Finezza Blog

Our Thoughts on Simplifying Lending Lending Lifecycle Management and Fintech in India

Can Co-Lending Be the Catalyst for the Resurgence of India’s MSME Sector?

Lending Lifecycle Management

The Micro, Small, and Medium Enterprises (MSME) sector contributes significantly to India’s growth trajectory, provides resilience to the economy, and generates a substantial number of jobs.

A total of 633.9 lakh MSMEs employed 93,94,957 people in the financial year 2022, as per IBEF. The sector has played a vital role in generating employment in rural and remote parts of the country. Their contribution to the Gross Value Added (GVA) in India’s GDP in FY 20 was 30%.

The above numbers underscore the contribution and importance of MSMEs. However, despite that, the sector faces many challenges, lack of easy availability of credit is one of them.

Co-lending model (CLM) offers a solution to this problem and can be instrumental in the resurgence of this sector. In this blog, let us explore the topic in detail.

Co-lending: Overview And Background

Co-lending or co-origination is a model where banks and non-banks come together to meet the credit needs of the underserved and unserved by extending credit to them jointly and sharing risk.

Banks and Non-Banking Finance Companies, NBFCs share the risk and rewards in the participation ratio. As per RBI guidelines, 80 percent of the loan reflects in the bank’s books, while the remaining 20 percent is in the NBFCs’ books.

The partnership allows NBFCs to source clients, perform credit appraisals and disburse a small part of the loan amount. Simultaneously, the arrangement enables a bank to lend out more funds to priority sectors and have a greater reach.

The Core of the Co-lending Model: Synergy and Agility

Therefore, the co-lending model synergises the strengths of banks and NBFCs; banks leverage their balance sheets while NBFCs can use their distribution network to provide loans to the MSMEs.

NBFCs specialise in underwriting micro, small and medium enterprises due to their in-depth knowledge of the local ecosystem and better credit assessment procedures.

How Will Co-lending Contribute to the Resurgence of MSMEs?

Co-origination of loans benefits all participants of the arrangement and the economy as a whole. Micro and Small Enterprises contribute to around 95% of the overall credit gap; the co-lending model can help revitalise the MSME sector by bridging this gap.

Here are 4 ways in which the model would impact the sector:

1. Co-lending Improves Credit Accessibility and Aids Financial Inclusion

Co-lending brings about transformation at the grass-root level and provides credit to MSMEs who traditionally do not qualify for a loan. Small businesses without credit history struggle to get loans from traditional banks. Banks are hesitant to lend to MSMEs; due to a lack of significant presence in remote parts, making credit assessment and collections a challenge.

Partnering with NBFCs allows banks to utilise NBFCs’ network and their ability to manage and spot risks. NBFCs, with their feet-on-street network and a structured approach to lending, make it less risky for banks to lend to MSMEs.

Thus, co-lending helps banks reach a larger pool of borrowers and NBFCs in scaling operations. Aided by technology, the model makes credit more accessible for MSMEs and drives financial inclusion.

2. Unlocks Dormant Funds

As per reports, only Rs 20 trillion is available against a credit demand of Rs 40-45 trillion from the MSME sector through the formal banking system. Despite structural reforms and policy changes by the government to increase credit to the MSME sector, the gap remains high.

RBI’s co-lending model proposed tackles this issue. The public sector banks (PSBs) dominate many of India’s liquidity reserves. Tapping into this liquidity with NBFCs as the front can infuse liquidity into the economy and increase credit availability for MSMEs. Subsequently, banks become more open to lending to MSMEs, leveraging the better reach and credit assessment capabilities of NBFCs, resulting in increased credit flow to MSMEs.

Co-origination of loans has been instrumental in unlocking dormancy by making small ticket loans economically viable for large lenders.

3. Co-lending Reduces Borrowing Cost

 

Co-lending aids the MSME sector growth by providing them with affordable credit.

Technology-driven CLM reduces the cost of customer acquisition and loan processing. Automating the loan origination process helps banks and NBFCs reduce operational costs and pass on benefits through lowered interest rates.

