The term Collaboration means approaching together for a common goal. In India, there are about 10 thousand active NBFCs but more or less 954 NBFC has a book size of more than 40 crores. The collaboration of NBFC is a new type of business term in which NBFC License holders tie-up with Fintech companies or banks for sourcing of funding and leading. Both parties may assume some number of NPA risk and share revenue with each other. Big size traditional NBFC has been facing liquidity issue for a few years now because of strict RBI regulation but small and mid-size and NBFC has been doing great and raised a good amount of FDI for retail lending. For the new body of NBFCs with several business plans, they engage themselves in the development of new products and make a place market for themselves helping the unorganized segment. It required time to smoothen the plan and execute the altered products. Within the strategic partnership, the concept of NBFC collaboration arose which allows NBFCs to lower costs and increase customer base and develop fintech segments and de-risk the loan book, lower customer acquisition cost and serve the wider part of the economy. NBFC with showing at least 20% of loan books and left loan book amounts will be funded by the fintech or Bank at a certain rate of interest.
NBFC Collaboration Possibility
1) Indian companies collaborating with technology company
Built In-house technology:
NBFC License was issued by the Reserve Bank of India to more than 9100 companies in India. In some cases, NBFCs wish to introduce in-house, by building unified solutions that have some challenges and In case of companies that wish to build. Few challenges are mentioned below
The slow process of introducing new technology gives the complication of in the businesses and firm compliance and regulatory environment challenges the legacy system and old structures and which is more expensive
Challenging old structures and legacy systems to develop technology and maintain.
Indian traditional NBFCs collaborating with fintech company
Old traditional NBFCs can use technology platforms that are developed by FinTechs companies
Offer claims and investment management services
Give guideline arrangements system in the lending space,
Better control of resources and technology and
have better control over loan disbursement
Use API to avoid losses and identify the risk
2) Collaboration with Investment Company
Working Flow of NBFC Collaboration with Investment companies to raise the investment to build financial strength, especially in the case of Foreign Fintech investment company involvement.
Fintech Company Collaboration Process with NBFC
1.NBFC Company and fintech company need to sign Co-origination scheme Agreements
2.Fintech Company need to Sign (Inter-corporate deposit agreements) with a Fund Manager
3.NBFC needs to sign a platform service agreement for the payment of technology services by the Fintech company
4.Opening of an Escrow Account is also need ( it is a Separate Account for repayment and Disbursement which need to be made according to RBI guideline)
5.a Chartered Accountant also need to be appointed for the management of operations of an escrow account and all the Fund
6.keep eye on Compliance (TDS, GST, Credit Reporting, CKYC, etc.)
7.NBFC need to follow 45 or 90 Days NPA Provisioning norms 8.reconciliation on monthly basis and CIC Reporting
NBFC observes for the background of financial strength and Fintech companies, the profile of its promoters, mainly in the case of Foreign Fintech companies. Necessary inspection needs to be conducted before the signature on NBFC collaboration Agreements. Also, the necessary rules must be followed by fin-tech companies.
Lead-Based Model
In this Model Fintech company provides leads and advanced tech managed underwriting and risk assessment software. Fintech is being paid in the range of 1% to 3% of the Loan Amount as a commission by NBFC
Co-Lending Model
Fintech companies provide the required information and decision-making tools for faster loan processing by the NBFC in this type of model. Fintech Companies work on the First Loan Default Guarantee model Via a fixed Escrow Account. In FLDG maybe Up to 70% and the rest 30% Loan book financed by the NBFC from its fund. Fintech companies share a 24% to 36% Rate of Interest with NBFC. Also, Fintech companies cover 100% of expenses and NPA.
First Loan Default Guarantee
The means to safeguard the lender’s interest in NBFC is called First Loan Default Guarantee or FLDG. Lenders ask to collaborate in order to protect their advances made through Fintech Company.
Business Model collaboration of fintech and its Flow
Fintech Company is a contributor which will give funds to FLDG. The fund is gathered by the Fund Manager and is included in NBFC.NBFC carries Retail Lending and the share of revenue is decided by Fintech Company.
Fintech Company- Company 1
Offline as well as online marketing campaigns are evolved by Fintech Companies for the leads. The Fund Manager is being given a sufficient amount of deposits and the arranger of it is Fintech Company. The funds are charged by the Fund Manager in NBFC which creates Inter Corporate Deposits.
Fund Manager – company 2
A fund is controlled by a capable person who has better knowledge of finance as well as law and is a Chartered Accountant or Lawyer; the basis on the orders received from Fintech Company. The fee is paid by Fintech Company to take the services of Chartered Accountant or Lawyer.
NBFC company 3
The activities like loan payment as well as underwriting are done with the help of NBFC which is regulated by RBI. The borrower’s list of different loan products is provided by Fintech Company and the base of risk assessment, the amount is given out by NBFC. Some portion of revenue is kept by NBFC as loan management services and risk assessment services are done by it whereas the left out profit goes to Fintech Company which was decided beforehand.
Conclusion
The word collaboration refers to the coaction of two or more entities to bring about the combined results. It is gaining popularity really fast. The rapid growth in the fintech industry is giving some realistic goals to the NBFCs to unite themselves with their technology. This is the reason behind the concept of NBFC collaboration.
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