Digital Lending Companies – II: Skirting the Law & Creating an Insta-loan Bubble
The operational structures of such loans are in defiance of many requirements of  RBI's (Reserve Bank of India's) directions. Following are the areas where most of the NBFCs (non-banking financial companies) act in their own sweet ways:
 
KYC Process: The KYC (know your customer) master directions specify that an authorised representative of the lender NBFC must physically visit and see and verify the original KYC details of the borrower. There are further requirements of maintaining the KYC records and carrying out customer due diligence (CDD) which the NBFCs fail (refuse) to comply with in their hurry of their 'superfast processing'.
 
Fair Practice Code (FPC): The FPC requires lender NBFCs to display annualised interest rates in all their communications with the borrowers. However, most of the NBFCs show monthly interest rates as part of their 'marketing strategy'. 
 
Risk Management: The directions require NBFCs to assess the risk before granting loans to borrowers which is overlooked while providing speedy disbursals.
 
Recovery Process: NBFCs do not even have a properly defined recovery process. They are just making rapid disbursals, without a thought of whether or not these loans will be repaid.  
 
Risk to Personal Information: Many NBFCs obtain access to personal information such as text messages and social media profile of the borrower by way of incorporating clauses in this regard in the detailed terms and conditions of the loan agreement. 
 
RISKS TO THE BORROWERS
 
The borrowers face several risks under such loan transactions, ranging from personal to financial such as:
 
Many borrowers usually don’t read the entire set of terms and conditions and end up granting the NBFCs access to their personal information. 
 
Privacy of the borrower is at stake as information trading is yet another business that the NBFCs may secretly engage in, posing a threat to borrowers’ personal information. 
 
The lucrative advertising strategies of these NBFCs might make a borrower take loans for purposes which otherwise would not have been a necessity or priority for the borrower. Hence, the borrower tends to borrow without any actual requirement because a demand has been created by the lender NBFCs.
 
The interest rates are very high on such loans. In case the amount of loan is high, the borrower is unable to pay the huge amount of interest and, thus, has to take another loan to repay the first.
 
The credit score of the borrower may get affected at the slightest delay in repayment, even if the amount of loan is as small as Rs500. Thus, the creditworthiness of the borrower is at a risk of degradation.  
 
THE BUBBLE OF ATTRACTION: PLAYING WITH THE PSYCHOLOGY
 
Despite such high interest rates, why is a borrower more attracted to loans from NBFCs? The only answer one finds is the ease and the fact that they are instant. In an era when everyone wants everything in a jiffy, be it food or health solutions, being attracted to instant loans is a very natural thing.
 
For example, if you meet with an accident and don’t have money for the treatment, just take a loan. You are shopping and suddenly realise you forgot your purse, take a loan.
 
The most crucial thing is that these NBFCs do not monitor the end-use of the loan amounts disbursed. So a borrower may specify any purpose for the loan which he might not actually use the loan for. 
 
Moreover, the high interest rates are not noticed by the borrowers as most of the NBFCs show monthly interest rates rather than the yearly rates in their communications on the app or the website. 
 
The NBFCs are playing the psychological game by becoming a friend in need for the borrowers. No matter how high the interest rates maybe or how risky the transaction maybe, it is a handy help whenever needed.  
 
Furthermore, the advertisements made by these NBFCs are so catchy that they may lure a person who might not really be in need of finance. The catchy phrases like “make your dream wedding come true”, “let the wanderlust in you come alive” create a 'need' for the customer to become a borrower. 
 
Marriage functions, travel and luxuries are the Indian way of displaying wealth and the the above strategies wraps people in a comfortable blanket of justification to remain under the debt burden.
 
ALL OUR MONEY INTO THE BLACK HOLE
 
While lending to businesses results in more capital formation and growth of the economy, personal lending mostly results in wasteful expenditure. Further, the interest rates being so high, the borrowers often obtain another loan to pay the previous loan and get trapped into the vicious circle of obtaining and repaying loans. 
 
The increasing lending volumes are not an indication of overall growth of the economy. Most of the purposes for which such loans are availed are consumption-based and less  productive. 
 
