Online NBFCs – Recent Trends and Players
What are NBFCs?
NBFCs full form is Non-Banking Financial Company and it refers to a company that has been registered under the Companies Act, 1956. These companies after NBFC registration engage in the business of loans and advances, acquisition of shares, stocks, bonds, debentures and securities.
The Investopedia defines NBFC thus, “Nonbank financial companies (NBFCs), also known as nonbank financial institutions (NBFIs) are financial institutions that offer various banking services but do not have a banking license. Generally, these institutions are not allowed to take traditional demand deposits—readily available funds, such as those in checking or savings accounts—from the public.”
These entities after undergoing NBFC incorporation procedure successfully are entitled to provide bank-like financial services but do not hold a banking license. Therefore, the NBFCs are not bound by the banking regulations and oversight to which the traditional banks have to adhere. NBFC registration is done by the RBI and is regulated by the Ministry of Corporate Affairs and the Reserve Bank of India.
Growth of NBFCs in India
Non-banking financial companies (NBFCs) play a pivotal role in the Indian financial system and have taken a great leap in the last 15 years. These financial entities after seeking NBFC registration have penetrated the remote areas of the country and offer credit facilities to those millions of individuals and small firms which generally are ignored by the banks.
Finance, that has rightly been termed as ‘driving force of business’ is short in supply for many people- startups, small firms and individuals as they are not able to satisfy tough conditions set by the banks.
The companies after fulfilling NBFC incorporation procedure have witnessed a robust growth rate as they come to the rescue of such people and companies, especially in small towns and remote areas, and given them a lifeline.
As per a study conducted by the Microfinance Institutions Network (MFIN) the gross loan portfolio (GLP) has witnessed growth of 47.85 percent in the quarter ended September 30, 2019. The report highlights that compared to that of Rs 1.36 lakh crore in the same quarter in 2018 it has risen to Rs 2.01 lakh crore in 2019.
Out of this a loan amount outstanding of Rs 62,960 crore that amounts as the second highest was provided by the NBFCs and Microfinance institutions, accounting for 31 per cent to the total industry portfolio.
The study by MFIN also states that NBFC-MFIs have witnessed a very impressive growth of 17 percent over the last fiscal and now cover 601 districts of 35 states and union territories in India.
Rise of Online NBFCs
With a high growth rate every year, there are many ways in which internet has affected the financial services sector including the NBFCs in India. To differentiate their services and gain advantage over the rising competition, the Non-Banking Financial Companies (NBFC) are trying to provide their services online to the customers. This is one of the factors for which India’s NBFC sector is experiencing rapidly.
NBFCs are undergoing a great technological innovation and revolution to disrupt how financial services have been made available to individuals, businesses and entrepreneurs. By taking the help of Software-as-a -service (SaaS) startups, NBFCs are adopting newer technology into their systems, especially in the light of the government’s push for digitisation
SaaS companies operate on a business model that offer software solutions over the internet, charging their customers based on the usage of the software. With the country’s financial solutions going online, NBFCs are turning to software providers for transition. Services such as credit score analysis; loan process automation and fraud detection through software are already on offer by different kinds of SaaS companies such as online lending platforms, financial marketplace and data analytics startups.
By catering to the needs of the emerging digital landscape, India’s leading NBFCs are taking timely and positive steps ‘to be online’, that is, to digitalise their lending processes – for both, business and retail lending.
As these NBFCs show disruptive digital trends, or inclinations towards adapting the digital modes, the corporate sector is also playing a significant role, by helping these NBFCs in adapting tech-driven innovations. There are leading brands that have been helping the NBFCs transform their lending processes by providing new-age digital first lending systems, and converting them into what is called Online NBFCs. Backed by investors, and armed with robust technologies, a raft of online NBFC consumer lending portals has already mushroomed recently..
“Investors feel that the vacuum left by the traditional banks in terms of not meeting the financial needs of consumers satisfactorily has led to the proliferation of such startups.”
– Isha Malik (Company Secretary, MUDS Management Pvt Ltd)
In other words, these Financial Technology NBFCs are replacing the traditional banking channels by making financial products and services more accessible and convenient to consumers who have been ignored by banks.
