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Difficult for banks to appraise credit worthiness
Top financial experts in the city claim that banks do micro-financing but they don’t lend to this body because of lack of collateral, repayment issues etc. They claim that since the money lenders give money without any collateral, the interests are higher as the stakes are high.
By
migrator
migrator
Chennai
Why don’t banks lend to this segment of borrowers?
Banks are hesitant to lend to this segment because it is difficult to appraise their credit worthiness, as they do not have documents supporting their cash-flows
Is the banking process responsible for the borrowers to rely on private financiers?
Naturally, non-availability of credit from formal channels sends these persons to informal channels, who exploit them Why are they willing to take that risk and the huge interest cost?
This segment is starved of capital, but they do have a business case.
Therefore, in their desperation they go to the easily available source for funding disregarding the cost.
Why are the NPAs not checked before it seems too late?
NPAs in this segment are difficult to tackle, as there is hardly any security available. The only security offered by this segment is their cash flows from their business. If the cash-flow stops or gets diverted for consumption or unproductive or speculative purpose, it becomes difficult to recover.
It is very difficult for banks or formal channels to lend to this segment, as they find it difficult to control end-use of funds and prevent default arising from diversion of funds for riskier or speculative businesses.
—Srinivas Acharya, MD, Sundaram BNP Paribas Home Finance Ltd
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