A slowing economy combined with a crisis of confidence in the NBFC sector following the RBI’s cancellation of 1,701 licenses in FY 2019 for failing to meeting minimum capital requirements would be more than enough for most to hit the panic buttons. However, for Govindankutty Edaden, Executive Vice-President at Bangalore-based Nitstone Finserv, these incidents do not signal a crisis. For, he believes that NBFCs are traversing a testing phase and those that survive would emerge the stronger.
Armed with more than three decades of experience in the banking industry, Govindankutty told CXOToday that as much as 25% of the credit flow in the economy came from NBFCs, which amounted to more than 12,000 at one point in time. Of these more between 2000 to 3000 shut shop as RBI cracked down on them for failing to meet minimum capital requirements.
The Core Issues
At the moment, there are close to 9,700 NBFCs operating in the country though only about 350 of them appear to be functioning efficiently and effectively, he says while asking the moot question: “How did we manage to create this situation for ourselves?” And the answer is quite simple and as with every sector of the economy, to sustain one needs to be disciplined. “Lack of discipline results in failure beyond a point,” he says while listing out a few of the challenges:
- Over the past four to five years, lending business was booming and usually there is a tendency of losing control at such junctures. Larger business volumes meant more chances of making money and in this chase many lost track and control, thus resulting in acute asset-liability mismatches. The large NBFCs borrowed short-term capital and lent it long-term causing a tenure mismatch.
- Due to increased volumes, the NBFCs overlooked lending quality which essentially means profiling borrowers. Caution went out of the window and companies began flouting basic norms related to a client’s track record and repayment capacity. And once these two factors lost importance, the lenders couldn’t save themselves from growing NPAs.
However, Govindankutty is quick to point out that “this isn’t really a period of crisis for those who maintained a strong system, were equipped with risk management, were diligent and basically operated a process-drive system.” Which is why this is a test phase for NBFCs and those that sail through would emerge stronger, he adds.
And the key differentiator could well be the level of tech-enablement that NBFCs invest in. Govindankutty recalled the days when the financial sector was about fat ledger books and manual entries. Having witnessed the technology evolution in the financial sector over the past couple of decades, he believes that this could well be the differentiator going forward.
For starters, technology has reduced the time taken for acquiring credit. From weeks and months, the time now required is but a few hours to sanction a loan where the customer needn’t even visit the office many times and indulge in never-ending paperwork.
Technology has not only speeded up the transactions, it has also made it more accurate due to the process-driven approach where human intervention is minimum and thus judgments are limited. Going forward, Govindankutty believes the successful NBFCs would be those that blend technology with an experienced human capital that runs the business.
On its part, Nitstone Finserv would be going after AI and ML in the business over the coming months by building a model whereby technology would be used to analyze human behavior in a more nuanced fashion. An example could be studying the messages the company receives with respect to existing loans, expenses and other sundries.
Our sole purpose is to ensure that repayment capacity and track record of the borrower become mission critical for our exposure to loans. Listen to the video interview of Govindankutty Edaden here.