Borrowers prefer the online NBFCs over banks as the former have faster decision-making capabilities, prompt services, and expertise in niche segments. They are more technologically advanced too. With the help of technology, customers are better able to transact just the way they want.
Digitalising the loan process not only helps the NBFC achieve faster processing time and improve productivity but also serve as ‘value addition’ to today’s tech-savvy generation who prefer digital mediums over the traditional ones.
Technology also allows NBFCs to tailor make products and customise services. They can send out well targeted automated messages, provide more personal access to customers and provide more efficient service. Investing in new technologies also allow NBFCs to lower their cost whether it is increasing their customer base, servicing existing customers or de-risking the portfolio while trying to overcome the increasing formal credit penetration in a growing economy.
The Online NBFCs partner with merchant aggregators, and offer small digital loans to micro-entrepreneurs, starting from as low as Rs 2000 for as short as 30 days. These loans are 100 per cent digital and require zero physical documentation.
The Key Advantages of Online NBFC are:
- Branchless operations to increase reach in market and reduction in operating cost
- Dealer based solution helps in expansion of business
- Automated End to End loan management
- Analytics to find cross selling and up selling opportunities
- Agility- to quickly accommodate customer’s requirements and customization
The Online/Fintech NBFC – NBFC with the Business model of FinTech – are agiler and significantly improve and ease the lending method.
Latest Digital Trends in NBFCs
The new age non-bank lenders i.e. the NBFCs, after fulfilling NBFC incorporation procedure, are focusing on processes and models driven by superior technology. The sector has witnessed a huge surge of technological revolution as more and more companies have started adopting them.
To keep up with the current market environment, it is essential that the NBFCs are aware of the newer technological trends and take advantage of them.
a)AI – Driven Predictive Financing
Artificial Intelligence has brought about a big beneficial change in the financing industry as with its help they can now consolidate all internal and external data, build predictive profiles of customers and members in real time. Thus, with a consumer data that is rich, accessible and financially viable to deploy, the non-banking financial institutions are not only able to know their customers, but also provide advice for the future.
b) Voice & Vernacular – The Next frontier
In the list of upcoming trends applications-voice in digital payments will play an important role, as it will be further enabled by different Indian languages. This will help the NBFCs in a big way in reaching the next set of users who are new to the internet and Voice will certainly make experiences more interactive and help reach the masses.
c) Video KYC – a great enabler
Video KYC is a feature that will soon become the future of identity verification as no other solution has come this close to eliminating identity fraud online. This will help benefit Online NBFCs in a big way.
d) Blockchain – The Game changer
By introducing blockchain solutions in functions such as the KYC process, data can be made available on a decentralised network and therefore, can be easily accessed by third parties directly after permission has been granted. The online NBFCs are able to benefit greatly from this.
e) Cloud Integration – bringing in Ease and Efficiency
Cloud computing has helped NBFCs in creating a flexible business model that fulfills growing business needs. Some of the prominent advantages of cloud services are lower costs, quick implementation, and near-universal availability.
f) Automation – Actualizing Speedy Outcomes
Another important future innovation which has strongly impacted the functioning of NBFCs is the power of Automation. It is a technology that helps in speeding up the lending processes and facilitates consistency in decisions.
g) Chatbots & Robo-Advisors
Some of the NBFCs have already employed chatbots and robo-advisors that interact with prospects and customers for self-onboarding of the customer, customer servicing and employee-related services. Most of these chatbots and robo-advisors have been developed with vernacular capabilities, making them well-suited for rural and semi-urban India and thus, the entire process of availing various financial services by masses has become much easier and hassle-free.
h) Biometrics – Fingerprint, Face & Iris Recognition
Last but not the least, through biometric-based authentication, the NBFCs is able to uniquely identify an individual by evaluating one or more of his/her distinguishing biological traits- like their fingerprints, voice waves, or retina and iris patterns. For customer’s KYC authentication, the financial entities use either the fingerprints or iris patterns of an individual to authenticate their identities.
“If you are a new entrant to the Indian market and planning to innovate in the online fin-tech market, your business is going to be faster, more automated and optimized.”
– Shweta Gupta, Founder and CEO, MUDS
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