The Covid pandemic has forced people of all age groups to rely on digital platforms for a variety of activities. Be it banking or grocery shopping, more and more people are gradually switching to online modes. While there has been a surge in various banking activities, digital loan applications have gained a lot of publicity. While digital lending is still in its infancy for banks compared to physical modes, digital lending increased significantly for non-bank financial firms (NBFCs) in 2020 following the Covid outbreak, according to a recent report by the Reserve Bank of India. (RBI).
NBFC – the preferred choice for digital loans
The percentage of total NBFC-sanctioned loans through digital lending platforms increased by more than 55 percent between 2018 and 2020. While the number has also increased significantly between 2018 and 2019 as Covid started spreading in late 2019, the number has increased in 2020.
“NBFCs have a more flexible approach to loan disbursement / processing. Banks are physically present and work on the traditional model, while NBFC work on a hybrid model, which makes their journey a bit smoother, ”says Mahesh Shukla, founder and CEO of PayMe India, the digital lending platform.
The percentage of the total number of online loans sanctioned by NBFC banks decreased slightly by the end of 2020, but increased slightly for banks. After
the outbreak of the Covid, there has been an alarming increase in the number of online banking frauds in India. This may result in a decline in the number of digitally disbursed loans by NBFC banks and an increase for banks, although other factors also apply.
“At the moment, there are a few lenders that are not recognized or regulated, which has resulted in several people having problems with the services. Maybe that’s why some of them moved to banks – says Shukla.
While both NBFC banks and banks make loans, they do so on different terms. “NBFCs have taken a cautious approach due to the uncertainty. They have a higher cost of credit than banks and therefore need to be careful with cash flow. In addition, several NBFCs saw an increase in non-performing assets (NPAs) during Covid, which led to a mismatch in liquidity and asset liabilities, says Sameer Aggarwal, founder and CEO of Revfin, the digital lending platform.
In 2017, there was not a big difference between banks (0.31%) and NBFC (0.55%) in terms of their share of the total amount of digitally disbursed loan. However, NBFC banks were lagging behind in terms of loans, with a share of 0.68 percent compared to 1.43 percent of the banks, the report said. Things changed as Covid spread and NBFC made great strides in digital lending. “NBFCs have a deeper specialization in customer segments and geographic locations. They use digital sourcing applications, which gives them alternative sourcing options in their areas of expertise. In addition, NBFCs have a simpler and faster decision-making process, which is convenient for digital lenders, ”says Aggarwal.
Most loans made digitally by NBFC banks are personal loans, followed by the “other” category, which mainly includes consumer finance loans.
Banks preferred for long-term loans
NBFCs have a higher share of digitally disbursed loans, but when it comes to longer term loans, people seem to prefer banks through digital loan applications.
In the case of banks, about 87 percent of the amount withdrawn (0.98 rupees lakh crore) has a term of more than one year. For NBFC, only 23 percent of loans, of 0.05 lakh crore rupees, are for that bucket. On the contrary, loans with maturities less than 30 days have a maximum share for NBFC banks (37.5 percent, totaling 0.9 lakh crore) compared to just 0.7 percent for banks (rupees 0.007 lakh crore). ), states the report.
“Banks have the ability to raise cheap long-term capital through deposits and other means. This makes it easier for them to borrow for a longer period. Most NBFCs are only able to incur short- and medium-term debt. Long-term debt can be very costly to the NBFC, ”says Aggarwal.
Watch out for bogus apps
As more and more people take out loans digitally, the RBI is warning customers to pay attention to fake applications. The report mentions that there were approximately 1,100 loan apps available to Indian Android users in over 80 app stores (January 1, 2021 to February 28, 2021).
“There is a need to facilitate the timely and frictionless identification of bad actors in the (digital) lending space by law enforcement. The payment system regulation should clarify the “travel rules” regarding the narration of one-time passwords (OTP) and SMS / e-mail alerts sent to users in connection with making payment transactions in any digital mode under the PSS Act (Act on Payment and Settlement Systems), ” says the report. “Travel Rules” include information that must be collected, retained, and included in any transfer of funds initiated by a financial institution on behalf of a client, and that should “travel” (transfer) to each subsequent financial institution in the chain.