How NBFCs are innovating new era financial products using technology

If financial inclusion is a battle, then non-bank financial corporations (NBFCs) are its foot soldiers. Yes, banks fuel economic activity, but without the active participation of non-banking financial entities, all that economic power will be underutilized. For decades, Indian NBFCs have reached where banks couldn’t, accepted customers banks wouldn’t, and served use cases no one else thought possible.

And now, these loyal financial system participants are turning to the techies and building the next generation of financial products, business models, and operational strategy.

Let’s start by understanding how important NBFCs are. Here is what the RBI says: “Around the world, non-banking financial entities complement the traditional banking system in the process of financial intermediation”.

They have gained particular importance in a country like India, characterized by limited penetration of banking services, traditional lending models and a large population that lacks access to formal loans. An RBI report released last year found that NBFCs accounted for the maximum number of loans (60%) sanctioned through digital platforms.

And while NBFCs in the country date back to the 1960s, it’s only in the last decade that they’ve really taken off. Their meteoric rise can be attributed to several factors such as changing customer demands, increasing digitalization, and the factor we are going to focus on in this article: technology.

They have kept pace with rapid advances in technology, leveraging artificial intelligence (AI), machine learning (ML), and big data to develop breakthrough credit products and processes that have brought lending formal to the masses (or at least, who help it get there).

Let’s see how NBFCs make the most of new-age technology.

AI and ML

Risk assessment forms the very basis of every lending decision, and it has far-reaching implications for the business metrics of the lender (in this case, the NBFC).

AI and ML models help NBFCs simplify credit decisions by leveraging a diverse set of alternative data (tax bills, device data, transaction volumes, etc.) to assess creditworthiness and reveal information on the risk of non-payment and how to manage accounts at risk. Research has shown that using alternative data and ML approves 27% more applications than a traditional loan model and results in 16% lower average annual percentage rates (APRs).

This is especially crucial in a B2B context, where underwriting is more complex with factors such as shareholder control, service capacity and industry risk. With a streamlined AI-powered pre-approval process, denial rates decrease and loan approval rates are optimized.

AI-driven intelligence also enables deep personalization of loans. Customers can be segmented based on their ability to repay using alternative data (device data, bill payments, etc.). NBFCs can leverage this segmentation to offer loan products with relevant amounts and repayment guidelines.

When it comes time for collections, ML can help identify borrowers at risk of default by mining information that was not previously identified. This allows the lender to allocate resources optimally and employ the most effective strategy for each group of borrowers based on their risk of default.

Robotic Process Automation (RPA)

NBFCs are known for the speed of their operations. In fact, this is one of their main advantages over traditional banks. They ensure this speed by leveraging RPA to automate multiple repetitive processes. It helps NBFCs automatically capture data from application forms, instantly verify KYCs (in just 3-5 seconds), verify eligibility, and quickly disburse loans on successful applications. While improving the speed of operations, RPA also helps NBFCs reduce costs, generate leads, and improve customer service.

Conclusion

While NBFCs have the ability to build this technology stack themselves, they can also partner with fintech companies to leverage their technology capabilities. They can integrate the predefined subscription models and last mile collection processes of these, and also work with them to improve the onboarding and KYC processes.

The future of credit is therefore not in the hands of one or the other. Fintechs, NBFCs, and even banks need to leverage their unique strengths and bring them together to serve those most in need.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)

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