NBFC Collaboration

Collaboration of two entities has always been a significant concept, which brings a wide range of benefits along with it such technological up-gradation, skilled team of professionals, more growth and innovation. Similarly, NBFC is also adopting the idea of collaborating with financial companies or banks with the aim of expanding financial integration.

NBFC is incorporated under the Companies Act and its activities are governed by RBI. Banks are incorporated and regulated as per the Banking Regulation Act. Both perform financial activities as their primary business operations yet they are dissimilar to each other. Some differences between them are:

• NBFC is incorporated under the Company Act and banks are incorporated under the Banking Regulation Act,
• Banks can accept demand deposits, whereas NBFC cannot accept demand deposits,
• NBFC cannot issue cheques drawn on its own or Demand Drafts like Banks,
• NBFC does not form part of the payment and settlement system,
• The facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs.

Financial Institutions are major players who structure the Indian Financial System. On the other hand, NBFC’s are also contributing to financial markets under RBI regulations. Where the two Financial Institutions and NBFC’s will join hands, it can lead to an increase in more innovative ideas to enhance banking outreach. Thus, the NBFC’s are collaborating with banks and Fintech companies as a part of a common goal of increasing their productivity and growing funds. 

Collaboration Models:

Co-Lending Model

Under this model, a bank and an NBFC share the risks and rewards by entering into a tripartite agreement between the Banks, NBFC, and the customer. Here, the Bank and the NBFC originate a loan jointly in their respective names.

This model was set up to provide credit flow to unserved/underserved sections at an affordable cost. Here, lenders are also required to disclose all the details to customers beforehand and take consent from them. Also, customer grievances must be resolved by co-lenders within the specified time limit. These transactions work through an escrow account maintained with the bank. 

Lead-Based Model

Under this model, the Fintech company provides lead and supply advanced tech-driven underwriting with risk assessment tools. And NBFC pays commission ranging from 1% to 3% of Loan Amount to Fintech.

NBFC Collaboration Process with Fintech Companies:

• The signing of Co-origination scheme Agreements between Fintech Companies and NBFCs
• Inter-corporate deposit agreement with Fund Manager to be signed by Fintech Company.
• Platform service agreement for payment of technological services provided by the Fintech company to be signed by NBFC.
• Opening of Escrow Account (for handling Disbursement and Repayment services).
• Appointment with the fund manager to manage the Escrow Account.
• Fulfillment of statutory compliance by both parties such as GST, TDS, CKYC, Credit Reporting, etc.
• NBFC must follow the guidelines for NPAs (prescribed as 45/90 Days).
• Monthly reconciliation by both parties
• CIC reporting by both parties.

Amongst various benefits, the collaboration of NBFC’s and Fintech Companies can help in accessing better and advanced technology, easy market reach, and availability of better and advanced products to the ultimate consumer.