Additionally, the lower cost of funds due to the participation of banks, which house 80% of the loan, reduces the entire lending cost. The lower cost of funds and processing trickles down as a reduced cost of capital for MSMEs.

More and more banks are tying up with NBFCs, and one bank may have multiple co-lending partners giving MSME more options to choose the most affordable solution.

4. Ensures Credit Availability on Time

Technology platforms have not only contributed to the growth of co-lending in India, but they are also essential for its smooth functioning.

With the help of automation and decision-making tools, lenders can process a larger number of applications and disburse more loans in a shorter span. Artificial intelligence and machine learning help banks make quicker decisions, accelerating the processing time and ensuring customers get credit on time.

MSMEs also benefit from the technology-enabled co-lending process, which improves the turnaround time and higher efficiency in processing loans.

Key Takeaway

Co-lending is a symbiotic relationship that helps banks and NBFCs benefit from each other’s strengths. MSMEs benefit from increased and improved access to credit at affordable rates, which can enhance their growth potential.

Banks and NBFCs need efficient solutions to ensure smooth functioning and a streamlined disbursal of loans to their customers.

Finezza’s Loan Management System is designed to be compatible with the co-lending model and offers numerous advantages like flexibility, agility, and efficient loan management.

Find out more about the intelligent solutions offered by us.

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Digital Lending: Managing AML and KYC in 2023

Lending Lifecycle Management

The global digital lending market is expected to grow exponentially in the coming years. The increasing demand for financial services and the rising adoption of digital solutions in traditional banking and lending services drive this growth.

Data Bridge Market Research shows that the digital lending market is expected to reach USD 69937 million by 2029, at a CAGR of 19.4% from 2022 to 2029.

The benefits provided by digital lending platforms, such as improved loan optimisation, faster decision-making, compliance with regulations and rules, and improved business efficiency, are expected to drive market growth.

But along with the growth, there are various challenges that digital lenders must address to ensure that their operations are compliant with Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations.

The article explains the importance of KYC and AML compliance management for digital lenders, and we learn how this can be achieved.

What Are AML and KYC and Their Use in Digital Lending?

AML is a set of procedures, laws, and regulations designed to detect, prevent, and report suspicious financial activity. KYC is a process that requires financial institutions to verify the identity and background of customers before onboarding them.

Digital lenders use AML and KYC to protect themselves and their customers, minimising financial crime risk. For example:

  • AML helps to detect and prevent money laundering and other financial crimes by identifying suspicious activity, such as large or suspicious transactions, and tracking the source of funds.
  • KYC helps to verify the identity of customers, ensuring that they are who they say they are and that they are not involved in any illegal activities.

Together, AML and KYC help to protect the lender and the customer, ensuring that the customer is legitimate and the funds are being used for legitimate purposes.

5 Major Challenges in Managing ALM and KYC

AML and KYC processes are crucial to ensure compliance with anti-money laundering directives. However, many digital lending companies inadequately use their time and resources, creating ineffective AML and KYC processes.

Some common challenges they face are listed below:

1. High Cost of Compliance

Digital lenders must invest significant resources to comply with AML and KYC regulations. This includes hiring compliance personnel, maintaining necessary technological infrastructure, and investing in third-party services.

2. Complex Regulatory Requirements

AML and KYC regulations are constantly changing, and digital lenders must stay up to date with the latest requirements. It can be a difficult task, especially for smaller digital lenders.

3. Data Protection

Another critical requirement for digital lenders is securely storing and processing data. This is especially important regarding KYC and anti-money laundering data, which are highly sensitive.

4. Lack of Resources

Many digital lenders lack the resources to manage AML and KYC compliance properly. It may lead to inadequate compliance and possible penalties for non-compliance.

5. Fraud Risk

Digital lenders must take measures to protect against fraud and money laundering. This requires a comprehensive AML and KYC compliance programme that can detect and prevent suspicious activities.

