorithm for the Bot.

One of the perks of my job is…?

I get to learn about credit and finances on a regular basis, despite being in a technology role.

The favorite part of my work is…?

Solving engineering issues raised by the customer support team. The thought of being able to contribute my small bits to build a company that offers great services – makes it the favorite part of my work.

Another favorite is writing clean, reusable code. Not that I am perfect at it, but with every next project, I try to code better and really enjoy doing it. (I am also somewhat guilty of refactoring the code secretly! 😛 )

How to manage educational fees and expenses?

Dear parent, 

Wishing you a great start to 2019! As admissions season is round the corner, a key question will be at the top of your mind – how do I allocate my finances to make sure school fees are paid for my child for coming academic year? This is a question which most families in India deal with every year – be it at pre-primary, school, or college level! Education today has become a fundamental need and right, rather than a luxury. Compromise on your child’s education, and you would have compromised on their future. 
In this article, we will share a few suggestions on what you can do as a parent to manage finances better in order to afford high quality education for your child. We will also give you advise on tips around taking education loans and how you can benefit out of it.
Take Stock
Figure out how much you are earning per month versus how much expenses you have. It is advisable to keep a personal track of your expenses and benchmark it against your allocated budgets. For example, if you have multiple loans running with EMIs, it is advisable to reduce your debt burden so that you can free up money for essential expenses like education, household expenses etc. It is advisable to not have more than 20-30% of your monthly income being spent on EMI expenses. Try to save from your monthly earnings – it is also advisable to invest your savings in a diversified set of financial instruments such as FDs, mutual funds, liquid funds and so on. Talk to a good financial advisor and people who are experienced in doing investments to understand how you can make your money work rather than keeping it idle in your savings bank account. 
 
Get Value for Money
In today’s world, as a parent it can be overwhelming to figure out which is the best possible education option for your child. Evaluate whether you are getting value for the money you are paying – it is always a good idea to get feedback from other parents and teachers teaching in the school you are planning to send your child to, check reviews of the school online, do on-ground due diligence of the school, take help of online aggregators like School Connects, Edustoke, who specialise in giving you quality content around the same, etc. 
 
Know the Need
If you are taking a loan, try to make sure it is for a specific expense. Knowing that makes it easy to manage. 
  • Recurring expenses: For example, education expenses are typically a one time expense in one academic year, recurring over several years – so if you take a loan for it, you would know your monthly obligation and compare it to your monthly income to check feasibility. 
  • Know the terms: if you are taking a loan, you should know the key terms – such as principal, interest, tenor, pre-payment fees, late fees etc. All these terms should be there in the loan agreement that you will sign. Ask the lender to clarify if the terms are not clear. 
Does an education loan make sense?
Absolutely! Education expenses are a recurring expense every year in the lifecycle of a parent, typically for at least 10-12 years. So if you are paying 70,000 Rs per annum for your child’s school fees, over 10 years, you will actually be spending 7 lakh rupees. Taking the right loan for managing this recurring expense makes sense because it comes with a lot of other benefits. For example, through an education loan via Credy – 
  • Open Credy Line: Credy releases funds to education institute and collect monthly instalments from you. If your repayments are good, for further loan requirements, you do not need to go through the process of applying for a loan again. We offer a mobile app through which you can borrow money as and when you want with flexible repayment terms. Over your 10 year journey, we will be with you to help manage your child’s education expenses. 
  • 0% EMI scheme: In partnership with several schools, Credy offers 0% EMI scheme, i.e, if you take a loan of 50,000 Rs for 10 months, you pay only 5,000 Rs per month. The interest is borne by the education institute where you are admitting the child. You can check out our 0% EMI scheme here 
  • Tax benefits under 80C & 80E: if you have incurred expenses towards tuition fees, you get to claim these as deductions under section 80C. Similarly if you have taken an education loan for higher studies, you can claim deduction for interest paid under section 80E. This loan may have been taken for the taxpayer, spouse or children or for a student for whom the taxpayer is a legal guardian. The deduction is available for a maximum of 8 years (beginning the year in which the interest starts getting repaid) or till the entire interest is repaid, whichever is earlier. There is no restriction on the amount that can be claimed.   
  • Build your credit history: Life is short, but dreams are many. By converting your fixed education fee obligation to school into a loan, you get an opportunity to build a good credit history. This helps you plan for future loan requirements such as home loan, car loan etc. A good credit score can make a huge impact in getting favourable loan terms for high value items like home, car etc. and can save you 1-1.5% interest on the loan. For a home loan of say, 50 lakh Rs, that can translate into real savings for you! Check out Credy Watch here to know more how to build a good credit history. 
  • Education refinancing – if you have already made payments to the school for the fees, Credy also gives the option of refinancing the cost that you have borne and pay back the amount in EMIs. In this case, we will ask you for a few additional documents than the usual process

