India is a country where procuring a loan, is a process which is not just confined to the boundaries of a bank. Banks with all their corporate glamour and credit rating criteria may intimidate a common citizen of our country, which in most parts, still remains a ‘developing country’. Indians are known worldwide for their creativity when it comes to finding a ‘Jugaad’, a colloquial Hindi term for finding a hack to a challenging situation. And find a ‘Jugaad’ they did. Lending money for absurd interest rates became a blossoming business opportunity. What started off as a means for farmers without a piece of land to set their business off soon became a common substitute for banks among both the rural and urban population of our country.
Through this crude concept of moneylending led to the rise of small financial institutes which were mainly involved in the business of lending loans and advances, something which was already in practice in other parts of the world. Over time such businesses grew, they were registered under the companies’ act of 1956, India. They expanded the list of services offered. From acquisitions of shares and stocks, purchasing of bonds to the insurance business and the chit fund business, they seemed to have everything covered. It was almost as if they had become a bank without actually becoming one. These businesses came to be known as Non-Banking Financial Companies (NBFC’s).
What made them successful?
Banks tend to scrutinize an applicant thoroughly before issuing a loan. NBFC’s on the other hand, were comparatively easier to accrue a loan from. Such flexible scenarios made such organizations seem lucrative to Indian masses, so much so that it made the people overlook the higher interest rates.
Their flexibility in functioning serves them the advantage of being able to serve a broader range of clientele. For instance multiple NBFC’s are setup with the motive of funding only a particular kind of a business, currently there are NBFC’s dedicated towards helping businesses pertaining to power generation, transport and so many more.
These institutions promote a selfless propaganda and a lot of such organizations have gained tremendous goodwill in the market. They differentiate themselves from banks by stressing on their customer oriented approach which again can be attributed to their flexibility. They offer student loans for unconventional courses, travel, businesses and such matters for which banks may be hesitant.
One of life’s greatest ironies is when the very cause of your success becomes the very cause for your setbacks as well. The flexible and lax approach employed by such institutions without any necessary research or background checks turned out to be a double-edged sword. While this strategy was good for customer acquisition, the major drawback was that there was no surety of the loan amounting to any kind of fruition for whosoever may have taken it, leaving the client with loans and no means of repaying it.
While NBFC’s were affected adversely by such incidents, moneylenders and middlemen seemed to thrive on such situations leading Prime Minister Modi to launch the Pradhan Mantri Mudra Yojana (PMMY) scheme, aimed to free young entrepreneurs from the malicious wrath of the said middlemen. This scheme urged young entrepreneurs to go to small financial institutions for monetary aid rather than the illegal operators. This came as a boost to NBFC’s and other micro financial institutions. The PMMY scheme proved to be a masterstroke. With planned loan facilities, easy paperwork and standardized interest rates, the scheme has already seen more than 12 Crore entrepreneurs benefiting from it.
Are these businesses on the wane?
NBFC’s and MFI’s have an elevated sense of risk attached to it when compared to conventional banking methods. These institutions generally tend to demand a higher rate of interest when compared to private sector banking facilities. The lesser popular ones among such institutions are not having a good business year as this year has seen multiple organizations shut down. More than twenty NBFC’s have shut operations just in the month of May alone. Worrying numbers, one may say. The Indian banking scenario is currently at a critical juncture with a surge in loan amounts to corporate entities; it was improbable that the NBFC business would go through unscathed and they certainly have borne the brunt of it too.
While it cannot be said the business has entered a period of stagnation with aggressive strategies like the PPMY already in motion, the NBFC and MFI industry definitely has leverage to claw its way back into business. While the Indian banking industry has more deep rooted problems than that of capital generation, the Non-Banking Finance Companies only trim the hedge when it comes to the problems the banking sector faces and hence could take lesser time recuperating from the state of the market. With the big names in the industry already going through pretty much unscathed, NBFC’s are projected to remain a pivotal part of the industry tending to matters regarding financial aid. Especially with Indians and their beloved ‘Jugaad’, it’s tough to see these institutions failing to serve a purpose.
