Meghna Maiti
Recently the Reserve Bank of India (RBI) has increased scrutiny of NBFC loans. In fact, they have sought the loan books of certain non-banking financial companies (NBFCs) because there is a concern if such loans are sustainable and whether this could lead to a credit bubble.
The RBI’s move aims to address critical concerns, such as the rising number of defaulters and delinquencies, particularly with unsecured and high-risk loans, including credit card debt. In fact, after RBI curbs on unsecured financial loans, gold loans have seen a surge.
“When loans are issued rapidly, especially without collateral, the risk of default escalates, leading to a significant surge in non-performing assets (NPAs) for NBFCs and putting additional strain on their financial stability. Compounded by inflation and rising interest rates, these challenges make it increasingly difficult for borrowers to manage their debt,” says Amit Prakash Singh, co-founder and Chief Business Officer, Urban Money, a digital platform for secured loans and mortgages.
Additionally, there has been a troubling increase in fly-by-night lenders who offer easy terms but engage in unlawful practices for debt recovery. Consequently, lenders such as NBFCs and banks are to adopt a more cautious approach, tightening their loan approval processes to mitigate these risks.
“For borrowers, this will likely lead to stricter credit checks and fewer approvals, particularly for unsecured loans such as personal loans and consumer durable financing. Maintaining a strong credit score will become increasingly important, as it can significantly boost your chances of securing a loan in this more selective environment,” says Singh.
In fact, tighter eligibility criteria would mean that borrowers may find it harder to qualify for loans as NBFCs tighten their screening processes and raise eligibility standards. This could also lead to NBFCs adjusting their pricing models, which could translate into higher interest rates or fees for borrowers to offset increased compliance costs.
While the immediate impact of these changes may seem restrictive, the RBI’s increased scrutiny aims to create a healthier, more stable lending ecosystem. For borrowers, this could mean access to more secure financial products in the long run, fostering a safer and more sustainable credit environment.
What You Should Do
“When applying for NBFC loans, borrowers are encouraged to consider the stricter lending criteria as a measure to safeguard their financial well-being. These regulations help ensure that loans are granted responsibly, reducing the risk of falling into unmanageable debt. Borrowers should take this opportunity to carefully evaluate loan options and interest rates, considering alternative financing options that might offer more favourable terms,” says Singh.
Additionally, financial planning becomes crucial in this new lending environment. Keeping track of credit reports, reducing existing debt, and avoiding multiple loan applications within a short period are important steps borrowers can take to strengthen their financial profile. Building a financial buffer can also help manage unexpected expenses and prevent delinquency when loan payments are missed. By being proactive and informed, borrowers can make better financial decisions, avoid potential financial strain, and adapt to the changing credit landscape.”
So, given this situation, borrowers should focus on improving and maintaining a strong credit score. This will increase their chances of loan approval and help them get a better deal. As always, borrowers should compare loan terms from various NBFCs and banks to find the best rates and terms that suit their financial situation.