Add trust and transparency to NBFC financing in India–Times of India

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In 2008, because the lending institutions were raising capital through securitization, the investors of ABS instruments went down with the lenders. In the last decade, the technology for lending has evolved significantly with the use of AI and other newer technologies (when a 2-minute loan approval offer is bettered by a 1-minute loan!), but the way lenders are funded is still mostly an excel and email process.

This process is simpler in India with the use of PTCs or direct lending to NBFCs. Unfortunately, the process in India is as opaque, in spite of it not involving as many parties as in the US. Even if the NBFC’s collections on a portfolio are dropping, banks do not have a real-time view. Ratings also do not reflect the changes in a timely manner. Moreover, if the NBFC is making up the shortfall in its obligations despite the shortfall in its collections on its loans, the situation can be hidden longer. The notion that it does not matter as long as banks are being paid back, has been proven to be wrong, as at some point in time the reality hits and impacts all balance sheets. We have had two leading NBFCs virtually collapse within months of retaining top ratings.

Banks clearly realise the problem and now looking at solutions to resolve onerous tracking and compliance measures. Bank of Baroda has even appointed advisors to track the asset quality of NBFC loans worth 4 lakh crores.

With the advent of blockchain, it has become possible that everyone involved in asset securitization or direct lending to an NBFC could be on a common platform, transacting based on a single version of the truth. It is a technology of today under regulations of today, unrelated to the cryptocurrency-related regulatory debate.

If a bank lends to an NBFCs with a loan pool as collateral, data for each loan used as collateral (or a pool that is securitised) will be on a blockchain. Subsequent collections data is directly from the loan management system (LMS). In case a Trust is used to protect the Bank/Investor from NBFC bankruptcy, the same can be provided for as well. Since it is on a blockchain, all records will be immutable with their audit trails available. Further assurance can be provided by holding cryptographically hashed copies of documents.

This can work in India in two ways – tracking large banks’ loans or securitisation transactions with multiple NBFCs (One-to-Many) or as an industry platform with many banks and NBFCs (Many-to-Many). Same platform can be used by NBFCs to offer their pools for securitization or to borrow against them as collateral – this will lead to a mark-to-market model where better run, more transparent NBFCs are rewarded for it rather than the opaque, one-on-one deal-making currently. The situation should evolve into the rating agencies also being on the same platform and analytics or artificial intelligence-based models flagging any deviations of the pool from rating assumptions.

We lent our way out of the 2008 crisis with minimal impact, but we are reaching a stage where the problem is being compounded. Global Financial Crisis had lessons for us, and you can’t be luckier than learning from someone else’s failure and getting more than a decade to learn the lesson!

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