NBFC or Non-Banking Financial Company is a company that is registered under the Companies Act,...
Since the IL&FS crisis, a strong RBI regulation has been put in place. However, relatively bigger NBFCs have been facing credit crunch for the last two years, whereas medium and small sized NBFCs have done well and are prepared to raise a reasonable amount of FDI for retail lending. There are number of NBFCs that require external stimulus to grow. Therefore the significance of NBFC collaboration is highly crucial.
Collaboration means coming together for shared goal. The collaboration of NBFC is a method where an existing NBFC license holder ties up with banks/fintech companies with a view to source leads and increase their funding. Both parties may or may not assume same % of NPA risk and share revenue. Recently many NBFCs have partnered with banks and fintech companies that can help them to boost funds and onboard clients.
NBFC collaboration has met success by utilizing loan products and fast disbursement of loans with the use of cutting edge technologies and financial tools.
NBFC, before collaborating with an entity, conducts a background check of the fintech companies to know its financial capacity and its promoters’ profile. When collaborating with a foreign fintech company conducting background check becomes more important. Required due diligence should be conducted before signing collaboration agreements.
Some of the collaboration models for NBFCs with other entities are as follows:
In this, the fintech company provides the information and tools for decision making, thereby ensuring quick loan processing to the NBFC. Those fintech companies that work in this collaboration perform according to the First Loan Default Guarantee model. It helps in guarding lenders’ interest in the NBFC. Lenders invite collaterals to protect advances made through the Fintech Company. This model works through the escrow account.
In lend-based model, fintech company sources lead and provide technological underwriting with the risk assessment tools. NBFC pays the commission to the fintech in 1-3% range of loan amount for leads and tool maintenance.
The RBI had issued a notification on co-lending model to be incorporated among banks and NBFCs during collaboration. It was issued in November last year.
The main objective is to provide the collaboration among banks and NBFCs in lending within the priority sector of the market. The notification was issued with a view to streamline the processing of loans for easy disbursal to lenders in various sectors. This notification is the point of co-origination for loans brought out by various banks and NBFCs to priority sector.
The process is as follows:
NBFC collaboration with the fintech and such other financial entities can ensure stability to the existing NBFC market. As stated at the start of this article, there are a number of NBFCs that have been facing credit crunch since last few years. Collaboration can ensure revival of such NBFCs through the technical assistance offered by Fintechs. The future of such collaboration may be positive and may help the NBFCs, which are plying low.
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