NBFC Collaboration Model
Over 9000 NBFCs have been serving the financing sector, out of which only 11% have a book size of over 40 crores, reflecting the magnitude of competition among private lenders in this sector. With a majority of NBFCs having a book size of 2 crores, it becomes pivotal for emerging and struggling firms to leverage a collaborative model to sustain in the competitive market. That is where the NBFC collaboration model comes into play.
Through this model, the grappling NBFCs can source leads and funds for lending while empowering Fintech to have access to their expertise and resources- a win-win proposition for either party. The NBFC Collaboration Model is primarily a combination of a struggling NBFC and a Fintech group seeking to withstand competition through new leads and funding while benefitting mutual growth.
Both Party can give this collaborative endeavor a legal effect via a co-origination scheme agreement. This would allow them to share the profits and even Non-performing Assets.
Since 2019 large NBFCs have been finding it hard to survive the fierce competition offered by the smaller and mid-size counterparts. As a result, these entities start looking to leverage the expertise of established banks and fintech to gain more leads and funds via a collaborative model.
NBFC Collaboration Model: Understanding the process and legalities
Signing a co-origination scheme agreement is the first step toward reinforcing a collaborative arrangement through which an NBFC and a Fintech solidify their business presence amidst the competitive market. The said agreement should have the signature of the interested party i.e. An NBFC and a Fintech.
Apart from them, the following conditions should be fulfilled:
- The FinTech, through a fund manager, must sign an Intercorporate deposit agreement.
- A separate escrow account should be there for the disbursement and repayment of credits. A CA will be liable to oversee activities concerning such an account hence their appointment is vital.
- Adherence to the norms concerning GST, TDS, credit reporting, CKYC, etc is mandatory.
- The NBFC should align themselves with the provision norm for NPAs
- Both collaborators must share CIC Reporting with reconciliation every month.
Collaboration Models available to FinTech and NBFC
NBFC should perform a detailed background check of a FinTech in terms of credit and financial strength. The NBFCs can adopt the given models for collaboration.
Co-lending model
In this model, the FinTech company shares the apt decision-making resources and data with the NBFC for swift loan processing. For serving this arrangement, FinTechs have to leverage the escrow account and FLDG (First Loss Default Guarantee) Model.
The FLDG empowers Fintech to finance at 70% of the threshold while the rest is addressed by the NBFC. Futech aims for shares on ROI ranging from 24-36% and spans 100% expense and NPA.
Lead-Based Model
In this model, FinTech provides NBFC with advanced risk assessment software and potential lead sources. The NBFC, in return, pays commissions ranging from 1-3% to the FinTech.
FLDG model
In this model, NBFC can seek collateral to ensure protection against the NPAs. This empowers them to operate seamlessly and meet their objectives while boosting their presence in the Fintech landscape through collaborative efforts.
ICD model
The ICD model in NBFC refers to the “Investment Company Deposit” model. In this model, NBFCs accept deposits from end-users or companies for investment purposes. These deposits are then used to purchase stocks, bonds, or other securities as a part of investment. The return generate via these investments are shared with depositers in the form of dividends or interest.
How exactly NBFC Collaboration Model Work?
The FinTech company renders cutting-edge support and funds to the NBFC, and the FinTech source leads in some collaborative arrangements and facilitates FLDG for the same. They are liable for executing marketing campaigns to augment the presence of NBFC.
The funds transferred i.e. FLDG by FinTech are deposited with the fund managers. Further, this fund makes its way to the NBFC’s fund manager as the Inter Corporate deposit. FinTech can cater to repayment collection on behalf of the NBFC.
Intermediary Legal Firm
A consulting legal and financial assistant provider or a lawyer is liable to oversee the funds arising from the Fintech-NBFC collaborative agreement.
Workflow of NBFC under the Collaboration Model
The NBFC shall lend credit against the leads curated by FinTech and process the loans. They will delve into the risk assessment data rendered by the FinTech to mitigate risks in lending. Both parties shall share the profit- a certain amount of which is kept by NBFC for risk assessment service.
Document Required for NBFC Collaboration Model
- NBFC Compliance Requirements
- Storage capacity for borrowers’ profiles for a minimum of 5 years.
- Provision of essential loan processing services, including capturing photos, paying E-stamp duty for loans, and executing loan documents.
- Reporting loan inquiries, delays in loan disbursements or processing to Credit Information Companies.
- Adherence to all compliance norms set by regulatory authorities.
- Engagement of a Chartered Accountant (CA) for auditing collaborating FinTech companies to assess risks.
- Compliance with the NPA (Non-Performing Asset) norm of 45/90 days.
- Utilization of online verification services for borrower document verification.
Compliance Requirement For FinTech
- A loan originating system, collection system, and loan management system should preferably be available on FinTech’s mobile app for borrowers.
- The FinTech company must own underwriting and credit software for loans.
- The company should have the necessary IT infrastructure to ensure security during the transfer of user and loan processing data.
- The loan app should be capable of integrating various ID documents of the end-user.
- Software should be capable of conducting income verification through analysis of the borrower’s bank statements.
- Verification system for employment and ID data of the borrower.
- The server for the application must be located in India, and necessary steps for data protection must be taken according to Indian law.
- A FinTech firm can provide loans or guarantees up to 100% of its free reserves or 60% of its paid-up capital, depending on which is more.
- The FinTech is responsible for paying GST on loan processing payments.
- Foreign FinTechs must adhere to ECB guidelines while raising funds in collaboration.
Conclusion
NBFC collaboration model is a step forward in the direction of mutual empowerment of grappling private lenders and financial institutions. It is ideally suited to NBFCs and FinTech’s that are finding it hard to survive in the market. With this model, they can pair up as a team and fulfill their objectives through mutual resources and funding.
Read Our Article: How To Get NBFC License In India?
