How is the loan taken from an NBFC different from a Bank? And More Insights…

Did you know that Non-Banking Financial Companies (NBFCs) offer more than just loans? What cautions you need to know before you take a loan from an NBFC?

In our exclusive interview, Vikas Singh, Founder Sugmya Finance Private Ltd.,  helps the us understand how NBFC lending differs from traditional banks and shares strategies for affordable interest rates. In conversation with The Think Pot  Founder, Mahima Sharma, Vikas a seasoned expert with 15 years in the lending industry, helps the readers understand why at times interest rates may pinch them as he makes them discover the regulatory challenges faced by the lending industry.  The USP of the InterviewGain invaluable insights for aspiring micro-finance entrepreneurs! Take a read….

How is the loan availed from an NBFC different from a Bank? In what scenarios, should a common man opt for NBFC lending?

A loan obtained from a Non-Banking Financial Company (NBFC) differs from a bank loan in several key ways.

Firstly, NBFCs are financial institutions that provide banking services without holding a banking license. They cannot accept demand deposits like banks but can offer various types of loans and financial services.

Secondly, NBFCs tend to be more flexible in their lending criteria compared to banks. They may cater to individuals and businesses that may not meet the stringent requirements set by traditional banks. This makes them an attractive option for borrowers with non-standard credit profiles or those seeking quicker loan approvals.

Additionally, NBFCs often specialize in niche markets or specific types of loans, such as microfinance, gold loans, or vehicle financing. This specialization allows them to have a deeper understanding of certain industries or customer segments, potentially leading to more tailored lending solutions.

Common scenarios where a common individual might opt for NBFC lending include:

Quick Processing: When urgent financial needs arise, NBFCs are often known for their faster loan processing times compared to banks, making them a suitable choice for immediate financial requirements.

Credit History: Individuals with a less-than-ideal credit history may find it easier to secure a loan from an NBFC, as they often have more lenient eligibility criteria.

Specialized Loan Types: For specific purposes like buying a vehicle or obtaining gold-backed loans, NBFCs specializing in these areas may offer more competitive terms and rates.

Tailored Solutions: If a borrower requires a specialized or non-traditional financial product, an NBFC that specializes in that area may be better equipped to provide a suitable solution.

What are the regulatory challenges that financial lending companies face in India, and how do you navigate them?

In my experience Mahima, financial lending companies in India face several regulatory challenges, and I would like to list just a few major ones at that.

There are Stringent Licensing and Compliance Requirements: Obtaining the necessary licenses and adhering to compliance standards set by the Reserve Bank of India (RBI) and other regulatory bodies can be a complex process.

Secondly we also face Interest Rate Caps and Regulations: The RBI has imposed regulations on interest rates charged by non-banking financial companies (NBFCs) to ensure fair practices and prevent usury.

The third case is of Risk Management and NPA Guidelines: Lenders must maintain adequate risk management practices and adhere to guidelines related to non-performing assets (NPAs).

Fourthly there is the Data Privacy and Security challenge: Ensuring the security and privacy of customer data in compliance with data protection laws is crucial and though we have the Data privacy Protection Bill 2023 in place, it is miles to go.

Fifth come the Laws Related to Debt Recovery: The legal process for debt recovery can be protracted and complex, which can impact the company’s ability to manage its loan portfolio effectively.

Sixth is the case of Regulations on Microfinance Institutions (MFIs): Specific regulations exist for MFIs, which may impose restrictions on lending practices.

Navigating these challenges involves establishing robust compliance departments, regular training for staff, and maintaining open lines of communication with regulatory bodies.

“But then the Evolution of Regulatory Landscape is totally happening, I won’t deny that. The regulatory landscape for the lending sector in India has evolved significantly over the past decade. The RBI has introduced various reforms to promote transparency, consumer protection, and stability in the financial system. The introduction of the Insolvency and Bankruptcy Code (IBC) and the establishment of the National Company Law Tribunal (NCLT) are examples of reforms aimed at improving debt recovery processes.”