While on the one hand, such loans are helping us in need, on the other they are luring us to take unnecessary debt burden. The lender NBFCs are under the risk of regulatory action by the regulators since many of them are in non-compliance with regulatory requirements. The borrowers are under the risk of pressing themselves under unnecessary debt burden and huge interest costs. 
 
The recovery procedures of these NBFCs are very lenient but due to the high interest costs, the cost of funds is readily recovered by the lender NBFC. Even when banks have tried to provide quick loans under 59-minutes loan scheme, they have failed to do away with the procedural requirements such as document submission and are still regarded as 'slow-loans' considering the super-fast loans being provided by NBFCs within five minutes.
 
Lenders and borrowers are happily floating in the bubble of 'instant loans' which is definitely going to burst in no time.
 
 
(Rahul Maharshi and Kanakprabha Jethani work at Vinod Kothari & Co)
 
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    Digital Lending Companies – I: How Are They Showing Exceptional Growth?
    “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. 
     
    Please also Read the article:
     
     
    (Rahul Maharshi and Kanakprabha Jethani work at Vinod Kothari & Co)
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    COMMENTS

    Godavari Joshi

    7 days ago

    Consume till you cant digest any more...The lendee gets into habit of borrowing till he can no longer repay . The lender is no less than a Shylock who keeps getting his pound of flesh ( reporting profits and fat Advance book). All that 'strength' of profits and loan books dissipate as defaults start growing and all tricks available to report the rosy picture are exhausted.
    What happened with Corporates ( Over leveraged and Living beyond means and some degree of misgovernance) is now is happening with Individuals and small businesses.

    Rajiv Gupta

    1 week ago

    If Quick rich schemes in investments is a myth, this is just the reverse of it. No borrower can pay more than the earning in sustainable manner. In lowering interest rate scenario, the defaults get pushed down the line but then will show up as NPAs one fine day.

    Ramesh Poapt

    2 weeks ago

    its booming business worldwide. Foreign bnks have tought indian nbfcs and banks
    this business. delinquencies are factored in int.rates. net net it is very profitable
    than traditional lending for pvt/psu banks. win win for lenders and borrowers.
    it will only increase in due course.

    Ravindra Shetye

    2 weeks ago

    These are finally future NPAs of the Banks which provide loans to these NBFCs which loan the same money to unsecured creditors and I doubt whether the NBFCs also have any strong securities to offer against their Bank loans.
    A bubble waiting to burst.

    REPLY

    PRADEEP KUMAR M S

    In Reply to Ravindra Shetye 2 weeks ago

    Another scam in the Making indeed.
    Or another experiment being staged at the expense of the public money.

    NBFCs pulling back on loans to MSMEs: Moody's
    The liquidity crisis triggered after the default of IL&FS is causing the non-banking financial and housing finance companies to pull back on loans to micro, small and medium sized enterprises (MSMEs), Moody's said on Wednesday.
     
    "The value of loan against property (LAP), assets under management by HFCs and NBFCs increased by 8.3 per cent over the six months leading to December 2018, down from 15.4 per cent growth over the previous six months," Moody's said.
     
    Moreover, according to Moody's, it does not expect LAP lending by NBFCs and HFCs to pick-up significantly in the next few months too as the operating environment remains challenging for them as they continue to face issues with accessing funds.
     
    "Indian non-banking financial companies (NBFCs) and housing finance companies (HFCs) are pulling back on loan against property (LAP), lending to micro, small and medium sized enterprises (MSMEs) because of the funding squeeze caused by the liquidity crisis in the country's financial sector," Moody's said in a note.
     
    This situation is credit negative for asset-backed securities (ABS) backed by LAP to MSMEs, because it will reduce refinancing options for these small businesses, potentially leading to loan delinquencies and defaults, the brokerage firm added.
     
    Besides, it said that the declining real estate prices in some cities and a slower pace of price growth in others has curtailed refinancing of LAP and hurt recovery prospects for defaulted loans.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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    COMMENTS

    Muniyandi

    2 weeks ago

    50000

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