7 Ways to Comply With AML and KYC Regulations as a Digital Lender

AML and KYC regulations protect against financial crime, including money laundering, terrorist financing, and other financial fraud. To prevent financial crime from occurring, digital lenders need to ensure their processes are compliant with these regulations.

They can consider several factors, including the following:

1. Risk-based approach

They must adopt a risk-based approach to customer onboarding and ongoing monitoring. This includes conducting identity verification, customer risk profiling, and transaction monitoring.

Identity verification ensures that the customer is who they say they are, while customer risk profiling assesses the customer’s risk profile.

2. Employing AI and ML

Digital lenders should also employ advanced technologies like artificial intelligence (AI) and machine learning (ML). AI and ML can help automate customer onboarding and ongoing monitoring processes, making them more efficient and accurate.

3. Focus on Data Security

Digital lenders must also ensure that their data security measures are up to date. This includes using secure, encrypted communication channels and robust authentication methods like biometrics.

4. Transaction monitoring

Digital lenders must monitor their customers’ transactions to detect any potential money laundering activity, which may include suspicious transaction patterns or transactions that involve high-risk countries so that they can detect potential money laundering activities.

5. Customer due diligence

A digital lenders should ensure they perform appropriate diligence on their customers to accurately verify their identities and have evidence of beneficial ownership of their accounts. High-risk customers should have enhanced due diligence measures applied to them as a result of these diligence measures.

6. Utilise Advanced Analytics

By analysing customer data, advanced analytics can help digital lenders detect fraudulent activity and money laundering. These analytics can also help digital lenders better understand customer behaviour and predict future risks accurately.

7. Monitor Changes in Regulations

Digital lenders need to stay up-to-date with changing KYC and AML regulations. This can help ensure their processes always comply with the latest regulatory guidelines.

Final thoughts

In 2023, Digital lenders must follow these steps to provide complete security to their customers. It will mitigate financial crime risks and ensure its operations comply with AML and KYC regulations.

A fintech software that automates the loan origination process ensuring any fraudulent activity is detected early can help in thorough compliance.

We at Finezza offer a service that can help you accelerate the time it takes to process KYC documents, which enables easy extraction of information such as faces, names, numbers, addresses, transactions, and more from images of your KYC documents in real-time.

As a provider of document identification and data extraction solutions, we help to facilitate the tagging of all data points and the automatic validation of the documents that are submitted.

We also offer a loan management system that helps our customers with the automatic verification of documents and easy integration with APIs.

Connect with us today!

Changes in Supply Chain Financing Disclosures: Everything You Need To Know

Supply Chain Financing

Supply chain financing (SCF) is a funding solution that uses innovative technologies to help manage cash flows and address liquidity constraints insu international trade. The World Trade Organization (WTO) estimates that between 80% and 90% of global trade is backed by some kind of short-term trade finance. 

Global supply chains are yet to be fully restored following the impact of Covid-19. The disruptions are further exacerbated by the ongoing military conflict in eastern Europe. 

In this unpredictable scenario, supply chain financing has indeed become a reliable solution for small and medium businesses to improve their working capital position and help them scale operations. 

To improve transparency in the SCF processes, the Financial Accounting Standards Board (FASB), USA, in late September 2022, issued an Accounting Standards Update (ASU) on the use of supply finance programmes. The updates became effective for the fiscal years starting after 15th December 2022.

This blog post delves into the specifics of this update, the context for its introduction, and its implications for the supply chain finance market. 

What Rules Apply to Supply Chain Financing Disclosures?

FASB’s new disclosure requirements were formulated in response to requests from industry stakeholders and investors for greater transparency regarding buyers’ use of supply chain financing facilities. 

Under the updates, buyer firms need to disclose qualitative and quantitative information regarding their supply chain financing programmes. 

The buyer must disclose the following information during each annual reporting period:

  1. Key conditions of the SCF programme, including payment terms, guarantees provided, and assets pledged to financiers for securing such facilities.
  2. For invoices confirmed as valid by the buyer to banks and financial intermediaries-
  1. The outstanding amount is due by the buyer at the end of the annual period.
  1. b) A description of how such outstanding dues are shown on the balance sheet.
  2. c) A roll-forward of such outstanding payables during the fiscal period. This must include the total amount of liabilities confirmed as well as the amount eventually paid for the obligations.

