How are emerging technologies helping NBFC’s?

Ashish M. Shaji

09 Jun, 2022

Non-Banking Financial Companies (NBFC’s) have been invaluable to many individuals and businesses. It has helped the individuals and businesses to meet their financial needs that have been traditionally un-served or underserved by banks.

With the regulations for NBFC’s becoming stricter in recent times, the cost of borrowing has gone up, and NBFC’s have been focusing more on niche markets, personalized products and services. NBFC’s are also seeking to develop innovative products and catering to low-income and urban sectors in unorganized sectors.

In this situation, NBFC’s are adopting business models and operational models backed by emerging technologies that uninterruptedly facilitate the design, launch, implementation and execution of services.

Investment in emerging technologies and strategic partnerships with incumbent financial institutions and FinTechs also permits NBFC’s to reduce their costs when it comes to increasing their customer base, reducing customer acquisition costs, servicing existing customers or de-risking the portfolio when seeking to conquer the increasing formal credit penetration in an expanding economy.  

The new-age NBFC’s are using technology like never before and harnessing partnership eco-systems across the value chain of lead generation, customer onboarding, credit or loan disbursement and collection. 

Things like Artificial Intelligence (AI), machine learning and big data analytics have helped lenders to measure individual customer insights and to build models of alternative credit scoring.  The penetration of Mobile phones has allowed NBFC’s to connect with low-income customers who may use their mobile phones during the entire cycle of application, engagement, e-KYC (Know Your Customer), and e-signature for disbursements.

Robotic process automation has allowed the streamlining of the operational workflows, increasing accuracy and productivity and cost savings. NBFC’s are experimenting and beta testing with distributed ledger technologies for different purposes such as data exchange, e-KYC, loan disbursement and cybersecurity. Application programming interfaces (API) are also built and tested for vigorous connected eco-systems of different institutions and stakeholders.

Traditional Operating Model and its challenges

There are a number of challenges associated with traditional operating model.

These are as follows:

• Longer lead generation and processing time;
• High operating expenses;
• Lending based on income, credit score etc.
• Limited risk profiling and credit appraisal;
• Manual work and human judgement;
• Long term loan with short financing;
• A high-cost model with people and branches;
• NPA’s (Non Performing Assets) and the massive cost of the fund;
• Legacy systems and Limited data governance; and
• Growth threshold.

How are emerging technologies defining a new standard for FinTechs and NBFC?

FinTechs have been creating a loud noise around value chains in the Indian financial space. It has also formed a part of the Indian government’s mission of financial inclusion for the past few years. Due to its enormous potential of disrupting the present and traditional banking system, the FinTech space is growing in the areas of lending, deposits, asset management and credit system.

Nowadays FinTech companies are making use of the emerging new age technologies effectively to conquer the challenges and build products and services like last-mile reach and delivery, fraud detection, regulatory compliance, alternative credit models, enterprise automation for accounting, treasury and reconciliation for traditional NBFC’s. 

Traditionally lenders have used a “one size fits all” method, thereby evaluating all kinds of customers against a single credit policy which has resulted in the exclusion of a large section of creditworthy customers. The FinTechs have been adopting and building models on Artificial Intelligence along with Machine learning and advanced analytics, therefore, NBFC lenders can take a personalized approach to underwriting by using definitive segment guidelines powered by alternative data sources and apply scorecard based credit decisions.

The approach must help in broadening the customer base, thereby allowing the sales team to target a huge pool of prospective customers and provide relevant products according to their credit scores.

Few of the NBFC’s are seeking to test and deploy solutions in collaboration with FinTech software as a service to automate back-end and middleware software applications which will make the origination as well as the underwriting process quick, structured and transparent.

 Technology boosted NBFC business models that aim to lower dependency on manual tasks and is built on the Robotic process automation, helps in broader inclusion, prowess in credit quality, cost-effectiveness and quick turnaround time as compared to the traditional lending models of banks.

Instead of having key resources scan pages of documentation to know the creditworthiness and risks in lending, emerging technologies such as Robotic process automation can allow such resources to focus on essential business requirements.

Emerging technologies can help NBFC’s with on the spot decision making. A technologically efficient NBFC can transform the manual, time taking process to facilitate instant and real-time approvals. Artificial Intelligence and machine learning can provide continuous evaluation of the underwriting and risks models.

A periodic assessment helps in determining the efficiency and effectiveness in dynamic scenarios and further determines steps of ready for improved performance. Advanced analytics and Artificial Intelligence powers NBFC’s to collect payments and monitor decisions robustly.

NBFC’s have relied on customer account balances and credit scores to prioritize non-performing and delinquent accounts and prepare strategies for its collections. However, with the amount of growth set to come from accounts with less or no credit history, NBFC’s are required to leverage broader data sets and the ability of big data processing to derive and synthesis insights from existing and used data sets of non-performing and delinquent accounts by looking at the big sets of information. 

Benefits of Emerging technologies

Some of the key benefits of emerging technologies are as follows:

Strategic partnership models between FinTechs and NBFC’s

The FinTech sector has been working speedily with emerging technologies to simplify borrowing for customers and solve the limitations of banking and NBFC’s. Banks and Non-Banking Financial Companies are changing their mode of operations, but this is done at a slower pace because of their legacy infrastructure, technologies, frameworks, the process of approvals, and tight integration across the business and technical value chains.

However, it does not mean that financial institutions like banks and NBFC’s are not innovating. The biggest challenge for them is to know which ideas are to be pursued to embed capital and technology. The complex, scale and siloed nature of the banks prevent them from performing these things effectively.

The customer’s expectations have also increased, and the common trait of the NBFC’s is that they understand that they are in with a better chance of succeeding by collaborating with new-age FinTechs and seeking strategic partnerships with them.

Traditional NBFC’s possess an inherent advantage that FinTech companies lack. FinTech companies possess agility and technology which equalizes things. 

Future of NBFC’s

Using the innovative emerging technologies across value chains will help with optimization of resources and processes, lower the turnaround time, promote intuitive and automated decision making and provide accessibility of credit or loans for customers at rates tailored to their socio-economic profile.

It will provide NBFC’s significant leverage over the traditional banking system and provide high growth possible. The success of the NBFC’s or FinTech companies largely depends on their ability to use technology to its best, human capital and strategic partnerships.

NBFC’s enjoy a large customer base, and FinTech companies comprise of right technological support. These can together form a mutually beneficial relationship to expand the process of providing customers with credit or loans. Collaborating with FinTech’s would provide NBFC’s chance of increasing revenue and providing more services without taking any additional risks or staff and providing an advanced form of customer experience.

At the same time, FinTechs will get access to a loyal customer base and get the chance to use it to the full experience of extensive financial services while moving forward in the regulatory environment. 

Conclusion

Also, read: SIDBI Launched Pilot Scheme for FinTech NBFCs to Promote Digital Lending