The Indian financial landscape has been through many changes since demonetization. From banks moving quickly towards digitization to fintech start-ups lapping up the rewards of demonetization and NBFCs paving a clearer path for them, the need for a digitized economy that is financially inclusive has been on the rise.
Non-Banking Financial Companies (NBFCs), too, have been growing in numbers in the country. Understanding that many small and medium business owners are intimidated by big banks and had been looking at unorganized alternatives for cash, NBFCs were formed to offer the benefits and services of banks sans the worries that come with it.
But working with the SME sector also invited challenges for NBFCs as the sector is largely unorganized.
Where’s The Data?
Small business owners carry out dealings a lot more than one thinks of, but they do not have records to show the same. While their businesses are booming, their data books are either blank or have information which isn't updated. “The availability of data is low so you cannot verify them. The sizes of their businesses are huge, but most of the data for these SMEs are off their books. When they have to present us with data too, they dig up their historical data to share it with us,” said Asish Mohapatra, CEO, and Founder, Ofbusiness.
Mohapatra’s company Ofbusiness, which is awaiting its NBFC licence, operates in business financing, where they offer materials required by SMEs on the back of the loans. By aggregating different vendors and orders from SMEs and then offering huge discounts, they allow SMEs to have an access to a wider suite of products.
The biggest risk NBFCs face is making sure that the loan is paid back. Most of this arises from the fact that the data required for the verification for most of these borrowers is missing.
But Mohapatra at Ofbusiness is also fighting the data problem. “We are looking at making an engine that gathers data, studies it and then designs a study to turn it around into a financial product. We look at other operating parameters that helps know the customer transaction history, giving us a better control on what he uses the money for. Many a time, the financial information you receive can be incorrect but that’s not the case with the operational information,” said Mohapatra.
Threat From “New Banks”
While the very nature of NBFCs projects them as a smaller bank that targets audiences not reachable by banks, the volatile structure of the fintech industry poses a threat to these NBFCs. “The NBFC structure, in itself, has been created to provide an easier compliance, a non-deposit taking body. That is probably why NBFCs as a collective entity are growing much faster. But there are many “new banks” coming up and they have an aggressive standpoint, much similar to NBFCs, except that they function with a lower cost of capital,” said Alok Mittal, Founder of Indifi Technologies. With RBI’s go ahead for Small Finance Banks, they also pose a threat to NBFCs for they are even targeting similar audiences.
GST and its ImpactThe introduction of the Goods and Services Tax has affected most industries. But Mittal from Indifi pointed out, “The interest income, which is the main source of revenues for most NBFCs, will not be affected. There will be a marginal increase in the tax rate. But instead, there will be more levelling of the playing field and the compliance requirement might go up.”