“यावज्जीवेत्सुखं जीवेत् ऋणं कृत्वा घृतं पिबेत् |
भस्मीभूतस्य देहस्य पुनरागमनं कुतः ||”
The famous couplet is taken from Charvaka Darshana, the treatise of a well-established school of Indian materialistic philosophy. It broadly translates as: “One should live luxuriously, as long as one is alive, and to attain the same, one may even live on credit and in debt. Because once you are dead and cremated, it is foolish to think about afterlife and rebirth.”
The financial services industry is taking the above couplet a bit too seriously and is flooding the borrowers with opportunities and facilities to burden them with debt at the click of a mouse.
Even the person who is unwilling to enter into a debt trap is somewhat lured by the 'instant loan' facilities given by numerous non-banking finance companies (NBFCs) these days. What is the implication?
While the Indian economy is facing a slowdown and banks in India are showing significant falls in their lending volumes, the NBFCs engaged in e-lending have been showing extravagant growth in their lending volumes.
The reason behind this is the transition from secured lending to unsecured lending, from corporate finance to personal finance, from paperwork to digitisation. This transition is the reason behind such a drastic shift of lending volumes.
CURRENT STATE OF LENDING TRANSACTIONS
NBFCs are crossing milestones and creating new records every day. A leading NBFC reported disbursal of Rs550 crore in 350,000 loan transactions and has been consistently disbursing loans over Rs80 crore every month, says a report from The Economic Times.
Another NBFC reported an existing customer base of 1.1 million. An app-based lender NBFC has 100 million downloads of its app and has disbursed around Rs700 crore in FY18-19 with an expectation of increasing the amount of disbursals to Rs2,000 crore in FY20, a report from CNBC TV18 says.
On the contrary, banks are showing a completely opposite picture. Under the 59-minute loan scheme introduced by the prime minister (PM) for small entities (having a turnover of up to Rs25 crore) to avail loans of amounts up to Rs5 crore from banks within an hour, only 50,706 loans were given approval in the FY18-19.
Growth rates in the banking sector are falling. Growth in retail loans fell to 15.7% in April 2019 compared to 19.1% in April 2018. The growth rate in credit card loans has also shown a decline of 8.8%, according to Business Standard.
UNDERSTANDING THEIR BUSINESS MODEL
NBFCs practise unsecured lending of small-ticket loans, usually personal in nature. The market tends to be more inclined towards obtaining finance from such NBFCs. The basic features of loans provided by NBFCs are:
Unsecured: The borrower or the customer is not required to provide any security for obtaining such loans. Thus, even if borrowers have no assets at all, they can still obtain loans.
Instant: These NBFCs process the loans within a very short period (‘superfast processing’ as they call it) and the disbursement is made within a period ranging from five minutes to three days, depending on the size of the loan. There is no requirement of long procedures as required to be followed in case of bank loans.
Digital: Usually, these NBFCs have an app-based or website-based platform through which they provide such loans. The KYC (know your customer) process is also carried out through the app or website itself.
High Interest Rates: The interest rates on such loans are very high as compared to the interest rates on loans provided by banks. The rates usually range from 15% p.a. to 130% p.a.
Small-ticket Size: The loan size is generally small ranging from Rs500 to Rs5,00,000.
Short-term Loans: The term of loan is also short. Repayment is required on weekly, fortnightly or monthly basis.
Credit Score Based Decisions: The lending decisions made by NBFCs are largely dependent on the credit score of the borrower. A strong network of credit information companies (CICs) stores the credit information of the borrowers and the borrower making default of even a single day would be barred from accessing any other e-lending platform as well. However, for first time borrowers, the only way to check credit standing is their bank statement.
Source of Funds: NBFCs get their funds from banks as well as bigger size NBFCs and from private equity investors.
Purpose: These loans are provided mostly for personal purposes like marriage ceremonies, buying a car, medical issues, travel, etc.
Innovation: Each of the e-lending platforms has a different model. While some involve students in their marketing activities, some have tied up with sellers and buyers to finance transactions between them and some with different brands to finance their operations.
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(Rahul Maharshi and Kanakprabha Jethani work at Vinod Kothari & Co)