Zero NPA through Technology: A Dream or a Possible Reality for India’s Lending Ecosystem?
By Vikas Singh
Non-Performing Assets (NPAs) have long been a thorn in the side of India’s banking and lending industry. These are loans that have stopped generating income for lenders because the borrowers have failed to meet their repayment obligations.
High levels of NPAs can destabilise financial institutions, dissuade foreign investment, and impede economic growth. However, with the rapid advancement of technology and innovative financial solutions, the dream of achieving zero NPAs in India’s lending ecosystem is becoming more plausible than ever before.
The Current NPA Landscape & The Role of Technology
India’s struggle with NPAs is not new. In recent years, it has faced multiple NPA crises, impacting both public and private sector banks. The Reserve Bank of India (RBI) has been actively implementing measures to tackle NPAs, including the Insolvency and Bankruptcy Code (IBC), but achieving zero NPAs remains a considerable challenge.
Technology has emerged as a powerful weapon in the fight against NPAs. Several key factors contribute to its potential to transform India’s lending ecosystem:
- Data Analytics: Advanced data analytics tools can scrutinise borrower data to identify early warning signs of potential defaults. Machine learning algorithms can process extensive datasets to indicate which loans are more likely to turn bad. This farsighted approach allows lenders to take corrective actions in a timely manner.
- Credit Scoring Models: Conventional credit scoring models often fall short in evaluating the creditworthiness of borrowers, especially in rural and underserved areas. Fintech companies are leveraging alternative data sources, such as utility bill payments and social media activity, to create more accurate credit scoring models. These models enable lenders to extend credit to a broader range of borrowers while maintaining lower risks.
- Blockchain Technology: Blockchain, with its steadfast ledger and smart contract capabilities, can revolutionise loan origination and management. Smart contracts can automatically execute loan agreements and trigger payments, reducing the risk of default. Additionally, blockchain can improve transparency and lessen fraud in the lending process.
- Digital Identity Verification: Digital identity verification solutions have made it easier to authenticate borrowers, lowering the chances of fraudulent loan applications. Aadhaar-based verification in India is a prime example of how technology can augment identity verification and streamline the lending process.
- Mobile Banking and Payment Apps: The widespread adoption of smartphones and mobile banking applications has made it more convenient for borrowers to make loan repayments. These apps often come with built-in reminders and notifications, reducing the likelihood of missed payments.
Challenges and Hurdles
While technology holds great promise in reducing NPAs, several challenges must be addressed. The digital divide still exists in India, with a significant portion of the population lacking access to technology and the internet. Bridging this gap is essential to ensure that all segments of society can benefit from tech-driven lending solutions.
It is precisely for this reason that NBFCs and fintech companies are embarking on the digital inclusion drive, thereby empowering budding entrepreneurs from tier-3, -4 areas and beyond. This also aligns with the Government’s vision of Digital India.
However, as financial transactions become increasingly digital, the threat of cyberattacks and data breaches grows. So, it is pertinent that lenders invest in powerful cybersecurity measures to protect sensitive borrower information and maintain trust.
The adoption of technology also requires a skilled workforce capable of implementing and managing these solutions effectively. While the NBFCs, other lenders and some corporates are invested in imparting training and mentorship to entrepreneurs, especially women, more needs to be done here. There may also be the need for proper marketing of schemes that they are entitled to.
The Road to Zero NPA
Achieving zero NPAs in India’s lending ecosystem is a multi-faceted journey that requires collaboration among the government, financial institutions, and technology providers. Here are some steps that can pave the way:
- Financial Literacy Programmes: To reduce defaults, enhancing financial literacy among borrowers is crucial. Government initiatives and partnerships with non-governmental organisations can play a significant role in educating borrowers on responsible financial practices.
- Risk Mitigation Strategies: Lenders should continuously assess and refine their risk mitigation strategies. Data analytics and artificial intelligence can help in identifying high-risk loans and devising appropriate strategies to minimise defaults.
- Collaboration with Fintech: Traditional financial institutions should collaborate with fintech companies to leverage their technological expertise. Partnerships can help established banks accelerate their digital transformation journey.
- Continuous Monitoring and Adaptation: The lending landscape is dynamic, and strategies must evolve accordingly. Continuous monitoring, feedback loops, and agile decision-making are essential to staying ahead of potential NPAs.
Technology, coupled with innovative approaches, holds the key to significantly reducing NPAs and strengthening the financial sector. As India harnesses the power of technology to reshape its lending landscape, the vision of zero NPAs may well become a tangible reality.
(The author is Vikas Singh, CEO and Co-Founder, Sugmya Finance Pvt Limited, and the views expressed in this article are his own)
