NBFC Collaboration is a sort of association where NBFC License holders partner with the Fintech companies and banks intending to raise funds and enhance financial inclusion in the country. In simple words, collaboration means joining hands for a common set of objectives. In India, there are more than 9000 active licensed NBFCs. Talking about the book size of more than 40 crores, only 954 NBFCs fits into this category. Remaining NBFCs are entitled to meet the regulatory cap of INR 20 million. These remaining NBFCs are just holding a certificate.
The term NBFC Collaboration is a newly introduced concept to enhance economic growth. Fintech companies, along with NBFC license holders, will fund the NBFC for an acceptable fee amount, as a consideration, they will be using the NBFC License. Both the parties decide the consideration and share revenue with each other. The success of NBFC Collaboration depends upon the combination of innovative loan products and the most advanced technology, making the process of loan disbursement easy and quick.
In the year 2019, due to strict governance norms of Reserve Bank of India, the NBFCs operating on a massive scale suffered from the economic crisis. However, Medium-scale and Small-scale NBFC faced a difficult time, they have been progressing, and they are readily raising a handsome amount of FDI for retail lending. It's not wrong to say that they are becoming commercially successful. The collaboration of large scale NBFCs with Fintech entities and banks are bringing the palmy days for the companies involved in all these processes. Furthermore, the NBFC collaboration will help in finding new ways to acquire clients and fulfilling the primary objective i.e., raising funds.
What are the Benefits that NBFC's Gains by Collaborating with Fintech players?
NBFCs are looking at Fintech Companies with an eye of fire and it's a fact that Fintech Companies are the next big thing, and thus, collaborating with them would bring unexpected and extraordinary results. NBFC's are walking out of the woods to increase their lending capabilities. Not only NBFCs will get benefitted from this collaboration, but also Fintech Companies would be dominating newbie in the industry after joining hands with NBFCs. In brief, we can say that it's going to be a win-win situation for both of them. The benefits that NBFCs gains by the partnership with Fintech Companies are as follows
Mount Up Productivity
Fintech has simplified the internal as well as external functions of NBFC. Also, it helps in the smooth functioning of the Non-Banking Financial Companies. Furthermore, it boosts NBFCs to revise their activities related to back-office, resulting in mounting up of productivity.
Launching Unique And Latest Product Offerings
By taking the help of Fintech's latest technology-based tools, the Non-Banking Financial Companies are bringing innovative changes in their new products. The collaboration of NBFCs with Fintech Players assists in launching unique and In-trend product offerings such as Payday Loans, POS Financing, Consumer Durable Loans, Invoice Financing, etc.
Embracing The Paper-Less And Modernized Digital Modes
After coming together on board along with a Fintech Company, NBFCs become familiar with the exceptional techniques. It dragoons NBFC into choosing the paper-less digital modes instead of the traditional, outdated manual process. Most importantly, digital onboarding and verification saves the costs incurred on operations.
Is it required for NBFC to have a glance at the Balance Sheet of FLDG (First Loss Default Guarantee) or Fintech?
Before giving its nod for any collaboration, NBFC Company must check the background of financial companies. NBFC Company should do proper research on Fintech Company and gather knowledge about the financial capacity of the Fintech Company. In addition to this, they must know regarding the promoters and also information about their profile. The importance of this information increases at the time of dealing with foreign Fintech Corporation. Before signing any agreement related to NBFC Collaboration, conducting due diligence is a must-to-do exercise. Also, Fintech companies should follow the essential compliance for sure.
Lead-Based Model
In this model, Fintech Company provides cutting edge and unique tech-driven underwriting and reducing exposure to risks by providing risk assessment software and tools. The Fintech Company usually receives a commission in the range of 1% to 3% from the NBFC.
Co-Lending Model
Here, The Fintech Company provides the much-needed information and tools that assist in making decisions for timely loan processing by the Non-Banking Financial Company. Fintech Companies are utilizing their dedicated Escrow Account to work on First Loss Default Guarantee Model. Fintech Companies are likely to share their 24% to 36% ROI with NBFC. When it comes to covering 100% NPA and expenses, Fintech Companies do their job.
Fintech-Led Model
The First Loss Default Guarantee is a way through which the lender's interest in NBFC gets safeguarded. Keeping in touch with the goals to afford protection to their advances made through Fintech Company, Lenders make the demand for collateral. It’s a Fintech-Led Model.
NBFC Collaboration Business Model
Company (1)
Online and offline marketing campaigns will be of much help for Fintech Companies to provide leads. There must be a requirement for a Fintech Company to deposit adequate amounts to the fund manager as FLDG. The fund manager will soak fund in Non-Banking Financial Company as Inter-corporate deposits.
