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What is NBFC Collaboration?

The word collaboration refers to the synergy of two or more entities to bring about the combined results. It is quite a new term in the lending segment but is gaining popularity rapidly. The constant growth in the fintech industry worldwide is giving some realistic goals to the NBFCs to merge themselves with their technology counterparts. This is what led to the emergence of the concept of NBFC collaboration.

With around 9000 licensed NBFC in India, less than 1000 of them are financially sufficient. Rest are in the continuous efforts of raising funds. For the new cadre of NBFCs with diversified business plan, they are engaged in the development of innovative products and creating a niche market for themselves serving the unorganized segment. Facilitating the planning and execution of the tailored products requires time and investment. It is here the concept of collaboration is originated wherein the strategic partnerships with evolving Fintech segment allows NBFCs to lower the costs and increase the customer base, thereby reducing the customer acquisition costs and de-risking the loan book, servicing a wider part of the economy.

Swarit Advisors enables the NBFCs and Fintech companies to come together for this synergy by providing end to end assistance in NBFC collaboration focused to go live within a month.

Facilities offered by Swarit Advisors in lieu of NBFC Collaboration

  • Coordination of NBFC License Holder with Fintech Players
  • Revenue Model Designing & Co Lending Partnership
  • NBFC’s Agreement of MOU & Platform Aggregation Agreement
  • Terms of NBFC & Fintech Companies Revenue Sharing model
  • Initiation of NBFC & Fintech Companies Escrow Account
  • One to one interaction with CA for round the clock customer support
  • Reconciliation on monthly basis and Performance Analysis of Business
  • FLDG Structure Designing and Reporting
  • Fintech Companies and Partner NBFC’s compliance management
  • Suggestion on technology till the satisfaction
  • Loan Application’s digital marketing
  • Advise on legal matters for firms engaged in Fintech business
NBFC Collaboration

Dynamics of NBFC Collaboration

NBFCs and Banks are continuously striving to meet the financial needs of the population and the businesses. But with increased cost of the funds, NBFCs are more focused in providing personalized products for meeting specific needs. Unlike banks, which also comes under the jurisdiction of RBI, there are some differences which sets NBFC apart from the banks and are listed below-

  • Demand Deposits are not be accepted by NBFC’s
  • Cheques can’t be issued by NBFC’s
  • If you are on a lookout to insure your deposits, NBFC’s are not meant for you as these does not deal in deposit insurance facility.

Therefore, NBFCs have to make continuous efforts to secure their domain and create a faithful customer base for themselves. The various kinds of loans in which the new-age NBFCs are being involved includes advance salary loans, student loan, medical loans, travel loans etc. The usage of big data and block chain technology proves to be the stepping stones in alternative lending methods, thereby also demanding huge investments in technology and loan origination process.

NBFC Collaboration is an emerging concept in India where NBFC license holders collaborate with evolving Fintech companies. It is done to attain leads and facilitate funding. The agreement is prepared which underlines the basic conditions like revenue sharing model between both the parties. It also depicts proportion of NPA and its risk between both the concerned parties.

The NBFC’s which are big in size are also facing liquidity crunch which is attributed to regulation of RBI but the scenario of mid size and small size NBFC is different as they are able to attract handsome amount of FDI which enables them to pursue lending on retail basis smoothly. The increase usage of Mobiles and smartphone penetration has encouraged NBFCs to connect with lower income-size customers, making use of their smartphones in the loan origination process, e-KYC and e-signature for disbursements. The operational workflows have been streamlined, productivity is increased, accuracy and cost savings is maintained by the implementation of Robotic Automation. NBFCs are also bringing into functionality various new age technologies such as e-KYC, data exchange, loan disbursement and collection and cyber security. Application programming interfaces (APIs) are being introduced and utilised for better connectivity among all the stakeholders.

Fintechs are rapidly making efforts in the field of acing technology making the overall tasks of Banks and NBFCs easier. Even if the NBFCs are trying to develop their own automated system, their pace is quiet slow because of their lethargic approach and traditional methods. Therefore, fintech players come to the rescue. The normal exposure of 20 % of loan books of NBFC is evident in case of NBFC Collaboration and interest rate is decided basis which Fintech company or bank funds the remaining loan book. The innovative products of loan as well as efficient loan disbursement through technology underlines the basis of successful NBFC Collaboration.

Process of collaboration of NBFC and Fintech Companies

1

Co-origination scheme agreements are signed between NBFC as well as Fintech Company

2

Inter Corporate Deposit Agreement is signed by Fund Manager and Fintech company.

3

Platform service agreement is signed by NBFC towards payment of Fintech company’s technology services.

4

Escrow account is opened for the purpose of repayment as well as disbursement.

5

CA is appointed for fund’s management as well as Escrow account’s operations.

6

Compliances like GST, Credit Reporting, TDS etc. are kept in consideration.

6

Norms related NPA Provisioning of 45/90 days are adhered by NBFC.

7

Reconciliation on monthly basis as well as CIC Reporting.

Process of collaboration of NBFC and Fintech

Pros and Cons of building own technology by NBFCs

Advantages:

  • Exclusivity;
  • Full control over resources and capital allocation;
  • Autonomy on technology and talent.

Disadvantages:

  • Deviation from traditional structure and age-old legacy
  • Cost intensive process;
  • Lack of in-house expertise and talent;
  • Lack of experience making it a time taking process.

Pros and Cons of Fintech collaboration

Advantages:

  • Rapid Growth owing to fast customer acquisition with limited resources;
  • Technological advancement;
  • Fulfills the requirement of lacking in-house talent and experience;
  • Quick implementation and go live procedures.

