Collaboration of NBFC with the Financial Companies
After the massive crisis in the IL&FS (Infrastructure Leasing & Financial Services Limited), it is an Indian infrastructure development & financial company; RBI introduced a robust regulation. However, relatively more prominent Non-Banking Financial Companies have been suffering credit crisis for the past two years, whereas small and medium-sized Non-Banking Financial Companies have done good and are prepared or arranged to increase a reasonable amount of FDI (Foreign Direct Investment) for retail lending. There are several of NBFCs that require external incentives to grow and develop. Hence, the importance of Collaboration of NBFC is highly essential. In this write-up, we discuss the collaboration of NBFC with the financial companies.
Collaboration of NBFC – Meaning
Collaboration means to work with another group or individual in order to get or do something. The collaboration of NBFC is a way where a present NBFC License owner collaborates with financial companies or banks with an outlook to source leads & increase their funding. Both the parties may or may not assume the same percentage of NPA (Non-Performing Assets) risk and share revenue. Many Non-Banking Financial Companies have collaborated with banks and financial companies that can aid them in increasing funds and onboard customers.
NBFC Collaboration has met the accomplishment by using loan products and quick disbursement of loans with the use of innovative technologies and financial tools.
Collaboration of NBFC – Different Models
Non-Banking Financial Company, before collaborating or combining together with a company, conducts a background check of the financial companies or entities to know their financial capacity and the profile of its promoters. When collaborating with an overseas financial company conducting background checks becomes more vital. Required due diligence should be performed before signing collaboration agreements.
Following are some collaboration models for Non-Banking Financial Companies with other companies:
- Lend-Based Model: In this NBFC Collaboration method, financial or fintech company sources lead and deliver technology underwriting with the risk assessment tools. Non-Banking Financial Company pays the commission to the fintech in 1 to 3% range of loan mount for leads & tool maintenance.
- Co-Lending Model: In this model, the fintech entity furnishes the tools and information for decision making, thereby ensuring the process of quick loan to the Non-Banking Financial Company. Those financial entities that work in this collaboration perform as per the First Loan Default Guarantee model. It aids in protecting the interest of lenders in the NBFC. Lenders invite collaterals to safeguard advances made via the Fintech Companies. This model works via the escrow account.
Co-Lending Model for the Collaboration of NBFC and Bank
The Reserve Bank of India has announced a notification on the co-lending model to be registered among NBFCs and banks at the time of collaboration of NBFC and Bank. It was announced in November last year. The primary purpose is to furnish the collaboration among Non-Banking Financial Companies and banks in lending within the priority sector of the market. The notification was announced with an outlook to streamline the processing of the loans for easy disbursal to lenders in different sectors. This notification is the point of co-origination for loans released by different banks and Non-Banking Financial Companies to the priority sector.
How does the Collaboration of NBFC Model Works?
- Workflow of Fintech: The fintech entity delivers advanced technical support & funds to the Non-Banking Financial Company; the Fintechs also source leads in some collaboration models & furnish FLDG for the same. They are accountable for operating marketing campaigns for NBFc to raise their business. The funds transferred by fintech are deposited with managers of the fund as FLDG; this fund is deposited later by the manager of the fund in Non-Banking Financial Company as the Inter Corporate Deposits. Fintech also provides collection services to Non-Banking Financial companies.
- NBFC Workflow: The Non-Banking Financial Company is accountable for lending money to the leads generated by fintech & loans processing. They will also work with the risk assessment data offered by the fintech to decrease their risks in lending. In return, they will share their profits with the fintech with which they collaborated. Some percentage of the profit is reserved by the Non-Banking Financial Company as a part of the risk assessment service.
- Mediator Legitimate Firm: A consulting legal & financial assistant provider company with a lawyer or Chartered Accountant (CA) should regulate the funds linked with NBFC and Fintech as per the collaboration agreement. This legitimate firm and the financial firm will charge a service cost from the collaborator.
What is the Process for the Collaboration of NBFC with Financial Companies?
Following is the process for the collaboration of NBFC with financial companies.
- A financial company and NBFC sign the co-ordination scheme agreements;
- The financial company also signs an inter-corporate deposit agreement with a mediator fund manager;
- Non-Banking Financial Companies signs an agreement called the platform service agreement for the technological payment services furnished by the financial company;
- Open escrow account for the objective of repayment and expenditure;
- The fund manager or an accountant shall be appointed to regulate the escrow account funds and their operations;
- Both entities should fulfil the required compliances like CKYC, GST, TDS, etc.;
- CIC Reporting and monthly reconciliation.
Compliance Necessity for NBFCs
- Before processing of loans, digital verification system for Aadhar, PAN Card, etc.;
- The capacity of data storage of borrower for five years;
- Comply with the rules of regulatory bodies or authorities;
- Suitable process of loan rules should be followed;
- Comply with the 45-90 days rule for stating NPAs;
- Reporting to CIC regarding the loan enquiry, delay or default, expenditure;
- CA Appointment for a surprise in section and check the financial company for business risk assessment.
Compliance Necessity for Fintech Entities
Following is the compliance requirement for Fintech entities:
- Financial or Fintech Entities can extend loans via board resolution up to 60% of its paid-up capital and 100% of their free reserves and security premium;
- It should persuade the essential norms if they raise overseas funds as loan or debt;
- Fintech companies are required to pay GST (Goods and Services Tax) on loan processing fees;
- Under exceptional situations, consent can be given up to 100% of its paid-up capital.
Collaboration of NBFC with the financial companies and such other fintech can ensure stability to the present Non-Banking Financial Company market. As mentioned at the beginning of this blog, there are several of Non-Banking Financial Companies that have been facing credit crisis for the past few years. Collaboration can make sure the revival of such Non-Banking Financial Companies via the technical assistance provided by Fintechs. The future of such collaboration may be positive and may aid the Non-Banking Financial Companies, which are operating now.
Read our article:Regulations governing NBFCs in India: An Overview