Advantages of Digitalization in NBFCs

Ashish M. Shaji

03 Jan, 2022

The advancement of technology has transformed many industries and institutions. Financial institutions like NBFCs have also benefitted by emerging technologies. In this article, we shall take a look at the advantages of digitalization in NBFCs.

What is the need for digitalization in NBFCs?

Today the regulations have become stricter; the cost of borrowing has also increased; therefore, it is necessary that Non-Banking Financial Companies sharpen their business agility. Customers are a critical facet of business and have become a focus area for NBFCs to differentiate. NBFCs are now more keen on developing innovative products and are looking to cater to the needs of low income and urban customers. In this situation, it becomes more important for NBFCs to adopt such business models that are powered by technologies.

The new-age customer is tech-savvy, and with increasing knowledge in their repository, there have been newer demands in terms of credit facilities. In order for the NBFCs to leverage fintech must meet the requirements of these new-age customers, it must look beyond the regular or the traditional approach and invest in digitalization and technological capabilities that will allow them to connect and cater to the customer in a personalized way.

Another critical reason that makes the case for digitalization strong is the fact that most public, as well as private banks, are distressed with bad loans since the last few years, and it has provided NBFCs an excellent opportunity to serve its offerings and aim for growth. The growth of NBFCs has been significant in the last few years; hence to maintain this growth in the coming years, they must bring in technology to drive their growth to the next level.

What are the main challenges that can be overcome by inducting digitalization in NBFCs?

There are a number of challenges that face NBFCs operating with traditional models. These challenges can be overcome by emerging technologies and by its induction into NBFCs. In this segment, we look at those challenges.

• Longer lead generation and processing time;
• High operating expenses;
• Limited risk profiling;
• Manual work and human judgment;
• A high-cost model with people and branches;
• NPAs and high cost of the fund;
• Long term loan with short term financing; and
• Limited data governance.

What are the main advantages of digitalization in NBFCs?

A digital transformation is beneficial for both NBFCs and their clients.

It gives a number of benefits, and in this segment, we determine the advantages of digitalization for NBFCs-

• Customer data acquisition and management

Today, we see reduced risk appetite in public sector banks to lend money as they are dealing with bad loans, mounting debts, and NPAs. Most often, NBFCs target applicants that are rejected by commercial banks, which provides a vast opportunity for NBFCs to expand, and the understanding of their audience can help them to reach greater heights.

Digitalization will allow them to capture, analyze, and leverage data accurately about their current and potential customers. It will help them in understanding their customers and make better lending decisions.

• Risk Mitigation

NBFCs can mitigate risks involved in dealing with cash by shifting to digital modes of payment, and customers can utilize the process of making payments through a safe and secure medium. It will save not only a tremendous amount of time but also effort involved in collecting and dropping off money.

• Better customer service

Today the bulk of financial transactions made by NBFCs include disbursement of loans. So, digital lending will help in providing better customer service as loan processing could be done much quicker due to the availability of customer data. It will also help NBFCs to connect to their customers by sharing personalized messages in terms of loan bill payment reminders, sending statements to customers, etc. It will build the relationship between the customers and NBFCs.

• Lower costs with Digitalization and increase in operational efficiency

Technology makes business operations easier for any institution and the same goes for NBFCs as well. Investing in technology will significantly reduce capital expenditure and improve overall operational efficiency.

It will also allow better utilization of the available assets within less time and resources, and also provide better services.

• Better customer reach and expansion of customer base

Technology will help in reaching out to customers who are otherwise difficult to reach. It will cause more and more people to be attracted to NBFCs, which provides them with every service and facility.

By adopting digitalization in NBFCs, it gets access to a wide-ranging network as technology can bring together consumers, financial institutions, and merchants.

• Creation of tailor-made products and services

Technology is a phenomenon that will allow personalization and flexibility that is most valued by customers. With it, customers can transact the way they want, and it will also help NBFCs to build tailor-made products and customize services.

The Road Ahead for NBFCs

The adoption of technological innovations is the way forward for NBFCs. It will aid the optimization of resources and processes to facilitate intuitive and automated decision making in the future. It will help NBFCs have enormous leverage over the traditional banking system and boost maximum possible growth. The way NBFCs make the best use of technology will also determine how far they can drive their success. Collaborating with Fintechs could be the future for many NBFCs as it gives them the opportunity to increase revenue and provide more advanced customer services. 

Conclusion