Top 6 things NBFCs must look at before they give loans to customers

Non-banking financial institutions (NBCFs) have contributed immensely in empowering the economy and driving financial inclusion in the country. The consumer segment that remained unserved by the mainstream banking system has found respite in NBFCs as a majority of the segment lacks formal documents and credit history. Moreover, the stringent rules and regulations of banks often discourage the low-income group from utilizing the financial tools. NBFCs focus on understanding the customers and providing financial solutions with ease and minimum documentation.

A major success factor for any NBFC is the trust of the customers. Currently in India, financial services are being provided to tens of thousands of retail customers daily and hence responsible lending is a practice that must be completely ingrained into the way business is done. 

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Here are the 6 key aspects that should form the core philosophy of NBFCs in terms of engaging with the customer:

1] Customer education: Lenders have an important role to play in educating customers about financial prudence and discipline. It is imperative that the lending companies double up as financial advisors and keep the customers’ best interests in mind. Lenders also need to take up the responsibility of making customers aware of the perils and negative impact of non-timely repayment of loans on their credit bureau scores. Comprehensive group training should be provided to microcredit customers to familiarize them with the concept of group borrowing, cashflows and financial independence.

Providing financial advice to the customers will also help the companies in tracking the development of individuals and catering to their changing needs with diversified products. It goes without saying that after a few loan cycles, some borrowers with great business acumen tend to lift themselves beyond the purview of microfinance loans. It is at this juncture where lenders should track the progress of said customers and help them recognize the need for higher quanta of credit facilities.

2] Curb aggressive lending and mis-selling: Aggressive lending and forcibly pushing products onto customers may yield limited success and more importantly result in loss of faith. To prevent mis-selling of products, customer-facing employees should be sensitized to gauge the cashflows and needs of customers, and to accordingly pitch relevant schemes to them. In the same manner, the loans to small entrepreneurs and business owners should be provided only after careful field investigations, family verifications and assessment of cash flow and income.

3] Sensitivity and empathy: In the case of collateralized loans like Gold Loan, the customers pledge their assets as a last resort to raise funds for emergency situations. Sensitivity and empathy for them in such situations go a long way in building long-lasting relationships. These 2 traits must also be the base upon which products are designed and implemented.

Customer acquisition and customer retention should be valued more than the mere transactional value which, in its true sense, would translate into responsible lending. To ensure the employees of the companies are also on the same page, training mechanisms should be built in that are focused on improving product-related skills and cultivating a habit of taking pride in finding solutions to customer needs.

4] Transparency and integrity: These two factors are always critical to ensure everlasting customer satisfaction. For this, comprehensive and uncomplicated documents should be designed, and all the information should be conveyed through vernacular means and / or orally to ensure transparency. An additional level of scrutiny should be in place in the form of a courtesy welcome call to ensure that the customer has fully understood the scheme and its benefits. There should an added emphasis to design innovative products aligned with the evolving needs of the customers.

5] Customer motivation: To indirectly bring in financial discipline amongst the target customers, borrowers with a good repayment track record and credit behaviour should be rewarded. The customers should be encouraged to be responsible borrowers especially recipients of microcredit facilities for the purpose of income generation.

6] ‘Need’ vs ‘Want’ of loan: Over-indebtedness is a bane to both the customer and lender. Being the partners in the journey of the common man in realising his dreams, we need to assess the ‘need’ vs ‘want’ of the loan for the customer. Assessment of family income, assets, past borrowing record and cash flows are some of the important checkpoints that should be used to determine the quantum and duration of loan being sought by the customer. Loan utilization checks should also be performed to verify the usage of funds. After considering the comfort level of the borrowers, a suitable collection frequency should be fixed.

In the current lending scenario, there is a need to constantly build meaningful relationships with customers. This should be a part of the core philosophy practiced by everyone in this industry.

Implementing customer-centric and transparent processes would enable a smoother transactional ecosystem based on trust that would help reduce variations and uncertainties for both parties. Through this culture of building trust, NBFCs would be able to reach out to a wider network and drive financial inclusivity.

All said and done, ensuring that the business does not swerve from a larger purpose of empathizing with the customer needs and having the willingness to serve those needs will be the key for responsible lending.

(Authored by Thomas Muthoot, Director, Muthoot Pappachan Group; Managing Director, Muthoot Microfin; and Executive Director, Muthoot Fincorp)