How NBFCs rein in their bad debts

The economic slowdown has meant that non-performing loans of both deposit-taking and non-deposit-taking Non-Banking Financial Companies (NBFCs) have shot up over the past two years. But disciplined lending and more feet on the street meant that NBFCs’ bad loans were far lower than banks.

For deposit taking NBFCs, bad loans as a percentage of total loans rose to 2.7 per cent in 2013 from 0.7 per cent in 2011 (compared to about 4 per cent of total loans for banks).

For non-deposit taking NBFCs, bad loans rose to 2.20 per cent in 2013 from 1.72 per cent in 2011, according to RBI data.

The majority of NBFCs have maintained their capital adequacy over the stipulated 15 per cent and provisioning has exceeded regulatory requirements.

Apart from strict regulatory controls such as higher capital requirements and lower loan-to-value ratios, what has really helped NBFCs keep their NPAs at lower levels is their focus on lending against a particular asset and a business model built on relationships.

Still, it is not as if NBFCs have been insulated from the worst of the economic crisis. Large NBFCs, such as Shriram Transport Finance, Mahindra Finance and Magma, fund individuals who find it difficult to access bank financing. People in this segment include truck drivers/operators and small engineering contractors.

Factors such as the monsoon/agricultural productivity and mining of iron and coal weigh directly on this segment’s ability to deploy assets and earn money.

As sectors such as mining were largely in limbo for much of 2013, the repaying capacity of individual borrowers was severely dented. NPAs of the top eight NBFCs rose sharply, by over a 100 basis points (to 3.6 per cent of total loans), in calendar year 2013.

However, NBFCs have traditionally done well in recovering their loans from customers. Most NBFCs keep at least half their workforce in direct engagement with customers. This is something banks have not been able to replicate.

NBFCs also try to recruit people from the locality they operate in. This, according to Ramesh Iyer, MD and CEO, Mahindra Finance, “makes a big difference”.

The local flavour means that people know each other, know each other’s difficulties and counsel each other.

Umesh Revankar, Managing Director of Shriram Transport Finance Company, explains: “When our customers are unable to repay, we encourage them to repay partially. We keep in touch with the customers and this helps in higher recoveries.”

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