Understanding NBFC (Non-Banking Financial Companies)
NBFCs are non-banking financial institutions that are not banks yet provide financial assistance and services. A Non-Banking Financial Company has many services that come under it; acquisition of bonds, debentures, shares, and stocks issued by the government or any other institution dealing with agriculture, industrial activity, or purchase or sale of real estate.
Categories of NBFC
- The basis of deposits
- The basis of the size of their assets
- The nature of their activity
Reserve Bank of India (RBI) regulates NBFCs if they meet the 50-50 criteria of principal business. All NBFCs must go for registration with RBI, which is mandatory irrespective of whether they are dealing with public deposits. No NBFC can operate any type of business without getting a license from the RBI.
Many prefer to avail of the services of NBFC for taking loans instead of going to a bank. This makes it imperative that they have a legal tracking notice software or application that enables them to tackle the challenges.
Some of the most common challenges faced by the NBFC are
- Absence of an adequate recovery tool.
- The absence of a refinancing option makes funding challenging.
- The difficult and tedious documentation process for the obtainment of an NBFC license.
- Disparities in the loan classification of non-performing assets (NPA).
- having a proper defaulter database.
- Having multiple representative bodies to govern NBFC all over the country instead of having one representative body.
- The tax treatment for NBFC is different from that of the banks.
Some of the effective remedies to overcome these challenges are:
- Appoint Subject Matter Experts (SMEs) for the licenses and documentation.
- Collaborating with Fintech.
- Create an effective business plan.
- Creating a competitive monitoring framework.
- Implement Risk Management.
- Have legal notice tracking software.
From Where Does an NBFC Get the Money?
The money for NBFCs usually comes from banks. They can also raise money by sharing assets and business papers. A few of the different categories of NBFCs that come under RBI are:
- Investment and Credit Company (ICC)
- Infrastructure Finance Company (IFC)
- Mortgage Guarantee Companies (MGC)
- Non-Banking Financial Company – Factors (NBFC Factors)
- Non-Banking Financial Company – Micro Finance Institution (NBFC-MFI)
- Systematically Important Care Investment Company (CIC-ND-SI)
When Does it Become a Default?
If the repayment of a loan is overdue even for a day, it can be a default. There are many other ways a default is count. Most of the customers of NBFC are mostly the ones who do not have a regular income. There are high chances of the EMIs not being paid on time. If the payment is delayed by 0 to 30 days, it can be termed a special mention account or SMA 0. If it gets delayed by 31 to 60 days, then it is classified under SM1. It comes under SM2 if the payment is overdue by 61 to 90 days. NBFC wants RBI to change the defaults to loans overdue for more than 30 days.
If a one-day overdue repayment is seen as a default, then it is on the lenders to make additional provisioning. This provisioning can be detrimental to the lenders and damage their profitability. The NBFCs are also looking for clarifications on the Central Bank advisory on adjusting such provisions. RBI has said these provisions can be adjusted against the provisions required or written back at the end of the financial year.
Borrowers can get in touch with their NBFCs and request to restructure the loan agreement so that their repayment can go smoothly. NBFCs incur huge losses if there is even one default in some cases.
Tips for NBFCs to Track the Legal Notices of Defaulters
The dues must be paid on time to NBFC so that the creditworthiness stays unharmed. In many cases like accidents, death, and serious health problems, NBFC gives a good amount of time to pay the due amount. A well-trained staff is necessary because NBFC should not unduly harass the borrowers. They can use a legal notice tracking service and deal with the customers professionally and appropriately.
There are a lot of cases in the court where NBFC cannot recover its debt. Since the NBFCs are categorized as bank institutions under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI ACT), this ACT gives them the right to pledge the assets of the borrowers in case he fails to pay on time.
The easiest way to track the legal notices of defaulters is by investing in one of the software (such as Legodesk) that will help with legal management, which is done systematically. A legal notice tracking software will help:
- Track the debtors easily
- Track the outstanding amounts of the debtors
- Track the time the payment is due
- Issue online legal notices to the debtors by tracking them
- Makes the recovery process more efficient
- Case tracking
- Constant monitoring will help manage the loan process and overdue payments
- Settling disputes with ease
All NBFCs should also have an appropriate mechanism to redress grievances and settle disputes between their customers and the company amicably. Customers complain about the harassment they receive for the recovery of loans. A Fair Practices Code and a Loan Agreement that can be termed as a Re-possession Clause are good ways to deal with the recovery mechanism.
Many legal departments of corporate companies use legal tracking software for their billing and keeping track of defaulters. The software also helps calculate the penalties and late fees, which are very accurate. A good way for NBFC to manage their database and payment pattern will be by using one of the software available in the market.
Wrapping it Up
It is the responsibility of the customer to pay off his loans on time as agreed with the lender during the borrowing time. The NBFC software is the best thing that can help with legal notice tracking. The advantage is that it does it precisely and accurately. The software is user-friendly, making it easy to track the defaulters. Several software companies sell this software. Look at your requirements and go for one, as it makes life easier.