NBFC

New Trend in NBFC Business Model, Challenges and a Scalable Business model

Fintech Based business model is the future of NBFC – a Scalable Business model

The Indian economy has been very positive towards the fintech business. The innovating and need basis loan product has been attracting entrepreneur, investors and innovators to come with the new NBFC Business model and fill the demand and supply gap created by the bank. Quick loan processing and Ease of credit by use of alternative credit scoring is still in trend and have proved loan business as the most profitable segment of the economy.

In last 10 years, there are a substantial increase in the take-home incomes of the salaried class in India, from Executive level to Co-founder of a company all such journey for the start-up ecosystem has turned the innovators to introduce more specialise fintech products.

In the past 2 years several Non-banks to enter the retail space. Most of them are aggressively using digital lending models and many new loan products have been introduced based on the requirement of the retail customer. In this article, we will cover the entire business aspects of fintech based NBFC.

Good Start to NBFC Regulations in 2019

Finance Act 2019 has entrusted to more Power to RBI to regulate, supervise and monitor the NBFC compliances, this will a game-changer for the industry and definitely, it will build a competitive business atmosphere so that trust of a financial institution, early-stage Investor and entrepreneur will increase.

The regulator has clear intent to benefit the community from the ease of credit facilities offered by the NBFC. In brief, RBI has power to remove directors in the NBFC, Auditors are now more accountable in NBFC. RBI is planning to introduce CRAR for NBFC Deposit-taking and Non-deposit taking.

Alternative Credit Scoring is Game Changer for NBFC

Fintech players have been aggressively using the alternative scoring model and this has led trust of venture capitalist towards the industry and we have seen a 48% increase in FDI FY18-19.  While traditional NBFCs is in crisis and unable to raise fund form Banks and also not able to attract venture fund in the business.

Fintech players have encouraged to transaction-based underwriting model and also using a variety of non-traditional data to evaluate credit risk and quickly able to verify borrowers and ability pay the loan. In the case of traditional lending only they look for past profits and loan servicing capacity of the borrowers. Alternative credit scoring is widely used for personal loans, consumer loans and small-ticket business loan.

Lending based on data from Mobile Phone

India rank 2 in World as Largest mobile phone users and every time mobile users make a phone call or receive calls from banks, send a text, receive SMS from Bank about banking transactions, SMS bank about the use of credit cards, reminder SMS from Bank/NBFC about Due / Overdue payments, also text SMS about the prepaid/postpaid utility bills recharge and expenses history, Travel history e.tc.

Fintech players can use the output of credit scoring to offer unsecured small size business or personal loan. Because of alternative data scoring, quick loan processing is possible.

Social media Social scoring a good tool for credit underwriting

Social media and search behavior of the user can be widely used as a data source for the credit underwriting using data collected from cookies, browser and prompt social login for processing of loan application, this can be used to determine the creditworthiness of its client. NBFC can also verify the number of social media accounts related to the user profile and activity in social media.

Regulatory View on Alternative credit scoring

RBI and Credit information company has been always keen to support the alternative credit scoring model to determine the creditworthiness of the borrowers unless such tolls do not violate the privacy norms of the borrowers.

RBI has introduced a new category of NBFC,  NBFC Account aggregator, this will replace the existing CIC, going Account Aggregator will provide more information about the creditworthiness of the borrowers both assets and liability statement with the consent of the borrowers.It recommends both NBFC and Banks to use a combination of both traditional and non-traditional data points for determining the creditworthiness of the business and individuals.

What is the Alternative Business Model for NBFC?

Traditional NBFC completely depends on the bank for fulfilling the fund requirement, due to recent assets liability mismatch by the bank has reduced leverage ratio to 4 from 7 or 8 times of the net owned fund.

On the other side Fintech, NBFC has been aggressively sourcing fund from debt issue or equity shares, however, due to huge expenditure over the technology and marketing in the fintech business, the alternative revenue model is required to compete with banks and large size NBFC. As a Start-up NBFC, you can opt for following an alternative business model for NBFC.

