Digital Lending – Fintech & Bank Synergy Means Customer is the Winner

Lending without powerful tech is going to be like running a business without a website.

Indian lending market is growing fast and is expected to further pick pace. Consumption fueled by rapid economic development is a key driver of this growth. The consumer credit market is expected to double in the next 5 years. Think about it – one whole new India will be added in just the next 5 years! The enablers to service this market well and to fill the unserviced gaps are technology & mobile internet. Technology has the potential to disrupt the way credit is structured, delivered and consumed in India.

We give an exposure here of how we have leveraged technology to deliver a great experience to the customer. Ultimately, the biggest differentiator for a company is the differentiation that their customers experience and enjoy.

In this article, we focus on one of the most important pillars of lending automation – the fund transfer infrastructure.

Digital Lending Infrastructure

Before we go into the details, here are some issues that are faced by most lenders / fintechs today:

  1. Friction and delay in disbursal of funds due to manual involvement, banking holidays, operational errors etc.
  2. Friction and delay in auto-debit management
  3. Difficulties in real-time reconciliation of repayments from multiple channels
  4. Paperwork and risks involved in handling cheques, loan agreements etc.

A truly digital lender should have powerful technology systems that can transfer funds in real-time, reconcile repayments from multiple channels, have fully automated auto debit management and do away with outdated instruments like cheques (RBI has recommended doing away with cheques long time back) and wet signatures. Here is what infrastructure of a digital lender may look like:

Indian Digital Lending

Credy Approach – Customer Focused Automation

Our approach at Credy has been to build automation that directly benefits the end customer. We are happy to have a strong technology-driven banker in Yes Bank. Banking products of Yes Bank are innovative, robust and work well at scale.

Here are some places where we have used technology to improve customer experience:

  • No cheques – Cheques are avoidable and inherently risky instruments, susceptible to fraud that can cause huge loss to the customer. Cases of cheque fraud in lending are not uncommon.
  • Real-time fund transfer – You would be surprised at how many of the large NBFCs and banks still use NEFT for disbursing funds, even if they are below the IMPS limit. Our in-house loan management system moves funds in real-time backed by strong authentication.
  • Multi-channel repayments – Customers should have flexibility in choosing the mode of repayments. All major payment modes like auto-debit, payment gateway, wallets, UPI etc should be allowed.
  • Real-time reconciliation – It is a bad experience when the customer has to follow-up to get a receipt for their payment. We have real-time reconciliation of repayments via different payment channels. Yes Bank provides virtual accounts where even IMPS transfers can be reconciled in real time without having to manually attribute the transaction to a customer.
  • Auto debit management – Majority of the customers have funds on EMI dates. For this large chunk of customers, paying the EMI should be as simple as, well, doing nothing! Our auto-debit (NACH) system is fully automated – from signing mandates via eNACH to placing auto debits when needed to reconciling the repayments onto our loan engine in real-time.

These are just some of the examples of how a powerful technology infrastructure can deliver superior customer experience at scale as well as bring down risk, costs and turnaround times.

Role of Banks, Regulators & Government

Banks continue to play a critical role in enhancing the technological backbone of our financial system. Players like Yes Bank, RBL etc. actively work with Fintech startups in a synergetic manner. This helps Fintechs develop innovative solutions on top of APIs provided by the banks. All this ultimately helps the end customer.

It is also encouraging to see support from RBI, government, related bodies like UIDAI, NPCI etc in powering our financial system with the necessary technological infrastructure to serve another India that is going to be added in next 5 years.

NBFCs : The present scenario (Part I)

In the present economic system of India, NBFCs (Non-Banking Financial Companies) have assumed a significant role in providing accessible and affordable financial services. We will be covering NBFCs in a series of articles. This article (Part I) will focus on the present status of NBFCs in India and try to understand how they have become a vital player in financial inclusion.

As per the RBI, an NBFC is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares, stocks, bonds, debentures or securities issued by Government or local authority or other marketable securities.

