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Fintech Startups Striving to Get NBFC License Despite Numerous Challenges

Fintech Startups
Karan Singh
| Updated: May 24, 2021 | Category: NBFC

The full form of Fintech is Financial Technology, which involves traditional finance business through the P2P Model, asset management, crowdfunding, and mobile payments loan. Precisely, such companies don’t fit with the legal meaning of a band, as prescribed under the Companies Act, 2013. Extensive internet diffusion and the wave of digitization have led to the growth in Fintech sector financing from venture capitalists. The beginning of the UPI or Unified Payment Interface platform has amended the way we looked at the traditional finance and payment services.

Full digitization of banking services could be the next massive Fintech area because it obeys extraordinary growth. However, it could be easy for Fintech Startups to wander on that path with ease. Unified Payments Interface is an online payment system that provides inter-bank transactions. The National Payments Corporation of India (NPCI) advanced this system, and the RBI is the one who manages it. In this blog, we discuss about the Fintech Startups striving to get NBFC License despite numerous challenges.

Why Some Fintech Startups needs an NBFC License?

There are several entities or companies in India that are quickly consolidating their existence in the Fintech sector. All such companies in India are now RBI to obtain their NBFC License. As per many experts, the reason behind this is to preserve the loan books rather than sharing the profit with the partner.

The permit of NBFC License to such entities or firms will affect the process of loan disbursal and capital cost. However, it will decrease the capital cost and speed up the loan disbursal process. As per some industry experts, this will aid to restrain deceptive activities using technology and scale-up.

Highlighting the Capability of Fintech Entities to Become a Full-Fledged NBFC

Fintech is the current approach to financial services. Since such companies or entities leverage the updated technology, they have more capability to provide quality services to the users. Below are some pros of Fintech companies that make them fit entirely to work as a full-fledged NBFC in India.

Capability to Revitalize Conventional Banking System

Fintech has been oscillating robustly in the Indian Financial space since its inception. They have also become a vital part of the Government’s vision concerning financial inclusion. Owing to its supreme capability to revitalize the conventional banking system, the Fintech space is now gathering popularity in the section of lending, asset management, deposits, and credit system.

Capacity to Provide Various Services

Currently, such companies are taking full benefits of the updated technologies to alleviate challenges and build products like enterprise automation for fraud detection, accounting, last-mile reach & delivery, alternative credit models, treasury and reconciliation for private lenders, and regulatory compliance.

Right to Use Alternative Data Sources and Current Technology

Conventionally, lenders shined on the one size suitable to all approach, estimating all types of clients against standard credit policy. Such an approach is excluding an enormous population of capable customers. With Fintechs adopting AI combined with ML, it becomes simple to provide personalized services to the customers. Under the control of alternative data sources, Fintech has the capability to take a right and quick decision, exceptionally in the case where the creditworthiness of the clients is in question.

Present Challenges for Fintech Startups to work as a Full-fledged NBFC

Following is the list integrates the possible loopholes that are considered as the major problem for the growth of new Fintech entrants:

growth of new Fintech entrants
  1. Existence of Severe Compliances: Several laws and regulations in India give to the slow-down of Fintech startups in the financial markets. Not only such laws are strict; however, they have also dispiriting Fintech players from creating their way into the Indian market. Compliance laws exist as a provisional regulatory framework to alleviate deceptive activities. However, unhappily, new Fintech entrants are finding them as the biggest obstruction in the trail of growth. There is a broad list of compliances that Fintech startups require to fulfil before commencing their operation.
  2. Delicate Recovery Protocol: Most Fintech startups may find it very difficult to create strong management for credit recovery. Regulating a continual connection with credit seekers for premium payment seeks raw professionalism and a correct code of conduct, which is something quite intimidating to maintain.
  3. Existence of a Huge Unbanked Population: At present, the enormous portion of Indian population lack access to proper banking services that makes them based on the cash transaction instead of digital purchases. A government enterprise such as Pradhan Mantri Jan Dhan Yojana has tried to repair that loopholes to some extent; however, that too remained largely unproductive owing to low-interest infiltration and literacy levels. Catering
  4. Data Breaching: Most Fintech entities have a great quantity of client data to deal with. Regularly observing and protecting such data against a possible cyber threat is a supreme challenge for such companies. Any loopholes in this regard could outcome in enormous financial losses at the time of online transactions. Hence, ensuring end-to-end encryption to client’s data is a primary concern for the new Fintech entrants.

Implantation of Strong KYC & Consumer Complaint Mechanism – Fintech Startups

Establishing a KYC (Know Your Customer[1]) and customer compliant mechanism would add to the adversity of these companies. Also, it seems such companies or entities would have no influence over the client’s bank account, charges & fees that the bank administers. Since such firms will work as technology participant, they might not have access to all banking services.

Conclusion

There is no refusing that Fintech Startups are playing a crucial role in transforming the financial services of India. Nowadays, many Fintech startups have combined with Banks and leveraged their APIs or Application Programming Interface. While playing such actions, these entities are under the duty to stay in line with current regulations. By doing business, the Government of India may quicker or later decide to increase the digitization of banking services, and that is the only thing that keeps the expectations of many concerned Fintech entrants live.

Read our article:An Overview of Housing Finance Company and NBFC: Its Exemptions & Filing

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Karan Singh

A legal writing enthusiast, a wanderer, and a zealous reader. After gaining a lot of knowledge about the diverse legal topics and developing research skills, Karan joined the league of legal content writers to deliver quality-rich blogs.

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