NBFCs worst hit among lenders as they face loan stacking.

NBFCs worst hit among lenders as they face loan stacking.

News:

According to Cibil-Sidbi study Non-banking finance companies (NBFCs) have witnessed a rise in loan stacking.

Important Facts:

• The report highlights a direct correlation between loan stacking behavior and probability of default which have turned non-performing assets

Major Finding of the reports:

• The loan stacking study shows borrowers taking multiple loans from multiple lenders within a period of 60 days have increased from 2.5 per cent to 4.4 per cent from September 2015 to September 2018.
• NBFCs have a 45 per cent share of loans given to loan stacking borrowers as compared to 11 per cent in borrowers who do not exhibit loan stacking.
• Study also reveal 63 per cent of loan stacking borrowers avail the second loan from another NBFC.
• The study also shows of the total borrowers sanctioned by NBFCs, 23 per cent borrowers exhibit loan stacking behavior. This number is much lower for private/MNC lenders and public sector banks at 8 per cent and 3 per cent respectively.
• Borrowers having loans stacked shows after 2015 the share of borrowers in low risk bands has gone down from 39 per cent to 26 per cent and at the same time, the share of loan in medium risk bands has gone up by 51 per cent to 63 per cent.
• Fresh NPA Rate of the MSME segment has been between 1% – 1.5% per quarter and recovery rates have been between 0.4% – 0.8%.
• At an industry level, loan stacking behavior is observed only on 5.5 – 6 per cent borrowers and the proportion of such loans is decreasing with increased usage of Credit Information Reports prior to sanction.
• The NBFC impact is high in a few infrastructure growths related sectors like transport and logistics, real estate, healthcare and construction as these are heavily dependent on term loans.
• The rampant use of loan stacking is pointing to the gaps in regulation and vigilance in the financial sector.

NBFCS play a critical role in emerging market economies by undertaking the following activities:

• Reaching out with their services to inaccessible areas
• They are substitutes to banks when the banks face strict regulatory constraints
• Convenience in transactions on the back of quicker decision making ability, prompt provision and expertise in niche segments

Way Forward:

• MSME Lenders must keep track and closely monitor borrowers seeking and availing loans from multiple lenders within a period of 60 days
• Lenders must establish prudent processes and policies to detect and mitigate risks arising from loan stacking behavior.
• Regular monitoring of portfolios can alert the lender and enable timely intervention to deter defaults and losses.