How new age NBFCs and alternative finance organizations are changing the game of lending ?
Achal Chaurasia– Looking To Borrow? Your Best Bet Could Be An NBFC, Not A Bank
The world of finance is becoming more democratic every day.
A few decades ago, it was nigh impossible to imagine a system of lending and borrowing without the institutional supervision of banks. I grew up in an environment where traditional credit systems: overdrafts, bank loans, and credit cards for small and medium enterprises (SMEs) were the undisputed guardians of credit. That is no longer the case, however.
As the decade turns again and the world economy attempts to recover post-Covid, it is time to take a hard look at the finance sector and identify the parts of it that have undergone a radical transformation. In the second category, I notice a significant rise in non-banking financial corporations (NBFCs) and other non-banking entities as viable, strong alternative sources of lending to SMEs. What are NBFCs, why are they important, and why should we care? Here’s a rundown.
How Do NBFCs Play a Prominent Role in the Lending Sector?
Why can’t banks meet the lending requirement of the economy without intervention the way NBFCs do? The short answer is there are some aspects of lending that traditional banks are unable to fulfill. It is in such cases that NBFCs step in.
The information given below fully clarifies this position:
New-Age NBFCs Are Digital And Accessible To All
Banks have been the respectable sentinels of credit for decades now; their role in managing the flow of money across lenders and borrowers cannot be overstated. However, the most attractive qualities that NBFCs bring into the market are some much-needed flexibility and diversity in their operations, features that banks are somewhat hesitant to incorporate into theirs.
Companies no longer need to rely exclusively on loans, overdrafts, and credit cards offered by banks; they increasingly prefer the experimental and transformative approach of NBFCs.
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Some NBFCs are not new by any means; for example, pawn shops and insurance firms have been around for several centuries, serving as strong auxiliary arms in the lending spaces of the economy. Now, they are finally coming into their own in a manner they haven’t quite managed to before.
Swift Fund Disbursal
It is no surprise that getting funds from a bank to start a business is a long, cumbersome procedure. It involves a lot of paperwork and lengthy documentation and verification. With NBFCs, the process goes much easier on the borrower; the requirements are fewer. Who wouldn’t want smooth, swift transactions? I know I would. And that is where NBFCs show true potential.
Whether it is for personal purposes or a business, we want loans with the lowest interest rates. The central bank does not govern NBFCs like it does traditional banks; this enables NBFCs to offer their services at much lower interest rates, making financial dealing with such organizations more lucrative for the borrower. Additionally, NBFCs are a more competitive space amongst themselves; the race for demand makes them further offer the best possible deal to their customers.
The eligibility criteria of NBFCs are much more relaxed in sanctioning loans, compared to traditional banks. So, it is easy to get loans even with low credit scores. Anyone who has dipped their hand into the traditional loaning process knows the nervousness of an inadequate credit score.
What if I told you that a corporation can not only lend you money on easier terms but also lend 100% of the amount, sometimes without collateral? It won’t be difficult to switch courses. That is exactly what we are noticing in the economy.
Minimal Paperwork and Documentation Requirements
The amount of paperwork and documents that need to be produced is considerably less for NBFCs. As a result, customers enjoy a much shorter loan processing time than traditional banks. The chances of getting a loan approved are significantly higher with NBFCs compared to banks.
NBFCs: The Future Of Lending?
To reiterate: my observation does not intend to undermine the importance of banks. Banks have been around for a considerably long time, and the biggest names in the business have established their presence in all corners of the world. That said, it is the sheer size of traditional banks that makes them unsuitable and inflexible to SMEs in times of need. The convenience and cost-effectiveness that NBFCs offer make them a welcome relief for an SME looking for a loan. Non-banking finance is transforming the credit ecosystem as we know it. Let a decade or two pass, and we could be looking at a world that lends and borrows in ways we would have never imagined.
A young businessman who has been in the line of entrepreneurship for quite a few years. He is an active learner and loves to know more about new technological developments coming up as well as how they can be put to great use to yield better results for society.