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Dropline Overdraft: A Must-Have for Lenders in Today's Market

What is dropline OD?

  • Its a limit based product with a time-bound principal repayment

  • Customers are assigned a limit for a tenure based on the credit underwriting

  • Customers pay for processing fee and other charges similar to CC/OD limits

  • Now customers are free to use this limit as per their needs

  • Customers are usually equipped with a mobile app through which they can request a drawdown within the available limit

  • Payment is instantly made to customer account

  • Customer is charged interest only on the amount utilised

  • Interest accrue on a daily basis and gets billed every month

  • Every month some amount of principal also needs to be re-paid based on the tentative repayment schedule drawn at the time of sanction

  • Post principal moratorium period every month the available limit reduces

How is it different from CC/OD limits given by the banks?

  • The problem with CC/OD is that principal never gets paid. Every year the limit gets renewed and the customer just keeps servicing interest every year.

  • This can be fine for the banks with continuous flow of liabilities but for NBFCs this can be dangerous.

  • NBFCs need to repay the principal amount to their lenders, hence it can be risky for them if they don't timely recover the principal back.

  • In Dropline OD, customers receive a tentative repayment schedule with defined principal repayment schedule.

  • At time of monthly billing if the utilised limit is more the balance principal as per repayment schedule then the additional amount needs to be repaid.

  • This ensures that NBFCs keep getting their principal back and its not an infinite interest only loan

Current landscape: Bajaj Finserv is market leader in Drop-line OD

There is a popular offering by Bajaj Finserv - its flexi loan offering

Bajaj Finserv Flexi Loan is a unique credit facility that offers several advantages over traditional loan options. It comes in two variants: Flexi Term Loan and Flexi Hybrid Loan. Here's a breakdown of its key features and benefits:

Key Features:

  • Loan limit: You get a pre-approved loan limit, not a lump sum.

  • Flexibility: Withdraw funds from your limit as many times as you need during the tenure.

  • Part-prepayment: Repay any amount at any time without any charges, reducing future interest burden.

  • Interest: Pay interest only on the amount you utilize, not the entire limit.

  • Tenure: Choose a repayment term that suits your needs, up to 96 months.

  • No prepayment penalty: Prepay as much as you want, whenever you want, without any fees.

Benefits to the customer:

  • Reduced cost: You only pay interest on the used amount, potentially saving money compared to traditional loans.

  • Increased cash flow: Withdraw funds only when needed and manage your repayments conveniently.

  • Financial discipline: Encourages responsible borrowing by limiting access to the entire loan amount at once.

Why should lenders start offering Dropline OD?

Primarily for below reasons

  1. Increased productivity of field sales team

    1. Your sales team faces rejections from the customers on non-requirement of funds right now

    2. Your sales team will now be able to convert the customers who are not looking for loans right now but might need in a few months time

    3. Your processing fee and stamp duties will be immediately paid out by the customer

  2. Expansion in the customer base

    1. Every business can be your customer, an extra liquidity can help them grow business faster

    2. Flexi loans offer them flexibility to draw funds when there is an actual need

    3. Due to its strong value proposition - you see rise in your customer base

  3. Create a brand for differentiated product offering

    1. Due to novelty in the loan product, you have a chance to create a differentiated name in the market

If value proposition is so strong, why is it not popular yet?

Surprisingly even after Bajaj -Flexi loan being a hit product in the business loans category, very few competitors offer the flexi-loan.

Our study after speaking with customers suggest that the primary reason for not offering flexi loans is their IT systems.

Very few loan management systems support Flexi OD / Dropline OD.

How can Synoriq LMS help?

Synoriq LMS is built with aspirations of "World's Best LMS". In Synoriq LMS, you can find

  1. Feature richness

  2. Wide product coverage (including Dropline OD)

  3. Evolutionary architecture

  4. Compliance compass

  5. 100s of APIs for easy integration

  6. Security / Scalability focus

Dropline OD: Core offering in Synoriq LMS

Feature coverage of dropline OD

  • Dropping methods - Support for multiple limit dropping methods -

    • fixed amount every month

    • step-up/step-down drop

    • drop after moratorium of X months

  • Repayment schedule -

    • Maintenance of two repayment schedule - 1) for the customer - tentative repayment schedule 2) actual repayment schedule based on utilisation

    • Repayment frequency - Monthly / Quarterly

  • Handling of charges -

    • Auto posting of charges and utilisation of limits for outstanding charges

    • Both options - charges on accrual basis or cash basis

    • Overline handling due to bouncing

    • Penal charges definition

    • Non-utilisation charges on limit non-utilisation for a period

  • Limit management

    • Limit management across multiple loan facilities for the same customer

    • Limit freeze / unfreeze

    • Drawing Power (DP), Available limit, Un-realized limit, Utilised limit, Overline

    • Temporary limit reduction via lien marking

    • Limit enhancement and reduction facility

  • Interest Accrual and Billing

    • Daily computation of interest on the utilised amount

    • Ability to define multiple billing cycle - month end OR any specific day of the month

    • Billing of principal according to the dropline

    • Define grace period for the repayment post billing

  • Handling of back-dated transactions

    • Receipts at times might not be through STP in case of manual collection. Hence due to operational reasons there can be a delay of 1-2 days.

    • Synoriq LMS ensures calculations are perfect even in case of back-dated operations

  • Customer mobile app for easy drawdown, repayment and statements

  • Instant disbursement for drawdown through bank API integration

  • Multiple repayment methods - a) payment gateways b) virtual account number c) UPI

  • Instant limit release on repayment through mobile app

  • Detailed audit trail for any disputes later

  • Rate change facility

  • Cancellations - drawdown cancellation, receipt cancellation and payment cancellations

  • Foreclosure - option to close the loan before maturity

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