What is NBFC Collaboration?
Collaboration means coming together for a common goal, India has more than 9000+ active NBFC license but hardly 954 NBFC has book size more than 40 crores. Rest 8046+ NBFC are only able to meet the regulatory cap of the loan book of INR 20 Million. NBFC Collaboration is a new business term in which NBFC License holders do tie-ups with banks/ Fintech companies for sourcing of leads and funding. Both parties may or not assumesome amount of NPA risk and share revenue with each other. With strong RBI regulation the traditional big Size NBFC has been facing liquidity crisis in 2019, however mid-size and small size NBFC has been doing well and able to raise a good amount of FDI for retail lending. The large number of NBFCs partnering with banks and Fintech companies to explore economical ways to raise funds and acquire clients. In NBFC Collaborations, NBFC with exposure at least 20% of loan books and remaining loan book amount shall be funded by the Bank or Fintech Company at the agreed interest rate. NBFC Collaboration is very successful if there are innovative loan products and quick disbursement of loan by use of the latest technology
NBFC Collaboration Process with Fintech company
- Fintech Company and NBFC Company will require to sign Co-origination scheme Agreements
- Fintech Company will require to Sign (Inter-corporate deposit agreements) with a Fund Manager
- NBFC will require to sign a platform service agreement for the payment of technology services by the Fintech company
- Open Escrow Account – (a Separate Escrow Account for Disbursement and Re-Payment)
- Need to Appoint a Chartered Accountant for the management of Fund and Operations of the Escrow Account
- Close Watch over Compliance (GST, TDS, CKYC, Credit Reporting, etc.)
- NBFC Should follow 45/90 Days NPA Provisioning norms
- Monthly reconciliation and CIC Reporting
Should NBFC also Look at Balance sheet of Such Fintech or FLDG (First Loss Default Guarantee) sufficient?
NBFC should look for the background of Fintech companies as well its financial strength and its promotors profile, especially in case of Foreign Fintech company, Necessary due diligence should be conducted before signature on NBFC collaboration Agreements. As a source of the fund invested Via ICD routes must be the tax paid and necessary compliance must be followed by the fin-tech companies.
Lead Based Model
In this Model Fintech company source leads and provide advance tech driven underwriting and risk assessment software. NBFC usually pays commission to Fintech in range of 1% to 3% of Loan Amount.
in this model Fintech company provides the necessary information and decision-making tools for quick loan processing by the NBFC. Fintech Companies are working on FLDG model Via a dedicated Escrow Account. FLDG Maybe Up to 70% and Remaining 30% Loan book financed by the NBFC from its fund. Fintech company shares 24% to 36% ROI with NBFC. Also, Fintech company covers 100% NPA & Expense.
Fintech Led 100% ICD Route
In this model 100% Loan book financed by the Fintech company via ICD/OCD Route. In the last few months, a large number of Fintech Companies has preferred to work via this route. In this Model, NBFC earns 1% to 2% of Loan Amount disbursed in a month. Fintech covers 100% NPA and All Expenses Associated with the loan portfolio. The Entire flow of fund whether ICD or Loan disbursement or loan re-payment is done thru the escrow account.
Working Flow of NBFC Collaboration Business Model
Fintech Company (Funder) - 1
Will Provide FLDG & Fund❮
Will Collect fund from Funder & will lnfuse in NBFC❮
NBFC (Retail Lender) (3)
Will do retail lending and will Share Revenue Fintech co.
A Fintech Company may or not a foreign subsidiary ready with Technology and underwriting and Risk Model. Fintech company will source leads from an online and offline marketing campaign. Fintech company will require to give a sufficient amount of Deposits to the fund manager as FLDG. Fund Manager will infuse fund in NBFC As Inter-corporate deposits.
Fintech company will render collection services to the NBFC.
A consulting company, CA or Lawyer, knowing law and finance, shall manage the fund as per the instructions from fin-tech company and will charge a service fee from Fintech company
an NBFC, Regulated by RBI act, will do loan disbursement and underwriting. The Fintech company will share a list of borrowers interested in various loan products and NBFC will be disbursed after risk assessment. NBF will keep Certain % of Revenue for Risk assessment services and loan management, Balance profit shall be shared with Fintech company as Agreed.
Fintech ICD Partner Process Matrix
Loan Flow Example
Minimum Required Technology With Fintech Company
- Mobile App Should be ready as per Indian Market
- Loan origination system, Loan management system, Collection system must be ready
- Credit and underwriting software should be owned by the Fintech company
- Fintech company should have sufficient IT Security so that the personal information of the Borrowers cannot be misused
- Loan App should be able to integrate the various APIs but not limited to Aadhar, PAN, Driver license
- Live Borrowers Profile Verification should be there
- Income check process should be followed by bank statement analysis
- The face of Borrowers must be matched to ID Submitted online
- Online Verification of Employment Profile
- Privacy norms as of Law of India must be followed in case use of Social scoring technology
- The server must be in India. Fintech company will require a share certificate in this regard.
What is the compliance requirement of the Fintech Company?
- Fintech Company can give any loan or any guarantee through board resolution up to 60% of its paid-up capital and 100% of its free reserves and security premium, whichever is more.
- Under exception after Members, Approval can give loan up to 100% of Its Paid-up Capital (Please read complete ICD Guidelines)
- Fintech Company must pay GST on Loan Processing fees, In Normal practice Processing fees is inclusive of GST.
- Fintech Company should comply with ECB guidelines in case foreign fund has been raised as debt/Loan.Read more about New ECB Norms for NBFC
What is the Compliance requirement for the NBFC?
- Online Verification of ID, PAN Card, Aadhar of the borrowers
- Store Data of the borrowers for 5 Years.
- Capture Live Picture of the borrowers
- Pay E-Stamp Duty on Execution of the Loan Agreements
- Report to Credit information Companies when loan inquiry, Disbursement, Delay or default
- Comply with CKYC Norms as Prescribed the RBI.
- Comply with GST, TDS, Companies Act, and RBI Act.
- Appoint a CA for surprise check and Audit of the Fintech company to assess the business risk
- Make Provision for NPA based on 45 days or 90 days Loan book performance norms
If you have any questions or concerns regarding NBFC collaboration model, or looking for tie-ups with NBFC, please send your business profile at firstname.lastname@example.org. Further, if you need clarification then we will be happy to send over the appropriate materials at a time of our earliest convenience, or to set up a meeting for us to discuss an appropriate course of action for your concerns.