• Insurance web aggregator Business

Insurance Web Aggregators are also known as Insurance Intermediaries. They are web aggregator or you may say a portal which gives a platform to various insurance products for its buying & selling like Policybazaar or Coverfox. 

As an NBFC you can easily set-up a subsidiary company with Rs. 25 lac paid-up capital and apply for Insurance web aggregator license and As insurance intermediaries, you can earn 15% to 40% on Policy being sold from your platform. To start with the insurance web aggregator, you can start with small capital Rs. 25 lac.

As Fintech Start-up Insurance web aggregator is more popular than the Insurance broker. Liability of the founder is less in case of insurance web aggregator.

• Investment advisory services

Sale of Mutual funds Online is commonly followed practice by the small or medium size fintech company as you have sufficient client based on the website a part of the loan you can help them in investment planning services

Investment advisors are required to register with SEBI. As Investment advisory your margin 1% of Sale proceeds.

• Lead generation services or Direct selling agents for other NBFC and Banks

This model is very popular, in fintech loan business you can generate end number of leads because of strong digital presence and can generate leads for other NBFC and Banks and earn DSA commission from 1% to 5% of the loan amount.

• Work as Forex dealer or Full-fledged money changers

NBFC can apply for Full fledge money changer license and can engage In sale or purchase of forex. This is further an extension of the online presence of your digital presence and you can refer to clients about the sale or purchase of foreign currency. you can appoint franchise to sever the travel destination and metro cities.

• Market and Credit Linked Debentures

There is also a trend of new structured products such as Market and Credit Linked Debentures. In this system, the principal investment of the debenture holder is secured against. The interest will be paid at the time of maturity. The amount of Interest will be depended on the performance output of the linked index or stock.

• Tackling Align Assets-Liabilities Mismatch

The NBFC sector is more profitable in terms of unit operation economy as its costing is less. The new model of NBFCs is focused on reducing the mismatch between asset and liability of the entity. The new model came as an awakening after the NBFC crisis surfaced in the sector.The lending models are stricter on credit vigilance to ensure default rates are capped.

Harnessing the Role of Technology

The trending business model in the NBFC sector is ensuring to harness the power of technological advancements of the given times. The role of technology is not limited to the collection of data but also to segregate and analyze that data. The technology can be used to finalize the credit repo of the potential borrower.

Moreover, the Reserve bank of India has even issued notification Master Direction for addressing the information technology framework for the NBFC sector. The role of the framework is to enhance security and efficiency in transactions of the NBFC.

The technology of Artificial Intelligence and Machine learning are playing a catalyst role in the NBFC sector makeover. These technologies are playing an important role in making data-driven decisions. They also provide insights into customer’s behavior and buying patterns. This can ultimately help to develop a lending cycle pattern of the customer. These modern age tech-tools can help to build data capabilities to determine the kind of instruments that can be ideal for cross-selling or up-sell to the potential customers. The appropriate rate of EMI^[1] and the period of the lending cycle can also be determined.

Additionally, the whole benefit of using technological advancements in NBFC operations is to provide customer-centric services. The role of digital data collection and processing provides significant insights into the potential customer base. Information such as Income Tax Returns, GST Returns, MCA Returns, bank statements can be fetched from a single platform with customer consent. Further, technology integration in the lending cycle can also help in detecting fraud and loopholes in the process.

Conclusion

The NBFC sector is assimilating with the push of Digital India by adopting new technology in its business operations. Moreover, the use of alternative business models in NBFC is cost-effective and shows a higher success rate in comparison to their traditional counterparts. The use of Software-as-a-service (SaaS) and Blockchain technology is making ways for newer working models for NBFC to evolve in the near future.

Read our article:Annual Compliance of a Public Limited Company: Rules and Procedures