As NBFCs continue to grow in significance, maintaining a healthy asset quality becomes paramount for their sustainable growth and long-term success. Asset quality refers to the health and performance of a company’s loan portfolio and the ability of borrowers to repay their loans. Let’s explore essential ways to improve asset quality for NBFCs, ensuring they remain resilient even in challenging economic environments.
NBFCs should implement robust credit evaluation mechanisms to ensure loans are extended only to creditworthy borrowers. A comprehensive evaluation should include an analysis of the borrower’s credit history, income stability, existing debt obligations, and collateral, if any.
By scrutinizing these factors, NBFCs can minimize the risk of default and significantly improve their asset quality. Poonawalla Fincorp, led by Abhay Bhutada MD, utilizes data points on GST/TDS payments and digital footprints (among others) for thorough risk assessment. Likewise, Muthoot Finance requires Income Tax Returns as proof of financial responsibility to be eligible for their personal loans. Without such rigorous borrower assessment, NBFCs risk dropping their asset quality.
Over-concentration in a particular sector could expose the company to higher risks, especially during economic downturns impacting that sector. By spreading out their loan offerings across various industries and segments, NBFCs can mitigate potential losses and maintain balanced asset quality.
NBFCs should establish robust early warning systems that trigger alerts when borrowers exhibit signs of financial distress. These systems can help NBFCs proactively address potential defaults, renegotiate terms, or initiate recovery measures, preventing further deterioration of asset quality.
Advanced data analytics, artificial intelligence, and machine learning algorithms can help NBFCs identify patterns, predict defaults, and assess creditworthiness more accurately. Additionally, technology-driven loan monitoring systems can provide real-time insights, enabling faster decision-making and timely risk mitigation.
AI and machine learning algorithms are part of this landscape via NBFCs like Lendingkart. With CEO Harshwardhan Lunia at the helm, it uses its proprietary algorithm for better risk assessment. Similarly, Abhay Bhutada, Poonawalla Fincorp’s MD, credits their digital-first approach as one of the reasons they are able to maintain asset quality.
By identifying and categorizing various types of risks, including credit, market, operational, and liquidity risks, NBFCs can take proactive steps to mitigate them. Stress testing the loan portfolio against adverse scenarios can also aid in understanding potential vulnerabilities and developing contingency plans.
Regular internal and external audits help in assessing the efficiency of credit processes, risk management, and compliance with regulatory guidelines. Sound corporate governance practices promote transparency and accountability, ensuring that the management is aligned with the company’s long-term interests and focuses on improving asset quality.
Implementing the strategies mentioned above, such as stringent credit assessments, diversification of the loan portfolio, technological advancements, and proactive risk management, will significantly enhance an NBFC’s ability to weather economic challenges and reduce the incidence of non-performing assets.