To mitigate risk, banks, DFIs to seek direct information on financial health of NBFCs’ clients

Banks and development finance institutions (DFIs), under the aegis of the Indian Banks’ Association (IBA), are working on a risk-mitigation mechanism to directly get information on borrowers about their non-banking finance company (NBFC) clients via blockchain.

This is aimed at safeguarding lenders’ exposure to NBFCs by getting a direct handle on the health of latter’s borrowers. It will also ensure that when an NBFC assigns receivables, it does not present the same set of borrowers to different lenders.

Defaults in repayments

This move comes in the wake of credit events relating to defaults in repayments by NBFCs such as IL&FS and DHFL having an adverse ripple effect on the financial system.

“The repayments NBFCs receive is the security for us as lenders. We don’t know whether the NBFC’s borrower exists or has repaid a loan. An NBFC doesn’t share all this information. So, currently there is an information asymmetry that exists. We (lenders along with IBA), therefore, have created a blockchain as a proof of concept whereby we will make the NBFCs provide us information on their clients (borrowers) on the blockchain,” said S Ramann, Chairman and Managing Director, Small Industries Development Bank of India (SIDBI).

Mitigating risk

He observed that lenders have tied up with a credit information bureau (CIB) for the risk-mitigation project, whereby the information shared by NBFCs with the CIB about their borrowers also flows to the blockchain. This way, all lenders that have an exposure to an NBFC will be updated about the status of every single loan.

“Suppose an NBFC is borrowing from SIDBI, NABARD and SBI— what is the list of borrowers it is giving to SIDBI? Is it the same as given to the other lenders? So, we need to also de-risk our own lending system. Hence, it is important for all of us share the data of an NBFC to know what part is our security and what part is theirs,” said Ramann.

The SIDBI chief also underscored that the blockchain-based loan monitoring system will be a substitute for the very expensive monitoring system associated with auditors being on the ground.

Published on

September 10, 2022