Disadvantages:

  • Difficulty in finding a suitable synergy partner
  • Lower return on investment
  • Data security threat and privacy issues;
  • Difficulty in cultural integration;
  • Rare exclusivity of arrangements.
  • Limitation over brand recognition.

Due Diligence for NBFC Collaboration

The background of the Directors and promoters of Fintech companies should be checked by NBFCs before getting into the synergy. It is in own interest to check financial strength too. Also, profile of promoters is vital criteria to be checked which is particularly applicable in case of Fintech company having operations in more than one country. Prior to NBFC Collaboration Agreements, due diligence is of primary importance. It is absolutely necessary to follow necessary compliances for Fintech companies. These are:

  • First Loan Default Guarantee (FLDG)

First Loan Default Guarantee is the means through which the lender’s interest is protected in NBFC. The lenders demand collaterals to safeguard the advances.

  • Lead Based Model

Lead Based Model is a model where the leads are sourced for which NBFC is required to pay commission in the range of 1-3% of loan amount. Risk assessment software is provided by Fintech company in addition to advance tech driven underwriting.

  • Co Lending Model

Quick loan processing by NBFC is possible in Co Lending Model as Fintech company offers decision making tools as well as necessary information to NBFC. FLDG model through Escrow account is the method adopted by Fintech companies where 30% loan book is financed by NBFC from its fund and the remaining 70% is financed by FLDG. As far as ROI is concerned, 24-36% is shared by Fintech with NBFC. Additionally, 100% NPA & Expense is covered by Fintech.

NBFC Collaboration Business Model & its flow

  • Fintech Company is a funder which will provide FLDG & Fund.
  • The fund is collected by Fund Manager and is incorporated in NBFC.
  • Retail Lending is carried out by NBFC and revenue share is decided with Fintech company.

Company 1 (Fintech Company)

Online as well as offline marketing campaign is deployed by Fintech company for the leads. Fund Manager is being provided with adequate amount of deposits and the enabler of it is Fintech company. The funds are infused by Fund Manager in NBFC which forms Inter Corporate Deposits.

Company 2 (Fund Manager)

A fund is managed by a competent person who has good knowledge of law as well as finance and is CA or Lawyer; basis the instructions received from Fintech company. The fee is paid by Fintech company to avail the services of CA or Lawyer.

Company 3 (NBFC)

The activities like loan disbursement as well as underwriting are carried out by NBFC which is governed by RBI. The list of borrowers of various loan products is shared by Fintech company and the basis of risk assessment, the amount is disbursed by NBFC. Some percentage of revenue is kept by NBFC since risk assessment services as well as loan management services are done by it whereas the remaining profit goes to Fintech company which was decided.

NBFC Collaboration Business Model

Basic Technology Requirements of Fintech company

  • Indian market needs Fintech company to be mobile app ready
  • Loan Management system, Collection system as well as Loan Origination system must be in its place
  • Fintech company must own Credit and underwriting software
  • Fintech company must know IT security so that breach of borrower’s information is protected
  • The scope of Loan App should be robust as it should be able to incorporate API’s and should not just restrict to Driver’s license, PAN or Aadhar
  • It should incorporate Live Borrowers Profile Verification
  • It is important to do scrutiny of bank statement analysis and income check
  • The verification of borrowers is must with respect to borrower’s face and ID which was submitted electronically
  • Employment verification is a prerequisite
  • Law of India mandates privacy norms especially in case of Social scoring technology
  • Share certificate is required by possessed by Fintech company and Fintech company must possess server which should be located in India

Fintech company and its compliance requirement

  • Any loan or guarantee can be given by Fintech company but it should be through board resolution and can go maximum up to 60% of its paid-up capital and 100% of its free reserves and security premium, whichever is more.
  • The loan can be availed of 100% of Paid up capital but this is an exception and is applicable only when members approve it
  • GST is levied on Loan processing as fees which is borne by Fintech company. Fintech company need to worry as processing fee comprise GST
  • ECB guidelines must be taken into cognizance by Fintech company especially when debt or loan is raised in form of foreign fund

NBFC and its compliance requirement

  • Borrower online verification is necessary such as Aadhar, ID and PAN card
  • The data of borrowers must be stored for 5 years
  • Borrower’s live picture must be captured
  • E-Stamp Duty is payable on processed loan agreements
  • In case of loan enquiry, delay, disbursement etc., vital information has to be provided to credit information companies
  • RBI prescribes CKYC norms which must be adhered
  • Strictly follow RBI Act, GST, Companies Act etc.
  • Business risk of Fintech company can be assessed by appointing CA who is helpful in surprise check and audit
  • Certain NPA provisions are required which can range between 45-90 days

Adopting technological innovations across the lending segment will aid optimisation of resources and processes, reduce the process turnaround time, facilitate automated decision making and will ensure the grant of credit for customers at competitive interest rates as well as customised products. NBFCs will enjoy a great leverage over traditional banking systems and shall be capable of driving maximum possible growth. The success of NBFC Collaborations is largely dependent on the ability to make the best use of technology, human resources and strategic partnerships. NBFCs have the departmental approval for lending and Fintech companies have the right technological approach and capacity and together, they can form a mutually beneficial relationship as well as provide the economy with requisite growth.

For any concerns related to NBFC collaboration model/ tie-ups with NBFC, contact us at Swarit Advisors. We are happy to serve you and solve your concerns related to NBFC collaboration model/ tie-ups with NBFC.

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