Many ways to convert unsecured loans into secured loans

Catering to the unbanked or underbanked is 'bread and butter' to any NBFC. Often customers may walk into a branch or dial on the customercare expressing zero-credit history or zerocollateral.

- Pankaj Sharma,

Pankaj Sharma, CEO, Religare Finvest:

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. There's telecom bills, Aadhar data, social-media meta-data and the 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.