This is a user generated content for MyStory, a YourStory initiative to enable its community to contribute and have their voices heard. The views and writings here reflect that of the author and not of YourStory.

Why Non-banking Financial Companies Have Become a Boon to Sub-Prime Borrowers

A report from credit bureau TransUnion CIBIL suggests banks and NBFCs might have shifted focus on lending to ‘near-prime’ and ‘sub-prime’ borrowers.

Why Non-banking Financial Companies Have Become a Boon to Sub-Prime Borrowers

Tuesday April 28, 2020,

6 min Read

In the past few years, Non-banking Financial Companies (NBFCs) sector has seen a considerable transformation. NBFCs are currently serving the financial needs of the sub-prime borrowers who are ignored by banks. A sub-prime borrower is the one who has a less-than-perfect credit score. NBFCs have become a boon for sub-prime borrowers currently as they are helping these borrowers meet their emergency needs by providing instant cash in the need of the hour.

A report from credit bureau TransUnion CIBIL suggests banks and NBFCs might have shifted focus on lending to ‘near-prime’ and ‘sub-prime’ borrowers.

TransUnion CIBIL has defined risky borrowers as those with credit scores of less than 700. The company classifies in five bands:

  • Sub-Prime (300-650)
  • Near Prime (651-700)
  • Prime (701-750)
  • Prime Plus (751-800)
  • Super Prime (801-900)

Higher Credit Scores Indicate that the Borrower is a Lower Risk for the Lender.

One of the top NBFC companies through which individuals can get an instant cash loan is Vivifi India Private Limited and it is registered with RBI. The company is offering a line of credit through its product ‘Flex Salary’. A line of credit is a preset amount of money that a lender has agreed to offer you as a loan.

Flex Salary provides a line of credit to the under-served/unserved population of India who does not receive credit elsewhere, and who resort to approaching unregulated moneylenders exposing themselves to undue vulnerability. With the rise of NBFCs, sub-prime borrowers are now in safe hands. Anybody with access to a mobile phone and an internet connection can apply for a personal loan online. Some NBFCs even approve and disburse funds on the same day with the Electronic Income and Bank Verification procedure.

Are the Sub-Prime Borrowers Charged Higher Interest Rates?

Compared to those with good credit score, sub-prime borrowers who have low credit score are generally a greater risk for the lender. Because a lender provides instant cash loan to help the sub-prime borrower in his emergency without seriously considering his credit score. So, the lender charges a bit higher interest rates compared to those having a good credit score to compensate for the greater risk and higher probability of delinquency.

NBFCs are the Future

The NBFC sector is continuing to offer new credit disbursal's for the under-served. According to the global consultancy Price Water House Coopers, over the last five years, the NBFC lending book has grown at nearly 18% driven by a deep understanding of target customer segments, use of technology advances, lean cost structures and differentiated business models to reach credit-starved segments. Because of the limited credit history or no credit history, these customers have found it tough to get credit from various sources. Another reason that is stopping banks to offer them credit is their low income.

Though NBFCs are taking a great risk by providing credit to the sub-prime borrowers, they are leveraging algorithms, social media behavior, and other aspects to mitigate risk. NBFCs are leading their way by driving new credit disbursals by overcoming challenges such as increasing customer expectations, stiff competition, etc. In the same report, PwC-ASSOCHAM demonstrated the key design requirements across ten dimensions that Non-Banking Financial Companies must consider, to construct a scalable and profitable model.

Factors that Sub-Prime Borrowers Must Consider Before Applying for a Loan

Couple of factors that sub-prime borrowers must check before applying for a personal loan online with a lender is flexible repayment terms and hidden charges. Find an NBFC which can offer you a loan with flexible repayment terms instead of fixed EMIs every month. Having a flexible EMI option can help you pay minimum amount for that month in case if you have overspent in a particular month and don’t have enough cash to pay back the loan EMI for that month. Also, read the loan documents and terms and conditions carefully. Choose a lender who does not levy any other additional charges except the processing fee.

Why NBFCs Are a Great Choice for Sub-Prime Borrowers?

Sub-prime borrowers have not been able to get credit from traditional sources such as banks because of their low credit score and not so perfect credit history. For these borrowers NBFCs have been the only choice because of the following reasons:

No Collateral Loans: Sub-prime borrowers who were overlooked by banks may need instant cash when they have an emergency and NBFCs could be their main source as they offer loans without taking any collateral from the borrower. Because the sub-prime borrowers may not have valuable collateral to give the lender. This makes NBFCs the main choice for sub-prime borrowers.

Low Credit Score Isn’t An Issue: Banks check if the borrower has a good credit history before lending them money. But, NBFCs check the borrower’s income and their ability to pay back the loan rather than just going with the low credit score. So, if you are a sub-prime borrower with a credit score below 700, you can still apply and get approved for a loan from an NBFC.

Simple Loan Application Process: Most of the lenders offer unsecured loans and the documentation is minimal. The loan application process is simple with less document submission. You may still have to submit some mandatory documents which depend on the lender you choose.

Pay Interest Only on What You Use: One advantage for the sub-prime borrowers is that they don’t have to pay interest for the entire amount that is borrowed. Instead, you will pay only for the amount that you have used.

For suppose, the total amount that you have borrowed is INR 1 lakh and you have used only INR 5000, then you will pay the interest only on the used amount i.e. INR 5000 instead of the total borrowed amount, which is INR 1 lakh.

Overall, sub-prime borrowers can also meet their emergency needs by getting instant cash easily with the help of NBFCs. You can quickly apply for a loan using Flex Salary Personal Loan App. Considering the above benefits, if you have a low credit score, always choose NBFCs rather than other unregulated moneylenders to be on the safer side.