While lending to support a small business, what strategies do you employ to keep interest rates affordable for your clients, especially from the low income group ones?

I would like to divide these strategies into six main factors, and none can work alone in the absence of the other.

  • Affordable Interest Rates for Small Businesses: To keep interest rates affordable for clients, especially those from low-income groups, a lending company may employ the following strategies:
  • Risk-Based Pricing: Assessing the creditworthiness of borrowers and offering interest rates based on their risk profile.
  • Collateral and Guarantees: Accepting collateral or guarantees to mitigate risk, allowing for lower interest rates.
  • Government Schemes and Subsidies: Utilizing government-backed programs or subsidies designed to promote small business growth.
  • Flexible Repayment Terms: Offering longer repayment periods to reduce the monthly burden on borrowers.
  • Capacity Building and Financial Literacy Programs: Providing resources and education to help borrowers manage their finances effectively.

Coming on to the next question Mr Singh, how has technology boosted the financial lending sector in the last decade? And what future potential do you see in the sector in the next decade?

You see, in the last decade, technology has revolutionized the financial lending sector. I would like to share some prime examples…

  • Digital Payments and Online Lending Platforms: The rise of digital payments and online platforms has made it easier for borrowers to access loans and for lenders to process applications.
  • Data Analytics and AI for Risk Assessment: Advanced analytics and AI algorithms enable lenders to assess creditworthiness more accurately, reducing default risks.
  • Blockchain for Security and Transparency: Blockchain technology is being explored for secure and transparent lending transactions.
  • Mobile Banking and Wallets: These have facilitated quick disbursement of loans and convenient repayment options.
  • Future Potential and Improvements: In the next decade, the financial lending sector is likely to see further advancements in:
  • Fintech Integration: Greater collaboration between traditional lenders and fintech companies for seamless and efficient lending processes.
  • AI-Driven Customer Service: Enhanced customer service through AI-powered chatbots and virtual assistants.
  • Blockchain for Smart Contracts: Expanding the use of blockchain for smart contracts to automate loan agreements.
  • Enhanced Cybersecurity Measures: Continued focus on robust cybersecurity to protect customer data.
  • Financial Inclusion Initiatives: Leveraging technology to reach underserved and remote areas with financial services.

What are some valuable lessons you’ve learned from your experience of working in the lending industry, especially when it comes to small-ticket size loans? What are the various factors of advice you would give to aspiring microfinance entrepreneurs looking to make a positive impact worldwide?

While the lending industry offers diverse experiences and lessons, it’s important to distinguish between the banking and microfinance sectors in terms of their objectives. The microfinance sector primarily serves unbanked individuals with smaller loan amounts. With 15 years of experience in this field, I’ve witnessed its resilience in the face of various challenges. This sustainability can be attributed to prudent policies, meticulous customer selection, and unique appraisal tools and mechanisms.

From my tenure in the sector, I’ve gleaned several valuable lessons that I would love to share with others, if that helpes pave a better path:

Adherence to RBI guidelines is imperative for all organizations operating in the lending industry to mitigate portfolio risk. Establishing a bespoke training system within the organization is crucial for personal development and aligning capacities with industry policies. Each organization should have its own code of conduct to guide employees, thereby ensuring the sustained well-being of borrowers. Product design should be tailored to specific geographic regions to enhance portfolio and borrower sustainability. Maintaining a diverse product portfolio enables organizations to effectively reach a wider audience of borrowers. A robust risk management system and alternative financing options are essential for organizations to navigate potential diversities in the sector. Customer acquisition should be approached with care and consideration to foster long-term sustainability. Cultivating a positive work environment for both employees and borrowers is vital for the sector’s enduring sustainability.

About Vikas Singh: He is the Founder of Sugmya Finance Private Limited (SFPL) is non-banking financial company (NBFC) in India. Established in 2019, this Delhi-based organisation claims to deliver a diversified range of end-to-end financial services to men and women from semi-urban, urban and rural locations in the country.

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