Also, at the end of each interim period, buyers must disclose the total amount of outstanding obligations they have confirmed as valid to the financier during that interim reporting period.

The Rationale Behind New Disclosure Requirements

Financial analysts and accounting professionals have long expressed concerns about the opacity of supply chain finance programmes and ambiguity in presenting SCF obligations in financial statements. 

Also, some critics of SCF were doubtful about struggling businesses using supply chain finance facilities to camouflage debts as trades payable. 

The following three reasons justify the change in SCF disclosures.

  • Lengthy payment terms

Buyer firms in certain industries were using supply chain finance programmes to extend their credit periods with their suppliers while providing them with early payment convenience. 

Investors and other accounting analysts, such as auditors, sought to better understand buyers’ usage of SCF programmes to assess working capital sources and the possible risks due to extended payment terms with suppliers.

  • Ambiguity regarding the balance sheet reporting of SCF obligations 

There is no general agreement on accounting for outstanding obligations under supply chain financing in financial statements. Some accountants and analysts believe SCF programme obligations should be reported as short-term debts or as a separate line item in the balance sheets rather than accounts payable. 

Furthermore, while some stakeholders prefer a separate presentation for all such obligations, others argue that only a subset of such obligations requires separate reporting. 

Because of this ambiguity, uniform guidelines for SCF presentation in balance sheets were required.

  • Lack of precise GAAP disclosure requirements regarding buyers’ participation in SCF schemes

The Generally Accepted Accounting Principles (GAAP) does not provide any disclosure demands on the nature, activity during the period, variations from period to period, and potential extent of buyers’ involvement in the SCF programme. This information is essential for an investor’s analysis.

Supply Chain Finance: 5 Key Implications of the New Rules

The changes to the disclosure norms impose some operational demands on the participant buyers of supply chain finance programs. However, the overall payoff of its implementation will be favourable in the long run.

Some Important Impacts:

  • Enhanced Transparency

Buyers’ use of supply chain finance programmes and the details of those programmes are now more transparent. This gives external stakeholders like investors, financial analysts, banks, etc. a clearer understanding of the impact of such schemes on the firm’s working capital, cash flow, and liquidity.

  • Standardised Accounting Treatment of Supply Chain Finance Obligations

The new updates clarify how SCF programme obligations should be reported in the balance sheet. This standardisation in financial reporting prevents firms from reclassifying supply chain finance obligations as short-term debts rather than accounts payable in their balance sheets. Such a regrouping would have altered important debt ratios, lowering firms’ credit rating and thereby increasing their cost of capital.

  •  Global Application of The New Disclosure Norms

The GAAP established by the FASB in the United States, and the International Financial Reporting Standards (IFRS), established by the International Accounting Standards Board (IASB), are the two most widely used reporting standards worldwide. 

The first accounting organisation to investigate the subject of disclosures for supply chain finance was FASB. ISAB was later consulted on how SCF can be disclosed under its standards, prompting the organisation to develop new standards. IASB standards are also expected to go into effect this year.

  • Retrospective Application of Disclosure Guidelines

     Businesses are required to implement this guidance retrospectively for all periods for which the balance sheet is presented, except for the roll-forward requirement. The requirement will increase the operational intensity, necessitate contract changes with financiers and suppliers, and raise the compliance cost of financial reporting.

  • The Disclosure Requirements Don’t Apply to All Types of SCF Programmes

    Both the ASU and the proposed disclosure guidelines by IASB pertain only to buyer-initiated supply chain arrangements. The disclosure requirements are limited to the buyers and not the suppliers or finance providers in such SCF programmes. 

In Conclusion

The new disclosure requirements are unquestionably a positive step towards a more reliable balance sheet. Increased disclosure would not only help investors evaluate specific companies, but it will also make it easier to spot general market trends and potential problems. 

