NBFC Collaboration: A Win-Win for Financial Innovation
The financial services industry is undergoing a metamorphosis. Traditional institutions like banks are embracing innovation, while nimble fintech startups are disrupting the landscape. In this dynamic environment, collaboration between fintech, banks, and NBFCs (Non-Banking Financial Companies) is emerging as a potent force for financial inclusion. This collaborative approach unlocks new possibilities for lenders and borrowers alike, expanding access to credit and financial services for a wider audience.
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Types of Collaboration
There are two main types of collaboration for NBFCs:
- Collaboration with Banks: This allows NBFCs to access additional funding and leverage the wider reach of banks.
- Collaboration with Fintech Companies: Fintech companies bring technological expertise and customer access to the table, helping NBFCs streamline processes and reach new customer segments.
Types of Collaboration
There are two main types of collaboration for NBFCs:
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With our VCFO team onboard for your NBFC, vcfo will update you with accounting and financial statement analysis and the monthly review on various concerns of Management.
Our Virtual CFOs are professional regarding RBI, MCA, FEMA, and other authority Compliances. Setting up and reviewing your compliance calendar is our VCFOs job.
By exploring all options to raise funds via external and domestic financial institutions, Securitization with Banks/NBFCs, Assignment of portfolios, Liasoning with FIs etc., Virtual CFOs will help you out.
Loan Agreements, Legal Agreements, MoUs, Structured Finance with Third Parties, Securitization Agreements with Banks/NBFCs. All you need is our VCFO to handle all these documents, and you are good to go.
The professional team of our Virtual CFOs doesn’t limit themselves to all those activities but are also keen on being responsive to the RBI notifications and updating those changes timely.
Models of Collaboration: Powering Financial Innovation
The fintech-bank-NBFC collaboration manifests through various models, each offering distinct advantages:
- Co-Lending Model: Banks and NBFCs collaborate to jointly finance loans, sharing risks and profits according to pre-defined agreements. Fintech companies can participate by offering credit assessment tools and taking on a portion of the initial loan defaults.
Risk and Profit Sharing:
- Interest Rate:
- Fixed Rate Loans: A single, blended interest rate is offered to the borrower based on the respective interest rates and risk-sharing proportions of each lender.
- Floating Rate Loans: A weighted average of the benchmark interest rates is offered, considering the contribution of each lender.
- Banks must comply with applicable regulations regarding interest rates.
- Credit Risk:
- NBFCs must retain a minimum of 20% of the loan risk.
- Banks take on the remaining 80% risk.
- NBFCs cannot use the bank’s funds to cover their portion of the risk.
Loan Management:
- Common Account:
- A shared escrow account is established by the bank and NBFC to pool funds for co-funded loans.
- These funds are dedicated solely to co-funded loans and cannot be used for other purposes.
- Borrower Accounts:
- Each borrower maintains a separate loan account.
- Combined Statements:
- Despite separate accounts, the bank and NBFC collaborate to provide the borrower with a single, combined statement reflecting the entire loan status.
- Interest Rate:
- Co-Lending Model: Banks and NBFCs collaborate to jointly finance loans, sharing risks and profits according to pre-defined agreements. Fintech companies can participate by offering credit assessment tools and taking on a portion of the initial loan defaults.
- Risk and Profit Sharing:
- Interest Rate:
-
-
- Fixed Rate Loans: A single, blended interest rate is offered to the borrower based on the respective interest rates and risk-sharing proportions of each lender.
- Floating Rate Loans: A weighted average of the benchmark interest rates is offered, considering the contribution of each lender.
- Banks must comply with applicable regulations regarding interest rates.
-
- Credit Risk:
-
- NBFCs must retain a minimum of 20% of the loan risk.
- Banks take on the remaining 80% risk.
- NBFCs cannot use the bank’s funds to cover their portion of the risk.
- Common Account:
-
-
- A shared escrow account is established by the bank and NBFC to pool funds for co-funded loans.
- These funds are dedicated solely to co-funded loans and cannot be used for other purposes.
-
- Borrower Accounts:
-
-
- Each borrower maintains a separate loan account.
-
- Combined Statements:
- Despite separate accounts, the bank and NBFC collaborate to provide the borrower with a single, combined statement reflecting the entire loan status.
- On Lending Model: Banks provide loans to NBFCs, who then use those funds to lend to their own customers. This model helps NBFCs expand their reach and access additional funding, while banks can meet their priority sector lending (PSL) targets.
- Process:
- Bank Loan: A bank grants a loan to an NBFC.
- NBFC On-lending: The NBFC utilizes the bank loan to provide financing to its borrowers.
- Repayment: The NBFC borrower repays the loan to the NBFC.
- Repayment to Bank: The NBFC uses the borrower’s repayments to service the loan from the bank.
- PSL Classification: Banks can potentially classify a portion of the loan to the NBFC as PSL credit, depending on the end use of the funds by the NBFC borrower and regulatory guidelines.
- Risk and Responsibility: The NBFC bears the credit risk associated with the loan they provide to their borrower. The bank’s risk is limited to the loan they extended to the NBFC.
- Regulations: On-lending may be subject to specific regulations set by the financial regulator (e.g., RBI in India) regarding loan amounts, eligible borrowers, and PSL classification criteria.
- NBFCs: Access additional funding, expand reach to new customer segments.
- FLDG Model: FLDG is a risk-sharing arrangement between a bank/NBFC (Regulated Entity or RE) and a Fintech company (Lending Service Provider or LSP). The LSP guarantees to cover a pre-determined portion of the initial losses incurred due to borrower defaults within a specific loan portfolio originated by the LSP for the RE.
- Structure:
- Loan Origination: The LSP identifies and assesses potential borrowers, originates loans, and onboards them onto the RE’s platform.
- FLDG Guarantee: The LSP provides a guarantee to the RE, typically capped at a certain percentage (e.g., 5% as per RBI guidelines in India) of the originated loan portfolio’s outstanding value.
- Loan Management: The RE manages loan servicing, collections, and potential defaults.
- Defaults: In case of borrower defaults, the LSP compensates the RE for a pre-agreed portion of the initial losses (up to the FLDG limit) within a specified timeframe (e.g., 120 days after default).
- Remaining Loss: The RE bears the remaining loss after the FLDG compensation is applied.
- Banks/NBFCs:
- Expand reach and access new customer segments, particularly those considered high-risk.
- Enhance portfolio diversification and potentially reduce overall credit risk.
- Fintech Companies:
- Gain access to a wider funding pool through partnerships with REs.
- Improve loan approval rates for their customers.
- FLDG arrangements are subject to specific regulatory guidelines set by the financial authority (e.g., RBI). These guidelines may outline limitations on the FLDG percentage, reporting requirements, and the nature of the guarantee (e.g., cash deposit, bank guarantee).
Conclusion
In conclusion, the collaboration between NBFCs, banks, and fintech companies is fostering a dynamic financial ecosystem that benefits both lenders and borrowers. By leveraging each other’s strengths, these institutions can expand access to credit, create innovative financial products, and promote financial inclusion for a wider audience. As the financial services industry continues to evolve, collaborative models like co-lending, on-lending, and FLDG are poised to play an increasingly important role in shaping the future of finance.
