One of the most significant turning points in the lending industry in India happened in 2016 when the NPCI (National Payments Corporation of India) introduced NACH (National Automated Clearing House) to handle and process bulk payments.
In that context, this blog aims to explore both Pre-NACH and Post-NACH implications on the lending industry and how lenders can leverage a NACH Management Solution like CHASSIST empowering lenders to offer loan products catering to changing customer preferences.
Pre & Post NACH: Streamlining EMI Repayments
Pre-2016, EMI Loan repayments were primarily carried out using Post Dated Cheques (PDCs) which challenged lenders with dealing with bulk volumes of manual cheques and coordinating with multiple banks which increased the risk of delays and errors with payment processing. Consequently, payment tracking and record keeping also became cumbersome and time-consuming. Furthermore, the printing, logistical and processing costs for producing cheques became a financial burden for lenders.
Post 2016, the introduction of NACH by the NPCI enabled lenders to establish Electronic Mandates (e-Mandates) with borrowers, allowing automated debits from their bank accounts on specific dates. In contrast to the time-consuming practice of managing physical cheques, NACH enabled a faster and more efficient form of EMI repayment. It decreased the administrative load on lenders greatly by automating payment processing, reducing mistakes, and improving overall operational efficiency. The switch from PDCs to NACH was a turning point in the lending industry, enhancing loan repayment dependability and timeliness while lowering related costs and complexity.
Exploring payment modes beyond EMIs
However, it is worth noting that, while the repayment method is progressively migrating digitally via NACH, the repayment mode continues to be based on EMI arrangements. While it is obvious that having predetermined amounts withdrawn via EMI was critical before the introduction of electronic payment systems for simplicity and ease of tracking, lenders continue to stick to the EMI structure. Customers are also seemingly better accustomed to the predictability and regularity of EMI repayments. However, as repayment methods grow more flexible and customized as a result of the advent of digital finance, lenders have an opportunity to explore alternate modes that better correspond with borrowers' financial choices and circumstances. This transition might provide better ease and customisation, perhaps improving the entire borrower experience in the emerging digital payments ecosystem.
In that case, what obstacle do most lenders face from providing loan products with alternate modes of payments?
The primary obstacle preventing the majority of lenders from providing loan products with alternate payment methods is the lack of a strong NACH Management Solution that can effectively manage end-to-end mandate processing and transactions. Although there is no denying that NACH speeds up loan payback processes, lenders are finding it increasingly difficult to handle large NACH Mandates due to the rising number of loan applications.
Lenders are unable to offer new loan products with more flexible and alternative payment options when there is no efficient way to handle large-scale NACH transactions. Essentially, the bottleneck is found in the NACH management systems' scalability and efficiency, which are critical for meeting the expanding needs of a wide range of loan portfolios and supporting a wide range of payback preferences.
Consequently, decisions within the industry often seem to be defined by the constraints of rigid legacy IT Infrastructure due to heavy technological debt. This circumstance highlights the crucial need for investments in updating and upgrading IT infrastructure to ease these limits and allow lenders to make strategic advances in loan product offerings that line with changing consumer preferences.
EMI Centric IT-Infrastructure
EMI arrangements are heavily embedded in the banking process, from origination to repayment. Changing these IT structures necessitates extensive adjustments to interrelated systems, which influence workflows and operational efficiency
Existing IT systems' rigidity, which has been geared toward traditional EMI arrangements, might make it difficult for lenders to swiftly adjust to more flexible or personalized repayment alternatives. Change implementation necessitates considerable adjustments to interrelated systems, affecting processes and operational efficiency. Legacy systems may be difficult to adjust to fit borrowers' different preferences and demands, posing a barrier to the rapid adoption of alternative payment methods. Addressing these IT infrastructure issues is critical for lenders looking to provide more adaptable and tailored repayment options.
With repayment having gone digital with NACH, a NACH Management Technology Solution capable of managing and tracking NACH mandates and equipped with NPCI integration is ideal.
EMI in the Pre-NACH Context
When market interest rates vary, Equated Monthly Installments (EMIs) pose a particular challenge. When interest rates rise, the fixed EMI amount remains constant, resulting in a bigger part being allocated to interest payments and a lesser portion to principal repayment. To account for the increasing interest rates, the loan term may be prolonged, resulting in higher overall interest payments for borrowers. Borrowers' financial planning and long-term budgeting may suffer as a result of this extended commitment. If interest rates fall, the fixed EMI remains the same, but a higher portion of the payment goes toward principal repayment, thus decreasing the loan term and helping borrowers to repay the loan sooner.
For its time, the historical marriage of Post Dated Cheques (PDCs) and EMIs was a fair and efficient arrangement, giving lenders a structured means to secure punctual repayments. However, when payment systems evolved from PDCs to National Automated Clearing House (NACH) and sophisticated NACH management systems were developed, operational possibilities grew. Lenders now have the operational capability to investigate more dynamic Variable Monthly Installments (VMIs).
Consider the following scenario:
Person A obtains a house loan for X amount at the age of 40 with a loan term of 20 years. As market conditions impact interest rates over time, the loan amount may grow out of control, particularly as Person A approaches retirement age. With a consistent salary no longer assured, a considerable percentage of their earnings may be devoted towards basic survival necessities, making EMI commitments extremely difficult. This scenario frequently leads to a higher risk of loan default and loan conversion into Non-Performing Assets (NPAs), emphasizing the inherent issues associated with extended loan tenures, particularly in the context of changing market circumstances and their influence on borrowers' financial stability.
It's important to understand that the goal is to highlight how lending practices have evolved as opposed to advocating for VMIs over EMIs. With today's operating capabilities, lenders may provide borrowers with a wide range of solutions to suit a variety of financial needs and situations. Owing to increased lending flexibility, lenders are now able to better match their products to the evolving demands of their customer base.
CHASSIST as a Strategic Enabler
CHASSIST enables lenders to reliably provide loan products with Variable Monthly Installments (VMIs) as a flexible repayment alternative. This technology solution enables banks and non-banking financial institutions (NBFCs) to profit strategically by offering their consumers more flexible repayment options. This not only helps to maintain and attract new customers but also enhances the possibility of getting timely payments, which contributes to long-term profitability. Aside from process improvement, the integration of CHASSIST opens the door to the development of novel loan products with several payment options for its customers.
CHASSIST, our NACH management system, is specifically designed to meet the needs of the lending business. It addresses four key areas: end-to-end visibility, in-house control, reporting, and the tracking of NACH obligations and paperwork. By seamlessly integrating with NPCI and utilizing OCR technology, CHASSIST goes beyond merely a tool and becomes a catalyst for altering the efficiency and compliance of lending operations in the sector.
SimSol as a Strategic Partner
Starting the digital transformation path in the lending business can be overwhelming, and one of the most common issues lenders experience is not knowing where to start. This 'starting trouble' might stymie the seamless incorporation of sophisticated technology and hamper loan operations optimization. SimSol, your trusted B2B banking partner and Banking technology pioneer emerge as a strategic ally to collaborate and overcome these challenges.
By implementing CHASSIST, lenders can ensure continued competitiveness and relevance in the lending business by streamlining their operations and strategically positioning themselves to navigate market changes.
As an ISO/IEC 27001:2013 certified organization, SimSol is a strategic facilitator since we are at a confluence of both the business and technology dimensions of the lending industry.
Our solutions are expertly designed to balance the complexities of lending operations with state-of-the-art technology, guaranteeing not just compliance but also a synergy that drives financial institutions toward increased effectiveness, competitiveness, and long-term success.
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