It is important to note that these guidelines have only changed the reporting requirement, not the accounting requirement. As a result, the changes are unlikely to hurt supply chain financing arrangements.

Finezza’s comprehensive Loan Management System can help you manage your lending portfolio. Our platform supports a variety of loan types, including term loans, overdrafts, revolving credit, and loans against property. It also allows for multiple disbursements and payment modules. 

To learn more, contact us today.

How Will RBI’s New Offline Payment Framework Impact Fintech Growth?

Uncategorized

Many have encountered a frustrating situation where they could not make a UPI payment due to poor internet connectivity. It is the sole reason that leads to the disruption of digital financial services, resulting in issues like failed transactions, UPI apps stuck at the loading screen and waiting endlessly for the merchant details to show up.

 

Therefore, usage of UPI and fintech payment solutions significantly depend on dependable internet connectivity. However, a study revealed two out of three Indians face issues when making digital payments due to poor network connectivity, and 9 of 10 users have reported network connectivity issues; despite over 98% of India having 4G coverage. 

 

As a remedial measure, the Reserve Bank of India (RBI) has devised a framework to solve this pesky problem: a framework allowing offline payments. 

 

In this blog, we will discuss how it can make transactions more seamless and influence fintech growth in India.

 

Boosting Fintech: An Overview Of The Offline Payments Framework

 

An offline digital payment is a transaction that does not need internet connectivity. Despite sounding absurd, the RBI’s recent framework for enabling small-value offline digital payments has made it possible. 

 

The new framework allows offline payments made face-to-face, up to Rs 200 per transaction, with an overall limit of Rs 2000.

 

RBI has designed the new framework based on the feedback from pilot runs carried out nationwide from September 2020 to June 2021 to develop a solution for internet-dependent payments. 

 

9 Notable Features of RBI’s Offline Payments Framework 

Here are some key features in the framework listed below: 

  1. Special wallet

The user loads money in a special wallet, subject to a limit of Rs 2000 per instrument, and they can use the app offline to make payments.

  1. No Need for AFA

Though user consent is required, these offline transactions do not require an additional factor of authentication (AFA) like a pin or one-time password.

 

  1. Payment instrument enablers

Authorised Payment System Operators and Participants (Banks and Non-banks) will enable payment instruments for offline transactions based on the customer’s explicit consent. 

 

  1. QR Code Generation

The user scans a QR code, after which the amount gets debited from the wallet even if the merchant has no network. A QR code gets generated after the payment, which acts as proof of payment. Once either the merchant or the customer goes online, the transaction gets settled.

 

  1. SMS/Email alerts

As the transactions are offline, alerts through an SMS or an e-mail are received after a time lag or when the internet connection is back. These alerts may not be available for each transaction.

 

  1. Reloading the balance

The Rs 2000 limit is applicable until the customer replenishes the balance. The user can reload the balance only through the online mode.

 

  1. Multiple channels

The framework enables small-value offline digital payments using any instrument or channel, like cards, wallets and mobile devices.

 

  1. Consistent protection

Users have similar protection against customer liability if there are any fraudulent or unauthorised transactions and grievance redressal, as in the case of regular electronic banking transactions.

 

  1. Liabilities

The acquirer must absorb liabilities arising from any security or technical issues at the merchant’s end.

 

Impact Of Offline Payments Framework On Fintech 

 

As innovations occur across the fintech sector, they have a trickle-down effect on the entire economy. Mobile banking, in recent times, has been one such innovation. Here’s how the RBI framework can impact the fintech sector:

1. Promote Financial Inclusion

The adoption of digital payments has been low in rural and lower-tier cities due to connectivity issues. Digital payments can wean buyers and sellers off cash transactions and steer them towards formal banking channels. This eventually paves the way for adopting other fintech services like savings, investments, loans and more. 

 

2. Introduce New Users To Fintech

The offline option encourages first-time users to make digital payments using mobile devices, cards, or wallets. Popular technologies like Bluetooth, sound waves, NFC, or IVRS will be instrumental in developing innovative solutions for such payments. 

