Digital Lending

How NBFCs are Levelling the Lending Market in India

The banking and finance sector has been subject to a tremendous growth spurt, especially in the last decade. The increasing contribution of Non-Banking Financial Companies (NBFCs) is one of the primary factors that contribute to this growth. NBFCs in India are also credited for democratising or equalising the lending market in India. This blog dissects the role NBFCs have been playing in simplifying access to lending solutions in the country and evidently backing the financial inclusion initiative of the Government of India.

Recent History of Lending Market in India

The loan market in India was once the playing field limited to only banking institutions and unsafe, unorganised channels. These credit institutions followed stringent lending parameters, making it difficult for a large number of individuals and small businesses to obtain loans for their different personal and business-related financial needs. These entities also relied heavily on traditional business models, with less involvement of technology and more dependence on manual operations. Because of this, the lending market in India was sickened with red tape and inaccurate processing of information. In 2012, the digital credit market of the country was estimated at a mere US$9 billion. 

Within one decade, the country’s financial sector has expanded at an exceptional rate, with a parallel increase in the demand for credit. According to a report, the domestic credit growth in India has increased at an average rate of 15.1% between 2000 and 2021. Some of the critical growth factors behind this include the following:

1. Shift in customer preferences from traditional businesses to technology-driven businesses; 
2. Change in customer lifestyle; 
3. Increase in net household income;
4. Expansion of the MSME sector; and
5. More awareness by customers about their latent credit demand.

Keeping up with this change, the Reserve Bank of India (RBI)^[1] also shifted its focus to non-banking channels of credit and provided a smoother entry to new NBFCs in India.

NBFCs- An Improvement to Indian Credit System

The entry of NBFCs as loan-giving entities has brought significant changes to the entire financial ecosystem, including the lending market in India. The digital lending market growth potential has been estimated to be US$ 820 billion during 2021-2023. It is a significant jump from the mere US$ 9 billion in 2012, making NBFCs a vital force in the growth of this sector. The credit inflow in NBFCs lending to businesses also grew at a CAGR of 72% during 2015-2019. As per a report by CRISIL, the retail loan market comprising individual consumers may reach US$ 1.3 trillion.

Based on these numbers, it can be easily deduced that NBFCs have been filling the credit gap left by the banking institutions in India. The number of NBFC registration in India has also increased, with more entities identifying the potential this sector has to offer. With their improved operational processes, NBFCs have outpaced banks and reduced delinquencies that were rampant in the lending sector. This change can be attributed to their localised presence, pan-India functioning and focus on segmented demographics.

How NBFCs Equalise the Lending Market in India

NBFCs create a more equally approachable lending setup for all demographics, including individuals, households, entrepreneurs, MSMEs and even large corporate houses. They have less rigid credit assessment and focus on the markets that banks generally avoid due to lack of credit history or financial information. Here are some of the top ways how NBFCs level the lending sector in India:

Serving the Unserved Markets

NBFCs have become an alternative loan channel to banks, targeting a broader market of loan seekers that were otherwise left unserved by the traditional lending entities. Those who were unable to avail of a loan from banks have started turning towards NBFCs due to their more lenient credit approach.

Specialised Loan Offerings

NBFCs have expanded the number of loan products available in the market by introducing loans that cater to the needs of a more niche market. It includes durable consumable loans, electric vehicle loans, travel loans, wedding loans, working capital loans, technology integration loans and much more. 

Technological Advancement in Lending Sector

NBFCs also bring more technological advancements to the financial sector, making the loan process more structured and streamlined for their customers. Unlike banks, NBFCs incorporate more contemporary business strategies and models to operate a leaner business. They offer digital or hybrid lending solutions using Loan Management Systems (LMS), APIs, Artificial Intelligence, and Blockchain. The lending market in India is now abuzz with terms like video-KYC, paperless documentation, digital loan disbursements and online grievance management. 

Better Customer Experience

With more streamlined operations, NBFCs offer prompter and more personalised lending experience to their customers. Most NBFCs provide customisable loan products in terms of flexible interest rates, tenure and repayment methods. They are able to process loan applications, approve loan applications and disburse loans quicker, thereby reducing the overall turnaround time of the loan lifecycle. By utilising technology, these entities also offer quick dispute resolution to their customers, something that was missing from the lending market in India a decade ago.

Better Risk Mitigation

Further, new-age non-banking financial companies also implement more airtight risk planning and mitigation strategies that enable them to gain an edge over their banking peers. NBFCs focus on minimising their credit risks, liquidity risks and operational risks with better underwriting practices, use of risk monitoring tools and periodic audits of their operations. This way, they are able to include the unserved markets in their customer base while keeping their NPA risk to a minimum.

Conclusion

The lending market in India has constantly been witnessing an evolution owing to the positive changes brought in by NBFCs. With the focus on digitalising the lending sector, FinTech NBFCs may comprise almost 48% of the total lending volume by 2023. With more customer-focused operations, NBFCs have been levelling the playing field in the Indian credit market, making it equally accessible to all and propelling the financial inclusion of almost 90% of underserved Indian credit markets.

Read our Article: Fintech Lending in India: Changed style of lending