How will RBI diktat on collection process affect NBFCs? Shachindra Nath explains

M&M Finance has clarified that they have not outsourced any collection activity in the vehicle finance business to any third party agency. Having said that, this is pretty much the norm across the industry. If the RBI is now getting stringent about it, should investors be worried about the collections coming in for NBFCs?

So I think that we have to look at the kind of NBFC and the product category. The outsourced collection predominantly is prevalent in the bottom of the pyramid customer segment. This is in the second hand vehicle business, truck business or second hand truck financing business, gold loan company, microfinance company.

NBFCs which are above that category, which is mostly in the semi-formal and formal segment, wherein the customer is aware that timely repayment of his loan is important for the credit profile of his business, this problem does not exist. This is also happening because of the change in the terms of the daily stamping of the NPA norm. In the coming few months from now, NBFCs are required to recognise NPAs on the basis of daily stamping of their repayment.

A buffer used to be available for NBFCs and for customers to pay up within a period of time and not getting recognised by bank, wherein you recognised not only on the date of your repayment you have to make the payment but if you miss the repayment, all the pending collection has to be paid upfront. It is expected that the majority of the NBFCs in that segment would have a temporary deterioration in terms of their gross NPA ratio and loss ratio.

NBFCs have been pushing hard to make their collection more efficient and that is why we are seeing some amount of disruption happening. I would say that NBFCs which are highly dependent on physical collection infrastructure for the unorganised or unserved or new to credit customer, would temporarily get affected, but not the semi-formal and formal customer segments of the NBFCs.

Is this an isolated incident that we should only look in context of what happened with MMFSL or should we read through that this is going to be the case across all NBFCs?

It is not the case across all NBFCs, it is about NBFCs which are in product segments which are dependent on outsourced collection agencies and customers who are behaviourally not attuned to making payments without the effort of collection agency.

Let me give you the example a microfinance company or a second hand truck finance company or a gold loan company. The practice is that the collection agent has to go and demand the payment and then payment comes but think of a company which is in say MSME financing or SME financing, wherein these are credit tested customers and repayment happens through banking system through NACH. I do not think those NBFCs would get affected.