 

3. Facilitates Last Mile Penetration

This payments framework incentivises last-mile penetration of digital payments and ensures the benefits of fintech innovations reach remote corners of the country.

 

4. Mix Of Safety And Convenience

The framework strikes a balance between safety and convenience. The transaction cap of Rs. 200 and a total cap of Rs. 2,000 (per instrument) are in place to ensure user security. Non-requirement of the additional factor of authentication adds to user convenience. 

 

5. Help Small Businesses Expand Their Base

Transactions habitually settled in cash, especially in small businesses, will now be settled offline using the customer’s UPI-enabled app., card, e-wallet or mobile device. This increase in person-to-merchant (P2M) and peer-to-peer (P2P) transactions via payment apps will give rise to a new wider segment for businesses. 

 

4 Vital Fintech Challenges To Offline Payment Adoption


Though offline payment comes with many advantages, it does pose some challenges. Such as:

  1. Top-up requires an internet connection

The user can top-up the wallet only when they are online with an AFA code; if one is going to be in a low connectivity region for a prolonged period, then they would not be able to replenish funds if they run out of money in their wallet.

 

  1. Future of Existing Debit Cards

Another challenge is the usability of existing debit cards for offline payments; can these cards be used, or do new cards have to be issued?

 

  1. Mobile Devices as a Solution

Mobile devices could emerge as one of the possible solutions. Banks and payment services can come together to devise a solution for processing payments through point-of-sale (PoS) terminals, mobile devices etc., either with or in the absence of a network and communicating transaction alerts to the user upon the user receiving connectivity.

 

  1. Slow Adoption

Implementation of the framework is left to the banks’ and payment system operators’ desire and is not a mandatory obligation placed on them. Banks have been slow in adopting and deploying technology solutions and infrastructure and may not be incentivised to implement offline payments for their users.  

Key Takeaways

The Reserve Bank of India’s framework enabling offline payments will have benefits across a large spectrum. Users in remote parts are not left behind and can benefit from the fintech revolution. Small businesses and banks also stand to gain with an expanded user base.

 

Finezza offers a range of services for integrating payment options with different frameworks. Additionally, Finezza is software and platform agnostic and offers secure APIs and data pipelines to make integration easy. We emphasise your dynamic security needs as well. 

 

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What Cybersecurity Considerations Are Crucial for Open Banking in Financial Institutions?

Open Banking

The rapid pace of open banking adoption has the potential to revolutionise the financial sector in India. Driven by fintech solutions, it emerged an innovative way for consumers to share their banking data with third parties, driving innovation, convenience, and value.

However, due to its reliance on information technology, cybersecurity risks are inherent in open banking systems. As a matter of concern, a new study shows that 53% of consumers perceive it as dangerous, especially when sharing data.

Financial services are well known for their vulnerability to cybercrime. But the question is, with increasing cyber attacks in the banking industry that can cost up to $18.3 million on average, can open banking achieve a solution?

In this article, we will discuss several cybersecurity threats the system faces, which must be addressed to ensure its safety. Let’s take a moment to learn more about the topic first.

What Does Open Banking Signify?

As noted above, open banking involves sharing banking data with third-party financial services providers.

Simply put, banks enable customers to share their financial data with third parties seamlessly. This allows customers to access a range of valuable services, such as comparison tools, budgeting apps, and other financial services.

For example, a budgeting app can access customers’ account data and transactions to generate a budget recommendation.

Also, if the customer wants to use a comparison tool to find the best savings account, they can share their data securely with the tool, which will help generate tailored results for the customer.

Some Major Advantages of Open Banking

Open banking mainly caters to consumer needs. However, businesses, banks, financial institutions, and consumers- all stakeholders in the financial ecosystem can benefit from data sharing. For example:

  • Easier Access to Financial Data

Open banking allows customers easier access to their financial data and enables them to share it with third-party applications through secure APIs. This allows customers to take advantage of more comprehensive financial services and products.

