Executive Summary – In the recent times, it has been witnessed that many fintech players in India have approached RBI for registration as a Non-Banking Financial Company (NBFC). Besides the primary purpose of using the technology for digital lending for their own captive purposes, the NBFC vehicle also gives an opportunity to the fintech to leverage the potential of mass outreach with digital only model of lending for small and medium ticket size loans.

 Needless to say, that India has the highest fintech adoption rate which is around 87% (as research indicate). Also, India with 2nd largest fintech base in the world has huge potential for any kind of regulatory integration which could be win-win for the entire ecosystem.

 Likewise, it is worthwhile to note that RBI recognizes NBFCs as an important pillar of the Indian financial ecosystem. However, we can also not undermine that post the IL&FS crisis, RBI has also tightened the regulatory regime covering specific areas such as corporate governance, liquidity management etc.

1)     Introduction

Before I start the discussion, let us see the above chart which outlines the three key areas of financial ecosystem which are very important for the growth of the economy:

The facts and figures are of mix bag. While the fintech growth rate is high and lending opportunities are getting utilized, RBI at the same time in recent past has cancelled large number of NBFC licenses due to non-compliance of regulatory norms such as non-maintenance of NOF etc.

More and more fintech are approaching RBI for NBFC license to avail the advantage of serving their own customers for loan requirement as well as target the larger customers base using the technology to serve the unserved base and off course with better margins.

2)     Key indicators why fintech look for NBFC Registration:

The first and the foremost reason for fintech to approach RBI is to get access of an Investment and Credit Company (ICC) license to be able to offer and built their own book for lending rather than dependent on few partner banks/NBFCs. This also give advantage in terms of sharing the margins. With this approach the customer needs are channelized better. I have been told that there are cities (tier 3 o 6) which are not catered by partner banks and thus having a self-sufficient lending arm as an NBFC is highly advantageous.

The second advantage for fintech to have NBFC license is to use technology features in lending space with “on the go” risk assessment and loan disbursement. There are advantages of cost of capital as well. Recently, RBI has issued many NBFC license on “Digital Only” mode NBFCs with more of digital footprint and less of physical model. Similarly, many NBFCs are working on “phygital” model which is a hybrid of traditional modes of branches with lot of technology specification.

The third reason for fintech is to collaborate with banks in co-lending arrangement as a partner rather than just facilitate as a technology service provider.

The fourth most relevant advantage is to disrupt the existing traditional NBFC using the advanced tech propositions and have a vast outreach and delivery channels.

The last but not the least reason could be the light touch regulatory regime by RBI when managing the NBFCs.

Never to forget, lending business has always been good in margins as compared to the payments or other financial services and thus, fintech would take this as an opportunity.

3)     Is this a viable option – from fintech to NBFC

While we have analysed the various reasons and advantages of having the NBFC license, let us also look factors which are genesis of such move by fintech. One thing which comes to my mind is the usage of consumer data and analytical tools for approaching prospective customers. Small ticket to medium ticket size loans are still not fully catered and addressed by Commercial Banks. Rather I would say, Banks are using fintech under collaboration for digital loan for mass outreach.

It is also said that the contribution of NBFCs to the overall balance sheet of banks is around 19% which is going to increase sustainably in future.

The quality of product, innovation and delivery strategy adopted by fintech are unparallel as well competitive to the existing set-ups. Hence, the advantage for customer for better customer centricity and experience.

4)     Conclusion:

As there are numerous advantages, likewise there are challenges for fintech to address such as availability of capital and issues relating to recovery mechanism.

It has also been seen that compliance to regulatory matters of RBI requires the professional who are thoroughly equipped. Finding out the right manpower also requires thorough engagement by fintech/NBFC.

To conclude, we can form a view that due to pandemic crisis there has been a lull in the overall movement of resources but as the market slowly opens us, there are immense opportunity to cater to the need of businesses such as MSMEs, Individuals in a post pandemic era.

At the end, we should also not forget the support which regulatory landscape provides for such business model where digitization is the fulcrum.

How Ananta can help?

Ananta Offers comprehensive advisory services for Incorporation, Acquisition and Compliances for NBFC. Ananta has been co-founded by team of experts with extensive experience with Banks and NBFCs.

 For further details, please contact Abhishek R Sharma at + 91 8928466952 or email at abhishek@anantafinance.com .

PS. The content of the article is written based on the industry research and personal professional experience.

(source of chart in the article – RBI, Industry research, publicly available reports on fintech/NBFC. Position as on basis)