27. Payments in — NBFC Sector

NBFCs (Non-Banking Financial Company) are licensed entities that give different types of loans to consumers and companies. There are thousands NBFCs that give different types of loans with or without collateral. Muthoot gives loan against gold and Bajaj Finance gives loans to buy even a washing machine without any collateral.

Two things happens when you take loan… you will bear interest charges and you have to repay the original loan amount either in instalments or one time. So NBFCs also need effective mechanisms to collect these instalments.

Requirements for NBFC sector

Requirement 1: Use Cases

• Repayment of loan instalment
• In case of delinquencies or late payments then provision to pay through online Payment gateway or across collection counters of NBFC

Requirement 2: Channels

• Physical: It can NBFC’s office or agents. Considering customer touch point is strong as customer has to submit other details (fill form, submit KYC documents) so NBFC can sign up for paper based NACH mandate
• Online: Considering NBFCs are moving digital/online so KYC verification and loan disbursement is done without customer stepping foot in office. And in this case customer can fill e-mandate for recurring payment

Requirement 3: Payment Modes

• Source of transactions should be bank account so debit card, net-banking, UPI modes are allowed
• Payment Solutions based on bank account such as e-mandate, NACH and PG are deployed
• Credit Card is not allowed as can’t pay one loan with other loan (directly). Wallets are not allowed as source of wallet balance can be credit card

Requirement 4: Charges

• For Debit Cards: RBI Standard rate or flat fee, for NB & UPI: Flat fee
• Charges are typically passed on customer (surcharge) but there are cases merchant may bear the charges
• Merchant may pass DC charges (if they are % of value) to customer and absorb NB charges (which are in flat fee). In such cases, two MIDs (Live Id) needs to be issued for merchant as one type of pricing (surcharge, upfront deduction or invoice) can be configured for one MID
• Charges on recurring payment solutions (NACH, e-Mandate) will be flat fee that can be either passed on to user or invoiced to merchant

Requirement 5: Settlement

• Merchant may receive gross-settlement (if charges are in surcharge model) or net-settlement (if charges are in upfront deduction)
• Settlement time is standard T+2 days (But merchant pushes then possible to get T+1 day)

Payment Solutions

Additional Points

A. Paper ‘Rocks’

Loan repayments are obligations so it is important for NBFC’s to have better control on collection (repayments). Irrespective of disbursement mode (online or offline), NBFCs prefer a recurring payment solutions. As most of NBFCs still operate offline (loan disbursement is done after customer visits branch or agent) so it is easy to get paper based NACH mandate registered so NACH still the most dominant payment solution.

B. How NBFC is safeguarded against mandate failure?

Section 25 of ‘Negotiable Payment Instrument Act’ safeguards merchants in case of dishonour of NACH mandate. In short, NBFC can file court case against customer under section 138 in case NACH mandate debit fails due to insufficient funds. This is similar to cheque bounce offence

NACH debit failure in case of SIP for MF or insurance premium is acceptable as these are voluntary payments but loan repayment is obligation. So NBFC that has given loan to customer is safeguarded under this act.

As said earlier, it is important for an NBFC to have control on collections so online PG is only standby solution. So PG is used (a) mandate is not registered due to some delay (2) Mandate debit failed due to insufficient balance but customer is okay to pay using another account.

So either customer can visit NBFC site to complete transaction or NBFC can send SMS/mail with payment link that opens checkout page.

C. Refunds:

Non-essential use case as any extra payment done by customer will be adjusted either in principal or next instalment. Also, there are offline processes for returning money.

D. Success rate:

Intent of payment is very high as customer may face bad credit score, penalties or even court case. In case of recurring payment solutions, merchant has control to re-run mandate if fails first time. And in case of online PG, customer will retry if transaction fails first time.

If there is collateral is involved against the loan then the NBFC is anyway safeguarded against risk of default (assuming value of collateral is higher than outstanding amount). So you can say that success rate is not that critical for this sector.

Final Note:

Payments for NBFC sector is similar to that of Mutual Funds and Insurance with small degree of variation in terms of charges, payment modes allowed and how failed mandate debits are treated.

Here is comparison of payments in Mutual Fund, Insurance and NBFC sectors.

NBFCs are on the raise as more and more loans are disbursed to individuals and companies. At the same time, Non-Performing Assets (NPA) and efficiency in collections are bigger challenges. Supreme Court ruling of Aadhar affected ‘go digital’ aspirations of NBFCs as it affected e-KYC as well as e-NACH (e-Sign flow). But relaunch of e-NACH (Net-Banking flow) will address collection issue (efficiency and cost) to some extent. Also, Companies are exploring using UPI based payment solutions improve collections. Let’s see…