  • Improved Financial Literacy

It also encourages financial literacy by giving customers more information about their financial activities. Customers can use this information to make better-informed financial decisions.

  • Improved Security

Open banking ensures customer data is protected using secure APIs and authentication methods. It brings more cohesion to the financial data-sharing processes in a safe environment.

  • Increased Innovation

Furthermore, it provides a platform for innovation, as third-party applications can use customer data to create innovative products and services. This encourages new ideas in the banking industry.

3 Common Risks Involved with Open Banking

Here’s a snapshot of some notable challenges:

1. Data Breaches

Data breaches are the most severe risks associated with open banking. If the APIs of third-party providers do not meet security requirements, data breaches may occur, affecting both the consumer and the bank with which the data was shared.

2. Application Vulnerabilities

Vulnerabilities in a third-party company’s web or mobile application could also allow hackers to enter and engage in fraudulent activity, such as requesting fictitious payments or posing as a single user.

3. Inadequate Digital Hygiene

Many are unaware of how their password choices affect data security. Most data breaches were due to compromised credentials and weak passwords. As a result, 81% of cyberattacks target users who use weak or repeated passwords.

Which Cybersecurity Factors Are Crucial for Open Banking?

With more and more financial institutions adopting open banking, it is essential to understand the cybersecurity considerations that must be taken into account when implementing this type of service. A few of them are as follows:

1. Data Security

The first and most important consideration is data security. Open banking requires sharing of sensitive financial data between the customer and the bank. This data must be protected from unauthorised access or misuse.

Banks should implement a comprehensive security framework that includes encryption, authentication, and access control. They must also be able to quickly detect and respond to any security threats or breaches.

2. User Authentication

Another consideration is user authentication. Banks must ensure that customers can securely authenticate their identity and access the bank’s services. It should include multi-factor authentication (MFA) and identity verification. Banks should also ensure they can detect unauthorised access promptly and keep customer data safe.

3. Government Regulations and Compliance

Another major factor can be compliance with government regulations. In open banking, financial institutions must operate within the premise of the laws of their regulatory body. This includes the regulations which set out the rules for open banking. Also, to protect customer data, banks must comply with all the necessary regulations.

4. Infrastructure Inadequacies

Finally, banks must consider the implications of open banking in their existing IT infrastructure, where they can integrate with new technologies and services, which can significantly impact the security of those systems in the long term.

Banks should ensure that their IT infrastructure is secure and that any new services or technologies are appropriately tested and secured.

Final Thoughts

The use of open banking is on the rise in India. According to a report, it recorded a 611% growth in customer accounts, from 180 million in September 2021 to 1.1 billion in August 2022.

In order to provide the most effective customer experience, banks must address cybersecurity concerns such as user authentication, creating a safe financial ecosystem, and a robust infrastructure.

Today, many financial institutions are increasingly collaborating with fintech companies to reduce cybersecurity risks, including dual-factor authentication, encryption, and access control. It can be an innovative way for customers to access various financial services, including budgeting, saving, and investing.

Finezza is also one such powerful fintech tool that uses innovative technology to process and analyse customers’ bank statements. It automatically extracts key data points and runs them through analytics algorithms to provide meaningful insights.

Finezza can help by providing users with secure access to their financial data and offering a wide range of services tailored to their needs. Our suite of APIs and services makes creating safe, compliant and reliable open banking applications easy.

Get in touch with us today!

Banking On Co-Lending To Serve Credit Demand: A Scaling Strategy For NBFCs

Lending Lifecycle Management

Co-Lending Model (CLM) is still in its infancy in India. RBI devised this specific lending model to improve credit availability to the underserved and unserved categories of the economy.

Generally, these segments are isolated from mainstream banking facilities due to their geographical or demographical characteristics. They include low and medium-income categories, Micro, Small, and Medium enterprises (MSME), economically weaker sections (EWS), etc.

While the Reserve Bank of India (RBI) first issued guidelines on the co-origination of loans in 2018, the pandemic-related credit crisis created greater significance and momentum for the model. Gradually, an increasing number of Non-banking Financial Companies (NBFCs) and banks are entering into co-lending arrangements.