Company (2)
As instructed by the Fintech Company, a consulting company, lawyer, or a CA will be managing the funds. For their respective services, they will be charging a considerable amount of service fees from Fintech Company.
Company (3)
The responsibility of doing loan disbursement and underwriting is in the hands of NBFC, regulated by Reserve Bank. The Fintech Company will share the list that includes those people who are interested in different loan products, and after the risk assessment process, disbursement of NBFC will take place. Taking risk management services and services delivered related to loan management into consideration, NBFC will hold some percentage of revenue. And with the Fintech Company, balance profit will be shared.
Reasons for Collaboration between Bank and NBFC
As taking the overall requirement to provide credit into account, along with ensuring the economic boost and development of the economy into account, the call for collaborations between an NBFC and a bank is something that requires everyone's attention.
Main Reasons Behind This Collaboration Are
- Ensuring sufficient liquidity in the market
- Advancing credit to borrowers
- Meet lending targets in priority sector
- Giving a boost to priority and other sectors
- Increase banking outreach
- Dodge liquidity crisis (Also known as credit crunch)
- Expand and augment financial inclusion
Insights on the Compliance Requirement for the NBFC
- The verification process of ID, Aadhaar of the borrowers, and PAN Card verification gets completed online
- Maintain and store records of borrowers’ data for five years
- Getting live snaps of the borrowers
- After loan agreement get executed, pay E-stamp duty
- In the case of loan inquiry, delay, disbursement or default, the requirement is to report to credit information companies
- Conform to the CKYC norms as stated by the Reserve Bank of India
- Comply with TDS, GST, RBI Act as well as Companies Act
- Hire a CA to manage the risks associated with business, and this can further help in out of the blue check and inspection of the Fintech Company
- Based on 45 days or 90 days Loan book performance norms, bring out the provisions for NPA
Minimum Desired Technology with Fintech Company
- Mandatory to have a mobile app in conformity with the Indian market
- Should be equipped with systems such as Loan management system, Loan origination, and Collection system
- Fintech Company must own credit and underwriting software
- Fintech Company must ensure that there is no lag in terms of IT security as it will safeguard the borrower's personal information
- Loan App must be capable enough to integrate the various APIs but not confined to PAN, Aadhaar, and Driver License
- It must have the verification of live borrowers’ profile
- Analysis of bank statement becomes a necessity for checking income process
- The face of borrowers and the IDs submitted online by them must be resembling each other
- Verification of Employment Profile Online
- As directed by Indian law, following of privacy norms is a requisite in case of using social scoring technology
- The server should be in India and shouldn't be outside the Indian boundaries.
India's FDI policy for Fintech Firms
- As per one of the RBI notification, new norms state 100% foreign direct investment for Fintech companies under the automatic route.
- In the current scenario, no such regulation exists that provides the minimum capital requirements for running Fintech business in India.
Compliance Requirement of the Fintech Business
- Fintech Company has the power and right to accord loans or guarantees by means of board resolution up to 60% of its paid-up capital and 100% of its free reserve as well as security premium, whichever is more.
- Once the members have given their approval under specific exception can be allowed up to 100% of its paid-up capital.
- Fintech Company should pay Goods and Services Tax on loan processing fees. Still and all, the processing fee is customarily inclusive of GST in regular practice.
- Fintech Company shall abide by ECB guidelines in case foreign funds get raised as Loan/debt.
NBFC Collaboration with Fintech Company - Process of Collaboration
The NBFC Collaboration with Fintech Firms is Following this Process
- It is mandatory for both the NBFC Company and Fintech Company to sign the co-origination scheme agreement
- Fintech Company must agree to sign Inter-corporate deposit agreements with a fund manager
- The NBFC that is a part of the collaboration should sign a platform service agreement that supports the payment of technology services rendered by the Fintech organization
- For meeting out the loaning purpose, NBFC needs to open a separate bank account
- The NBFC leap ahead and opens an Escrow Account (a segregate Escrow Account for disbursement coupled with re-payment purpose)
- Appoint a highly skilled and well experienced Chartered Accountant for managing and handling funds and services of Escrow Bank Account
- After the commencement of business, the Fintech Companies should thoroughly observe and keep their eyes on regular compliance (CKYC, TDS, GST, Credit Reporting, and others)
- Reconciliation on a monthly basis and Credit Information Company (CIC) Reporting
- Following NPA provisioning Norms of 45/90 days is a mandatory point to consider for NBFC