Choose the right Lender

There are many loan options – banks, NBFCs, online lenders, informal money lenders and so on. Not all are same, and not all would offer what your unique circumstances require. Identify your priorities – is it getting the money quickly? Is it having flexibility in loan terms and repayment options? Or is it saving interest cost? Here are some useful guidelines:

  • Speed: If you need fast loans, you should pick lenders like Credy who have an online process. Online process doesn’t just mean having a website application. Check what their KYC process is, check how they take documents and signatures on documents etc. The speed that an online process gives, a paperwork-heavy and manual process will never be able to give.
  • Interest Rates: You should evaluate for yourself if interest rates are a major concern for you. Small ticket personal loans are generally less sensitive to interest rates. For e.g. if two personal loan options have 3% difference in interest rates, total interest paid on a Rs 50,000 6 month loan would be different by less than Rs 500!
  • Customer Support & Transparent Process: This is probably the most important. A lot of lenders have hidden terms, undisclosed steps and third-party dependencies. The last thing you want in case of an urgent need is the lender telling you the process is stuck in some other department and no one can help. Rest all being the same, go with lenders who have an easy process and helpful customer support. At Credy, we have a customer focused paperless process designed to tackle this issue. 

Based on your needs, you may prefer a lender who is fast and gives good service than a slower option with long opaque processes.

Dont’s
  • Do not confuse loans with income! When you take a loan, you are signing up for an obligation to pay back with interest, and non-payment can actually be financially costly for you (by way of late fees etc.) and it impacts your credit score too. A poor credit score can permanently impact your creditworthiness and hamper your chances of getting a home loan, medical emergency loan, car loan etc. when the need arises. 
  • Do not over borrow!

           Customer support: But sir, why do you want just Rs 50,000? Your loan is approved for Rs 2,00,000
           Me: Umm.. because I have to pay interest?

    This actually happened when Harshit got a call from a loan company after he checked out their website. Loan companies will always want to give you a loan higher than your need. For them its simple economics – their processing costs are almost the same whether the loan is Rs 50,000 or Rs 2,00,000. So why not give the customer higher amount and earn more? As a customer, you have to make sure you borrow only the shortfall you have. Only the amount that you are lacking. This requires discipline, just as most financial best practices do. Another way a lot of our applicants end up over borrowing is trying to pay off one loan with the other. Don’t do that. You will end up churning loans and enter a debt trap. Borrow what you need. Anything more is giving your hard-earned money for free to lenders.

Repay on Time & To The Right Party!

This sounds obvious but sometimes is hard to implement. If you are facing financial troubles and don’t have the money to pay the personal loan EMI, you can do two things

  • Cut down any extra costs. Look closely at your expenses – there must be some expense that is avoidable at this point in time.
  • Borrow from friends just for the EMI payment. Don’t go for an additional loan. Borrowing EMI amount from friends and paying ensures that your credit score is not affected. A bad credit score will ruin your chances of getting loans in future and cause considerable stress and cost in arranging finances from alternative sources.

Be careful to ensure you make repayments to the right party. Be extra careful when making cash payments. We had a customer who was paying his EMIs regularly in cash to a bank agent. Later he found out that the agent was not depositing the cash on time and using it for his own expenses! The customer’s credit history got permanently damaged because of that.

Make sure of the following when paying by cash:

  • Check for some company identification of the collection agent
  • Ask for a payment receipt/email to be sent after you make the payment. If the receipt is not received within 48 hrs, escalate the issue.

Take care of above to a get a good deal on your education loan without affecting your long-term creditworthiness.

Pratish Gandhi, Harshit Vaishnav
Founders, Credy
Credy is a new age digital lending company, which offers education loans to parents either via 0% EMI scheme (no interest payment by the parent) or via unsecured short tenor education loan scheme (interest paid by the parent).

Profile Feature: Credy Champion Ranvir!

ranvir

Journey before Credy

College life was great. Along with the usual fun, I met many awesome people who helped me to become the person I am today. At the end of the second year, I found some like-minded people, with whom I learnt a lot of new things. Along the way, I got selected for Google Summer of Code – 2017 for AboutCode organization in my third year and that gave me a great learning opportunity.