NBFCG240114_IV.gif
Source: RBI

With the focus of Non-Banking Finance Companies on segments neglected by banks (non-salaried professionals, individuals, traders, transporters and stock brokers), and with the ongoing stress in the public-sector banks due to mounting bad debt, NBFCs have had a lucrative opportunity to expand their presence in the Indian financial story. The RBI, in line with the growing importance of NBFCs, has a separate Department of Non-Banking Supervision, the vision of which is “to have a strong, robust and vibrant NBFC sector, complementing the banking sector”. As per an MCA report (March’14), 36,347 NBFCs exist in India. Out of these, 11,682 (32.14%) were registered with RBI as of Mar ’16. Here are some key data points related to NBFCs –

  • The aggregate balance sheet size of the NBFCs sector expanded by 14.5% during 2016-17 as compared to 15.5% during 2015-16.
  • Loans and advances increased by 16.4% and investments increased by 11.9% in March 2017, YoY
  • Whereas the banking sector has had an average NPA of around 10% in 2016-17, NBFCs have done a better job of managing risk by capping the sector’s NPAs at around 4.5%
  • Overall, NBFCs were on their way to setting a record of a robust growth of 19–22% CAGR in retail credit to reach an AUM of approximately 6.044 trillion INR by March 2017.
  • NBFCs have contributed to growth consistently over the past decade. For example, the contribution of NBFCs to commercial banking assets increased from 8.4% in 2006 to 14%+ in March 2015. Similarly, NBFC sector on an average witnessed a CAGR (Compound annual growth rate) 22% during the period between Mar ’06 and Mar ’13, with NBFCs growing faster than banking sector in most of the years
  • It was surprising to note that NBFC sector clocked a growth of 25.7% in 2011-12 although GDP growth decelerated to 6.3% in 2011-12 from 10.5% in 2010-11 (counter-cyclical movements)
  • Similar to the trend in recent years, over an extended period of time, NBFC credit grew more rapidly as compared to the banking sector – NBFC credit witnessed a CAGR of 24.3% during the period between Mar’07 and Mar’13 as against 21.4% by the banking sector.
  • Infrastructure Financing: The quantum of infrastructure finance provided by the NBFC sector witnessed a CAGR of 26.2% during the period between Mar’10 and Mar’13. In absolute terms, NBFC finance to infrastructure increased from Rs.2228 billion to Rs. 4479 billion in the mentioned period. NBFC finance to infrastructure accounted for 35.8% of their assets as of March 31, 2013, while in the case of banks it was a mere 7.6%.
  • Loans Against Property: Low turnaround time and easier documentation has allowed NBFCs to invest assets in multiple segments, especially small-scale industries and MSMEs. According to a recent CRISIL report, loan against property segment for SMEs is expected to grow by Rs. 5 lakh crore by 2018-19 and NBFCs are expected to contribute nearly half of this.
  • Market Perspective: has also been bullish. “Incrementally, in recent times, investors are allocating more to NBFCs, as compared to banks. Off late, NBFCs have outperformed banks,” said Gautam Chhaochharia, head of research at UBS Securities India Pvt. Ltd.

The success of NBFCs can be clearly attributed to their better product lines, lower cost, wider and effective reach, strong risk management capabilities to check and control bad debts, with a better understanding of their customer segments. Recent reforms have been on the lines of ‘rationalization’, i.e. stricter rules for NBFCs that have a significant impact on the economy to keep the negative effects of Shadow Banking in check, while providing certain easy passes to NBFCs that don’t systematically impact the Indian economy, thereby allowing them to solve real problems without the possibility of any major threat to the economic operations.

The next series of article on NBFCs will highlight upon the drawbacks that NBFCs are facing. Credy is actively partnering with NBFCs and helping improve lending processes through automated borrower sourcing, profiling, authentication, agreement signing, repayment management, legal processing etc. Automating processes to every extent possible and building better credit underwriting algorithms to increase accuracy and speed are critical for a healthy credit business.


Abhishek Ranjan is a Research and Policy Analyst to Members of Parliament (MPs) Mr. Ninong Ering and Mr. Dilip Tirkey. He is also working as a Consultant to DTSRDF and University of Chicago’s Delhi Center for Anubhav Lecture Series and is a Policy Consultant for FinTech start-up Credy. Earlier, he was a LAMP Fellow and graduated in Engineering from Manipal Institute of Technology.