The start of the 2018 NBFC crisis in India triggered an unexpected cascade of events that impacted not just NBFCs but other entities. Many banks decided to reduce their exposure to NBFCs. Some experts even proposed the idea that it was not an NBFC crisis at all; instead, it was an issue with the underlying financial model itself. However, irrespective of the perspective, one thing is for sure: the crisis played a big role in breaking the ice for securitisation. Many NBFCs in India turned to increased securitisation of loan portfolios to stay afloat.
The result? The volume of securitisation more than doubled to Rs 2.6 lakh crore in the fiscal year 2019, compared with Rs 85,000 crore for the whole of fiscal year 2018.
However, uncertainties posed by the COVID-19 pandemic for the lending industry have raised several questions again, regarding the growth prospects of securitisation in India. The Indian securitisation market is highly concentrated with 80% volume governed by as little as 15 players (out of 100 active players). Smaller players lack the technology edge and the internal processes required to adapt to the quickly evolving business landscape.
It is our belief that establishing processes that can address these gaps is the way forward. It can empower all stakeholders with the tools they need to efficiently manage and view data and help shape the future they want.
Driving Adoption at Scale—What will it Take?
Given the lack of a proper IT infrastructure among various small players, data is often exchanged over insecure channels during securitisation transactions. This not only limits efficiency but creates room for security risks. To mitigate such issues and ensure compliance with the Reserve Bank of India’s guidelines for securitisation, data transfer practices will soon require realignment.
From NBFCs and banks to investors and credit rating agencies (CRAs), emerging technologies such as blockchain, artificial intelligence (AI) and machine learning (ML) can unlock the true value of securitisation. These technologies can help mitigate existing issues and create a strong foundation for trust, collaboration, and sustainable growth for all. Let us look at some of the keybenefits from technology adoption.
- Enable efficient data access and analysis
A comprehensive solution that supports the entire securitisation lifecycle can help create a single source of truth for all transaction-related data. A popular NBFC recently completed a securitisation transaction of 100+ crores entirely from non-priority sector pools after exploring multiple investment options across pools. They were previously concerned about accessing transactional data and had limited exposure.
- Minimise transaction costs
From prospecting to monetising of loan books, the end-to-end securitisation process involves many legal, taxation, regulatory and accounting requirements. All this adds to the cost of customer acquisition for NBFCs and banks. Leveraging technologies such as AI and NLP to automate these processes can significantly reduce transaction costs. A large bank recently saved INR 1.5 crores in a month by signing up for a comprehensive platform that automated and versioned all their previously manual procedures, which resulted in transactional speed, cost-effectiveness and accuracy.
- Build resilience against unprecedented circumstances
The three-month loan moratorium issued by RBI during the pandemic-triggered lockdown in India was worrisome for investors: how would such an unprecedented change impact their portfolio? A cognitive-based insights engine can offer significant benefits in such a situation. A mid-sized NBFC wanted to assess the outcome of the moratorium on its liquidity profiles and inform investors to be more cautious about the performance of retail loan pools. An AI-driven insights engine helped successfully analyse critical scenarios, assess risks, and accelerate decision making.
- Enable better regulatory adherence
Without the right technology, reporting alone can cause unnecessary overheads, specifically for small NBFCs. Standardisation of documentation and processes using predefined digital workflows can go a long way in streamlining reporting. A small NBFC wanted technological support to implement an effective regulatory and reporting plan, which was being handled using excel sheets. A full-stack technology platform aided in document conversions, resolved versioning issues, ensured traceability of audit trails, and made data accessible and streamlined for regulatory compliance.
The Way Forward
The COVID-19 scenario is forcing financial service providers to realign their offerings with evolving customer expectations. The post-pandemic world will certainly necessitate major strategic overhauls.
Now is the time for banks and NBFCs to assess where they stand and start preparing for the future. Flexible securitisation solutions designed for quick adoption can play a critical role in the current climate. With such solutions, banks and NBFCs can build the much-needed IT infrastructure to ensure data security, integrity, and accessibility.
With technology driving the securitisation market in India, we can expect great things ahead. To put it simply, the future is ours: Cras Es Noster.