What is NBFC Collaboration?
In laymen term, collaboration can be defined as an amalgamation of two parties to achieve a common goal. In India more than 9000 licensed NBFCs are active, but only 954 NBFC has book size more than 40 crores. Remaining NBFC only becomes eligible to meet the regulatory cap of the loan book of INR 20 million. Thus to raise funds, a new business model is framed called NBFC collaboration. NBFC collaboration is a process in which NBFC license holders do tie-ups with the banks/ Fintech companies. The purpose behind the collaboration is to raise funds.
In 2019, large scale NBFC suffered from financial crisis due to RBI's strict regulations; however, no such difficulty is faced by mid-size and small size NBFC. Commercially, these NBFCs are performing well and are skillfully raising a good amount of FDI for retail lending. However, with the motive to raise funds, large scale NBFCs are collaborating with banks and Fintech companies and are exploring new ways to raise funds and acquire clients.
Banks or Fintech companies will fund the NBFC at the agreed interest rate, NBFC with a minimum of 20% of loan books and remaining loan book amount shall be funded by the Bank or Fintech Company. NBFC collaboration can lead to success and growth if the latest technology and innovative loan products are used in the quick disbursement of loan.
NBFC Collaboration with Fintech Company
- Both NBFC Company and Fintech Company will need to sign co-origination scheme agreement
- The Fintech Company will sign an Inter-corporate deposit agreement with a Fund Manager
- A platform service agreement must be signed by the NBFC that allows the payment of technology services by the Fintech Company
- Open Escrow Account - ( a segregate Escrow Account for disbursement and re-payment)
- Appoint a Chartered Accountant for managing funds and operations of Escrow Account
- Keep a close watch over compliance (GST, TDS, CKYC, Credit Reporting, etc.)
- Monthly reconciliation and CIC reporting
- NBFC must follow NPA Provisioning norms of 45/90 days
Should NBFC look at the Balancesheet of Fintech or FLDG (First Loss Default Guarantee)?
Before any collaboration, NBFC Company should check the background of Fintech companies. NBFC Company must be aware of the financial strength of the Fintech Company, who are the promoters and what is their profile. Gathering this particular information becomes crucial while dealing with Foreign Fintech Company. Required due diligence should be conducted before signing any NBFC collaboration agreement. Fintech Company must follow the necessary compliance as well.
Fintech Company gives advance tech-driven underwriting and risk assessment software. The NBFC usually pays a commission of 1% to 3% to the FIntech Company.
The Fintech Company provides all requisite information regarding quick loan processing by the NBFC. Fintech Companies use their Escrow account to work on FLDG model. Fintech Company must share 24% to 36% o their ROI with the NBFC. Also, 100% covers NPA and expenses.
First Loan Default Guarantee
The function of First Loan Default Guarantee is to prevent the lender’s interest in NBFC. Lenders demand collateral with the motive to safeguard their advances made via Fintech Company.
NBFC Collaboration Business Model
Fintech Company will provide leads through online and offline marketing. It has to deposit enough amounts to the fund manager as FLDG. Fund manager will immerse fund in NBFC as Inter-corporate deposits.
CA, lawyer or a consulting company will manage the funds according to the instructions given by Fintech Company. For the service, they are providing; they will charge a considerable amount of fee from the Fintech Company.
RBI regulated NBFC has the right to do loan disbursement and underwriting. The Fintech Company will provide the list of people, who have a keen interest in various loan products and NBFC will be doled out post certain risk assessment. NBFC will keep certain amount of revenue for the services delivered in risk assessment and loan management sector. And with the Fintech Company balance profit is shared.
Minimum Required Technology With Fintech Company
- Should have a mobile app
- Systems such as Loan origination, loan management, and collection must be ready
- Fintech Company should own a credit and underwriting software
- Fintech Company must have a tight IT security; it will protect the personal information of the borrower
- In the case of loan app, it should be capable enough to integrate various APIs
- It should have live borrowers profile verification
- Bank statement should be analyzed to check income process
- Face of borrowers must be similar to the IDs they have submitted
- A thorough online testament of employment profile
- Privacy norms as prescribed by the law of India must be followed
Compliance Requirement of the Fintech Company
- Fintech Company has the authority to grant loan or guarantee via board resolution up to 60% of its paid-up capital and 100% of its free reserves and security premium, whichever is more.
- Once the members have approved under certain exception can be sanctioned up to 100% of its Paid-up Capital.
- GST should be paid on loan processing fee. Though, in normal practice processing fee is usually inclusive of GST.
- Fintech Company should follow ECB guidelines in case foreign fund has been raised as debt/loan.
Compliance Requirement for the NBFC
- Verifying ID, PAN card, Aadhar of borrowers. The verification process is done online
- Keeping borrowers data for five years
- Taking live picture of the borrowers
- Once the execution of loan agreement is processed, pay E-Stamp
- In case of loan inquiry, disbursement, delay or default report to credit information companies
- Comply with CKYC norms as stated by the RBI
- Adhere to GST, TDS, Companies Act, and RBI Act
- To manage business risk hire a CA, this can further help in surprise check and Audit of the Fintech Company
- Come out with a provision for NPA based on 45 days or 90 days loan book performance norms
If you have any doubt related to NBFC collaboration model contact Corpbiz. Corpbiz will clear your concept on it and will also help in the tie-ups with NBFC. In case of any clarification, we will feel happy to serve you and will send you appropriate materials as soon as possible. Don't hesitate and reach out to us for setting up a meeting and discussing an appropriate course of action for your concerns.