By Pankaj Sharma, CEO, Religare Finvest
Catering to the unbanked or under-banked is ‘bread and butter’ to any NBFC. Often customers may walk into a branch or dial on the customer-care expressing zero-credit history or zero-collateral. Lending to this strata is crucial to economy and banking penetration, but often comes at a high cost to the NBFC. In such cases, effective risk management is ‘survival 101’ for any NBFC.
It is a classic ‘to-be-or-not-to-be’ situation – can’t say no to lend, but still confused whether to lend. The problem here is not the lack of a collateral but absence of a viable plan to tackle disruptions. The easiest solution could be to convert unsecured loans into the safety-net of a secured loan – by getting a collateral. Other viable models such as personal guarantees and insurance can help, but there are other unique solutions for NBFCs.
WITHOUT RISK, THERE’S NO REWARD
The NBFC model is akin to a high-stakes game. But the strategy is not very difficult to master. Ideally, a viable risk-framework involves 6 risk matrices – credit, liquidity, operational, market, regulatory compliance, and fraud. Prior to the internet-era, lack of a collateral meant a risky proposition, but today, NBFCs have other ways to scrutinise a borrower’s credit-worthiness, such as telecom bills, Aadhar data, social-media meta-data and CIBIL checks. These can help evaluate a borrower’s repayment capacity and provide a holistic picture of a borrower’s financial capability.
Operating in a collateral-free lending model presents a unique challenge – balancing aggressive market penetration with risk containment. Credit risks can also be contained by collating customer’s data. But what about liquidity and operational risk? Liquidity isn’t just about maintaining buffers anymore; it’s about creating financial agility. Traditional Asset Liability Management (ALM) frameworks, while essential, can be further optimized using predictive analytics powered by AI and machine learning. Such tools enable real-time tracking of cash flow patterns, stress-testing under dynamic scenarios, and even offer predictive forecasting for potential market disruptions.
SECURING WITH TECHNOLOGY & COLLABORATION
A major part of securing a transaction can be achieved by leveraging technology and collaboration. Behavioural biometrics can help flag potential fraudsters. Here, Chinese fintech lenders offer some lessons – they utilize data such as proximity to a cell-phone tower for risk-profiling. Regular proximity to an area can imply a stable living situation, while frequent changes may raise red flags regarding financial reliability. AI-driven anomaly detection systems now go beyond identifying red flags; they predict fraud before it occurs by analyzing deep borrower patterns.
Additionally, advanced analytics and customer behavior insights can help reduce operational risks. For example, borrower-centric data – like spending patterns or repayment behaviors – can help design personalized repayment plans that enhance recovery without alienating borrowers. Technology can also be leveraged to derive dynamic pricing models for loans, pegged to benchmark indices. This ensures that loan pricing adjusts automatically to market conditions, protecting margins in turbulent times. Technology also helps build real-time tracking tools and dashboards with automated reporting frameworks to respond quickly and accurately to new compliance.
Moreover, collaboration and partnerships can help unlock better business value. For instance, partnership with Peer-to-Peer (P2P) lending platforms, fintech aggregators or system integrators can counter liquidity risk. A collaborative mindset with data-rich ecosystems – such as e-commerce, telecom, and utilities, helps build alternative credit scoring models and a deeper understanding of micro-segments.
BUILDING & LEVERAGING TRUST
Any viable lending model is built upon trust. As trust matures, there is a higher possibility to secure a collateral or to relook the transaction with an insurance or a personal guarantee. A personal guarantee transfers part of the risk from the lender to the guarantor, ensuring accountability. For small businesses or startups without significant assets, personal guarantees can be a practical solution.
Credit insurance provides an additional layer of risk management although it doesn’t convert an unsecured loan into a secured one directly. Hence, exploring partnerships with insurance-backed credit products can allow NBFCs some leeway to cushion liquidity risks without increasing exposure. Borrowers, on the other hand, can demonstrate their commitment to repayment by purchasing credit insurance as part of the lending agreement.
Continuous adaptation to regulatory changes and technological advancements will further strengthen their risk management frameworks. Staying competitive in such a landscape means constantly evolving – testing unconventional funding avenues, building cross-industry collaborations, and using technology as an enabler rather than just a tool. The game has shifted from traditional risk mitigation to a symbiotic relationship with technology, data intelligence, and innovative financial partnerships. The true measure of success lies not in avoiding risks but in anticipating them, adapting strategies faster than the environment changes, and turning every challenge into a competitive advantage.
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