How did Credy happen?

Joining a startup with a product in mind was always the dream. I was applying for a lot of startup jobs on Angellist (getting your first job is always difficult) and one day my friend called and told me about the internship opportunity at Credy. I researched about Credy and really liked the work they were doing and quickly applied there.

Interview experience in Credy

There were two rounds of interview and one small programming assignment, which I completed within a day. I won’t say that I nailed it during the interview rounds but it was good enough. I could not answer some of the questions confidently, as both interviewers asked few data structure questions which caused a lot of problems for me 🙂 However, I got selected for a 6 months internship program.

Learning curve at Credy

The learning curve at Credy is very steep. I was introduced to a big and well-managed code base for the first time. It took me a while to understand the working of the code but once I got the hold of it I started appreciating things more. With the help of everyone in the team, I was able to complete things quickly. I learned the importance of breaking down the system into smaller chunks and pushing things on a regular basis.

Journey/Experience in Credy

I got good experience and learning during the internship. I faced a lot of problems during the internship but every problem was solved by iterating approach to the problem statement. A slight change in the course of thoughts can bring the solution to everything. After completing 6 months of internship I was offered to become a full-time member of Credy.

Most interesting project till now

The most interesting project (and most irritating also 😛 ) was implementing social login for new users into the Credy system. It took an entire day for me and my colleagues Krisha and Gauthama to figure out what was wrong and how that can be fixed. After so many iterations we were able to do that, but this project taught me a lot of important lessons which will definitely be useful in future.

One thing that you like about Credy

It is “Credy Insights”, where every Friday we all gather around over food and drinks and one of team member gives a talk and presentation about the new things/feature on which he/she has worked in past couple of weeks and gives a better idea about its usability.

One of the perks of my job is: Walking into the office in casuals 🙂

Mantra of life: Just keep doing it, One day it will happen.

 

 

 

 

Profile Feature: Credy Champion Chahat!

Chahat

Journey before Credy:

This is my first job. While I was in college, I started studying about Android in the second year, and I enjoyed it so much that, after that I was unstoppable. 🙂 I took various courses in Android like Google Certification course and received Associate Android Developer Certification by Google. It was a bit difficult because I was given just 2 days to complete an entire project, but it was really useful and gained a lot of knowledge after completing it. Like many others, I was not much interested in college lectures and was working towards making a career in Android Development. Placements in college were difficult for me because we were not having many companies which were offering Android Developer position. And then came Credy & rest is history.

How Credy?

Credy was one of the companies which came for placement in our college and was providing 6 months internship, which was a mandatory part of my B Tech in IIIT Vadodara. I was quite happy after listening about Credy and liked the work they do. And finally, there was someone who was offering a position of Android Developer.

Interview experience & Thoughts before joining Credy

I was quite nervous before giving the interview but with the friendly nature of interviewers, I was completely relieved.

There were 2 rounds of interviews. I liked the friendly and supportive nature of the interviewers. They helped me while I was answering the questions and gave me the confidence to speak freely. I was asked algorithmic questions and questions on Android ranging from the basics to very advanced.

I was sure to join Credy after my interview process because these guys were not only interviewing me but were also telling me where I was wrong, how should I work on it, etc. This gave me an idea about people I would be working with and thought that I will get to learn many things while working with them.

HR was also very supportive, and she was the one who answered all of my questions before joining and cleared my doubts.

1st Day in Credy

It was 1st Jan, starting of the new year with my career and it was quite good. I was introduced to everyone and then was given some initial work to understand the work atmosphere at Credy. I spent the whole day setting up my Credy Android App environment and reading the code. Gauthama was quite helpful in resolving my doubts.

Learning curve in Credy

Learning at Credy increases day by day. Every day you get to learn something new. The most helpful thing is mentors here reviews the code and give their inputs. Abhash Anand is the one who reviews my entire code and suggests changes which would be really helpful for the development process.

Journey/Experience in Credy

I Joined Credy as an intern and it was a very good experience as I got to work on a Production Level software. There are different challenges that you face while your software is in production. But facing these challenges and overcoming those, is the time when you really become a Software Engineer. After completing 6 months of internship I got an offer for permanent employment with Credy.

Myntra of life/work:  Whatever you do, do with all your heart

Favourite part of my work is: Gradle build running

Work I dream of one day doing: Becoming CEO of the company