More than 60% of the loans came from NBFCs

The Covid pandemic forced people of all ages to rely on digital platforms for various activities. Whether banking or grocery shopping, more and more people are gradually switching to online mode. While various banking activities have grown dramatically, digital loan apps have grown in importance. While digital lending to banks is still in its infancy compared to physical modes, digital lending to non-bank financial firms (NBFCs) has increased significantly in 2020 after the Covid outbreak, according to a recent report by the Reserve Bank of India (RBI).

NBFCs – preferred choice for digital lending

The proportion of the total number of loans sanctioned by NBFCs through digital lending platforms increased more than 55 percent between 2018 and 2020. While the number also increased significantly between 2018 and 2019, Covid began to spread in late 2019, with the number increasing in 2020.

“NBFCs are taking a more flexible approach to disbursing / processing a loan. Banks have a physical presence and operate on the traditional model, while NBFCs operate on a hybrid model, which makes their journey a little smoother, “said Mahesh Shukla, founder and CEO of PayMe India, a digital lending platform.

The proportion of the total number of online loans sanctioned by NBFCs decreased slightly by the end of 2020, but increased slightly for banks. After

Covid outbreak has increased the number of online banking scammers in India at an alarming rate. This could be a reason for the decline in the number of loans digitally disbursed by NBFCs and the increase for banks, although other factors are also true.

“Up until now there are some lenders that are not recognized or regulated, which is why some people have faced service problems. That could be why some people switched to banks, ”says Shukla.

While both NBFCs and banks lend, they do so under different frameworks. “NBFCs have taken a cautious approach due to uncertainty. They have higher borrowing costs than banks and must therefore be careful with cash flows. Also, several NBFCs saw an increase in non-performing assets (NPAs) during Covid, resulting in a mismatch of liquidity and liabilities between assets, ”said Sameer Aggarwal, founder and CEO of Revfin, a digital lending platform.

In 2017, there was no big difference between banks (0.31 percent) and NBFCs (0.55 percent) in terms of their share of the total loan amount disbursed digitally. However, the NBFCs lagged behind in the number of loans with a share of 0.68 percent compared to 1.43 percent for the banks, the report said. Things took a turn when Covid spread and NBFCs made great strides in digital lending. “NBFCs have a deeper specialization in customer segments and regions. They use digital apps for sourcing, which opens up alternative sourcing options in their areas of expertise. Also, NBFCs have an easier and faster decision-making process, which is convenient for digital lenders, ”says Aggarwal.

The majority of the loans disbursed digitally by NBFCs are personal loans, followed by the “Other” category, which consists mainly of consumer finance loans.

Preferred banks for long-term loans

NBFCs have a higher percentage of the number of loans disbursed digitally, but when it comes to longer-term loans, people seem to prefer banks over digital loan apps.

At banks, around 87 percent of the amount paid out (0.98 lakh crore rupees) has a term of more than one year. For NBFCs, only 23 percent of the Rs 0.05 lakh crore loans go into that bucket. In contrast, loans with a maturity of less than 30 days at NBFCs have a maximum share (37.5 percent, totaling Rs 0.9 lakh crore) compared to only 0.7 percent at banks (amounting to Rs 0.007 lakh crore.) . ), says the report.

“Banks have the ability to raise inexpensive long-term capital through deposits and other means. This makes it easier for them to lend over a longer period of time. Most NBFCs can only raise short to medium term debt. Longer term debt can be very expensive for NBFCs, ”says Aggarwal.

Be wary of fraudulent apps

As more and more people take out loans digitally, RBI is warning customers about fraudulent apps. The report mentions that around 1,100 rental apps were available to Indian Android users in over 80 app stores (from January 1, 2021 to February 28, 2021).

“There is a need to make it easier for enforcement authorities to identify bad players in the digital lending space in a timely and smooth manner. The Payment Systems Ordinance should refine the “Travel Rules” for the transmission of one-time passwords (OTP) and SMS / email notifications to be issued to users in connection with the execution of payment transactions via any digital mode under the PSS Act (Payment and Settlement Systems Act). “Says the report. “Travel Rules” include information that must be captured, retained, and recorded in every money transfer transaction initiated by a financial institution on behalf of a customer and that should be “passed” to each subsequent financial institution in the chain.

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