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Non-banking financial companies (NBFCs) seem to be taking more exposure to high-risk borrowers, mostly individuals and households.
They are reportedly using algorithms, social media behaviour and ratios to screen these clients and mitigate risk.
A report from credit bureau TransUnion CIBIL suggests banks and NBFCs might have shifted focus on lending to ‘near-prime’ and ‘sub-prime’ borrowers. Near-prime borrowers are those with credit scores between 650 and 700, while sub-prime borrowers have scores between 300 and 650. The range of these scores is up to 900 and one higher than 700 is considered good.
According to the report, 44.8 per cent of new NBFC borrowers during the quarter ended June were categorised as sub-prime and near-prime, compared with 36.4 per cent in the same quarter last year.
Abhay Kelkar, vice-president of research and consulting for TransUnion CIBIL, said: “This indicates a greater willingness among lenders to relax underwriting standards and extend more unsecured credit to higher-risk borrowers. This approach can certainly lead to growth, as we have seen, but requires consistent and effective risk management strategies to be undertaken properly on an ongoing basis.”
A lot of screening is done before sanctioning loans. NBFCs no longer depend on credit score and history for assessment. They are now also trying to gauge spending behaviour patterns. Whatever is spent by an individual, especially on digital platforms, is tracked. That gives a much better picture of a borrower’s financial capacity, according to senior executives at various finance firms.
This tracking of transactions on e-commerce websites, point-of-sale machines and Unified Payment Interface platforms are collated over 15 months and cash flow identified.
Manish Lunia, co-founder of FlexiLoans.com, said: “We are using data from every corner, and not limiting ourselves to data from the credit bureau, which is old and generally replicates only big transactions.”
Monish Anand, founder and chief executive at Shubh Loans, adds: “We validate data in multiple ways. We track your average bank balance, spending habits and social media activities. We extensively use ratios like fixed obligation-to-income, to identify if you have the intent and capacity to repay.”
This nimbleness of new-age NBFCs in using technology is giving them an edge over traditional ones. A senior banker at an old NBFC, who did not wish to be named, said: “It is easier for new players to dig deep into data and change according to market conditions. We (older ones) have a lot of checks and balances which make us non-flexible.”
Lenders also believe that a good communication channel encourages the borrower to pay diligently. Rajesh Gupta, founder, Cash Suvidha, said: “We have been extending personal loans to individuals in rural Bihar, Haryana and Rajasthan.
The default rate for us has been quite low; most of these loans have been repaid in time. We have a strong on-ground presence at these places and make sure to educate the borrower on the benefits of timely repayment.”
