India has over 9000 NBFC but only 954 companies have a book size in excess of 40 crores. Most of the NBFCs only have the minimum required book size of 2 crores. This makes NBFC collaboration necessary as it will accentuate growth for both NBFC and the partner firm. In the NBFC collaboration model, NBFC license holder companies collaborate with FinTechs or banks to source leads and additional funds for lending. Both parties can get into an agreement to share their revenues or sometimes even the NPAs.
The large NBFCs in India are going through a crisis since 2019 and facing stiff competition from small and medium-size NBFCs who are doing well. Therefore many large NBFCs are looking to partner with FinTech firms and banks to raise funds/acquire more leads.
NBFCs should verify the background of the financial strength of the collaborating FinTech with a promoter’s profile check. This is essential especially when collaborating with a foreign FinTech Company. The NBFCs can follow the following models for collaboration.
In this model, the FinTech company supplies the necessary decision-making tools and data to the NBFC for quick processing of loans. The FinTechs in this type of collaboration work with an escrow account and FLDG (First Loss Default Guarantee) Model. The FLDG of FinTech is generally set at 70% with the remaining part-financed by NBFC, the shares on ROI for Futech is generally between 24 to 36% and they cover 100% expense and NPA.
Here, the FinTechs are responsible for sharing advance risk assessment Softwares with NBFCs and sourcing them leads. In turn, the NBFCs pay commission to the FinTech in the range of 1 to 3%.
In this model, the interest of the NBFCs for protection from NPAs is guaranteed by asking collaterals. This model safeguards the NBFC making its advancement through the FinTech company.
The FinTech company provides advance technical support and funds to the NBFC, the FinTechs also source leads in some collaboration models and provide FLDG for the same. They are responsible for running marketing campaigns for NBFC to increase their business. The funds transferred by FinTech are deposited with the fund managers as FLDG, this fund is later deposited by the fund manager in NBFC as the Inter Corporate deposits. FinTech also offers collection services to the NBFC.
A consulting legal and financial assistant provider company with CA or a lawyer should manage the funds associated with FinTech and NBFC as per the collaboration agreement. This financial/legal firm will charge a service fee from the collaborator.
The NBFC will be responsible for lending money to the leads generated by FinTech and processing the loans. They will also work with the risk assessment data provided by the FinTech to reduce their risks in lending. In turn, they will share their profit with the collaborating FinTech. A certain percentage of the profit is kept by the NBFC as part of the risk assessment service.
Compliance Requirement For FinTech
Technological Requirement For FinTechs
Muds Management assists collaborators in devising an MoU and collaboration agreement. We provide end to end services and sort all queries of our partners. We also offer business collaboration plans for FinTechs and NBFCs to enhance growth and revenue.
The main purpose of NBFC collaboration is to boost funding and get access to new technologies like AI, Machine learning, and Big Data by collaborates with fintech companies.
NBFC collaboration is mentioned as a process where NBFCs tie-ups with big banks or Fintech companies to boost funding or getting technologically advanced.
The various ways for Fintech-NBFC Collaboration are:
NBFC must open a separate account to meet the aim of providing loans. Besides, a separate account is mandatory to meet the standards of the Companies Act 2013.
The Fintech-Led Model specifies that it is a setup where Fintech Company and NBFC join hands through First Loss Default Guarantee cover.