Direct Tax Services
Select Your Location
In many countries such as the US and the UK, large credit rating agencies such as Equifax, Experience, and the Trans Union allow credit scores to be given to lenders documenting the borrower’s past repayment data.
However, in India, most people give little or no thought to their credit scores unless they plan to apply for a new credit card or loan. For those who lack credit, the attainment of a good credit score is often a vicious cycle, which means you cannot get credit without a score, and you cannot build your score without getting credit. Barely twenty per cent of the Indian population has a valid credit score, and hence, most Indians are unable to get a loan from banks in the country.
Hence, the role of the NBFCs and MFIs fill the gap between loan seekers and borrowers. The retail sector, the unorganized sector as well as the micro, small and medium enterprises, are the prime customers of the NBFCs and Micro Finance Companies (MFIs). The NBFC registration with RBI and the Micro Finance Company Registration are witnessing a gradual increase in credit due to the increasing demand for finance.
Table of Contents
For the care of the individuals who are unable to get credit from the traditional banking system, NBFCs and MFIs seem to be a ray of hope for them. Basically, the NBFCs and MFIs charge interest at a little higher than other banks, but their easy accessibility, promptness in providing credit, wider reach, and greater efficiency, as compared to banks, makes them a lucrative option in the hands of borrowers, especially when the amount of the loan is high and the loan seekers have already been denied by the banking system due to their low credit scores. NBFCs and MFIs basically focus on traditional data sources to extend lending. They need to realize the value of alternative data and the need to invest in technology in order to develop advanced credit scoring models that incorporate non- traditional data sources. Only then will they be able to establish a reasonable basis for extending credit that traditional credit bureaus currently do not take into consideration.
As per the demonetization drive announced by the Government of India on 8th November 2016, all the INR 500 and INR 1000 denominated currency notes cease to be recognized as legal tender w.e.f. 9th November 2016. The primary aim of the demonetization was to curb the malicious activities of corruption, black marketing, money laundering, terrorism, etc.
As stated earlier, the NBFCs and MFIs strives to cater to the financial needs of small sections of the society, such as daily wage workers, farmers, small traders, and retailers hailing from rural areas as well as remote urban areas. Therefore, an instalment on credit is usually collected on a weekly or even a daily basis. Demonetization hampered the cash transactions thereby leading to defaults in the payment of instalments as well as final repayment. Most of the customers of the NBFCs and MFIs do not have bank accounts and their livelihood depends upon cash transactions. Moreover, the limit imposed on cash withdrawal further intensified the concern. As the cash was not readily available, collections of the NBFCs and MFIs have dipped substantially as people who genuinely wanted to pay their dues have lost access to their cash.
Over the medium term, the real estate sector where the cash component is an important part of transactions, especially in the secondary market, could face a slowdown. This could impact NBFCs and MFIs adversely to some extent.
As per a report by “The Hindu”, Mortgage financier Company Can Fin Homes stock fell down by 20 per cent while Manappuram Finance stock hit the ground by 16.6 per cent from their previous close. Some of the other NBFCs, like Capital First (-13.6%) Edelweiss Financial (-9.5%), LIC Housing Finance (-7.7%), also came under the negative impact of demonetization.
Despite of the near-term disruptions in the collection cycles along with a hike in over-dues, putting the liquidity strength and the disbursal cycle under pressure impacting the growth and profitability of the NBFCs and MFIs in the short run, the entities will not be majorly impacted in the long term as the cash flows of the borrower segment are in smaller quantity. It is expected that post demonetization the application for NBFC Registration will increase.
After the demonetization period, NBFCs and MFIs are promoting cashless disbursement of the credit and encouraging collection through Jan-Dan accounts and continuously upgrading their technology. Many NBFCs and MFIs are conducting meetings in the remote locations to encourage the borrowers to open up bank accounts to overcome any slowdown in their business activities and become aware of the negative impacts of the default in loan repayments on their credit scores. Therefore, it can be said the NBFCs-MFIs have adapted themselves towards the changes occurring post demonetization and are working in a positive direction in order to avoid any further disruptions.
Do you wish to apply for NBFC Registration? Or are you looking for an NBFC Takeover advisory? Would you wish to know about the NBFC / Fintech Consulting or know more about peer to peer lending? Please feel free to contact Enterslice, India’s leading online legal and tax advisory firm.
Read our article:Analysis of NBFC Liquidity Crunch in NBFC Sector
Experienced Finance and Legal Professional with 12+ Years of Experience in Legal, Finance, Fintech, Blockchain, and Revenue Management.
Many investors use fixed deposits as their primary investment vehicle. Investors with a high-ri...
The main idea of CDS, which was initially to give banks a way to transfer credit exposure, has...
Black money has been the subject of heated political debate in India for a long time. Successiv...
The Apex Court pronounced a judgement in the case titled Tata Motors Vs The Brihan Mumbai Elect...
Since economies are moving towards digitalisation and making it feasible to conduct transaction...
The Alternative Investment Funds (AIFs) Pro-rata and Pari-Passu Rights Proposal Consultation Pa...
The Financial Action Task Force, i.e. FATF (the Force), is the global money laundering and terr...
Advance tax refers to the payment of the tax liability before the end of the relevant financia...
On 11.12.15, the Hon’ble Delhi High Court (HC) pronounced a landmark judgement in the case ti...
Money laundering can be defined as the process of illegal concealment of the origin of money ob...
Are you human?: 7 + 1 =
Easy Payment Options Available No Spam. No Sharing. 100% Confidentiality
It is very common for any Non-Banking Financial Company (NBFC) to change its management or to experience such chang...
26 Jun, 2017
The rapid growth of NBFCs, especially during the nineties, has led to a gradual blurring of the fine line between b...
19 Nov, 2019
Red Herring Top 100 Asia enlists outstanding entrepreneurs and promising companies. It selects the award winners from approximately 2000 privately financed companies each year in the Asia. Since 1996, Red Herring has kept tabs on these up-and-comers. Red Herring editors were among the first to recognize that companies such as Google, Facebook, Kakao, Alibaba, Twitter, Rakuten, Salesforce.com, Xiaomi and YouTube would change the way we live and work.
Researchers have found out that organization using new technologies in their accounting and tax have better productivity as compared to those using the traditional methods. Complying with the recent technological trends in the accounting industry, Enterslice was formed to focus on the emerging start up companies and bring innovation in their traditional Chartered Accountants & Legal profession services, disrupt traditional Chartered Accountants practice mechanism & Lawyers.
Stay updated with all the latest legal updates. Just enter your email address and subscribe for free!
Chat on Whatsapp
Hey I'm Suman. Let's Talk!