The co-lending market is expected to achieve a volume of Rs.25,000- Rs.30,000 crore in FY 2022-2023. One can conclude that co-lending is ready for take-off with NBFCs and banks planning to issue Rs.50,000 crore credit, as stated by the kingpins of NBFC firms in a recent Banking, Financial Services, and Insurance (BFSI) summit.

 

6 Factors That Would Spur The Growth of Co-lending

The co-lending model intends to make affordable credit available to the economy’s priority sectors. The framework makes use of banks’ surplus funds and NBFCs’ outreach to provide low-cost loans to borrowers. This tripartite arrangement benefits all parties involved-the bank, the NBFC, and the debtor.

Let us delve into some key factors that will drive the co-lending growth in the coming days.

1. Continued demand for credit in the economy

In terms of credit, it is the supply rather than the demand which has been a challenge. Economic Survey 2022-2023 forecasts increasing demand for bank credit for the next fiscal year. The current year has seen a revival of economic activity, which is supported by a fundamentally stronger banking system and a robust corporate sector.

Non-food bank credit increased by 15.3% on a year-on-year basis in December 2022. This credit growth is visible across sectors like home loans, agriculture and allied activity loans, and MSMEs which are driving industrial credit.

The survey also predicts an active rise in credit in FY2024 if inflation declines and the real cost of borrowing does not increase.

In the co-origination model of lending, the benefit of low-cost capital trickles down to the borrower keeping the interest rate in check. Effectively, there will be more takers for such loans.

2. Increased government spending on infrastructure

Infrastructure spending often creates a bigger economic stimulus than other types of spending. Capital expenditure on infrastructure generates a multiplier effect on other sectors like real estate, cement, steel, and transportation.

Also, Infrastructure development projects provide NBFCs with lending opportunities in direct lending or equipment financing through co-lending.

3. The pressure of Priority Sector Lending (PSL) targets on banks

If a bank fails to meet its PSL targets for the year, it must invest the lending shortfall amount in Rural Infrastructure Development Funds (RIDF). They can also purchase excess PSL certificates from banks that have exceeded their lending target for the priority sector.

In this case, co-lending partnerships with recognised NBFCs will assist banks in meeting the PSL targets.

4. Regulatory modifications by the RBI

The RBI has made significant regulatory changes affecting NBFCs and fintech lending in the last two years. The scale-based lending framework for NBFCs focuses on strengthening the NBFCs’ governance, capital adequacy, and technological infrastructure.

RBI’s new digital lending guidelines aim for transparency and efficiency in fintech lending. These regulatory changes reinforce the fundamentals of the co-lending model.

5. The Untapped credit market in tier-2 and tier-3 cities

Tier-2 and tier-3 cities in India are quickly emerging as development hotspots. The most recent budget authorised the establishment of an Urban Infrastructure Development Fund (UIFD) of Rs.10,000 crore per year for the development of infrastructure in these cities.

Compared to traditional banks, NBFCs have a more substantial presence in tier 2 and tier 3 cities. Through co-lending partnerships, NBFCs can use this advantage to enter the untapped credit market in these geographies.

6. Reduced cost of funds for NBFCs

When the RBI tightens monetary policy, the cost of funds for NBFCs rises, making their loans more expensive for borrowers.

Co-lending enables NBFCs to obtain low-cost funds from banks for onward lending to customers.

 

Some Hurdles The Co-Lending Model Has to Overcome

The growth of co-lending poses some challenges to lenders as well. Understanding and overcoming those obstacles is critical for maintaining a sustainable business model.

1. Complex process model– Banks and NBFCs share risks and rewards in the co-lending model. Proportionate allocation of benefits and drawbacks necessitates complex accounting methodologies, complicating the lending model even further.

2. Banks unaware of their customers’ risk profiles– In a co-lending arrangement, NBFCs become the customer-facing entities engaged in sourcing, onboarding, and servicing the borrowers. Here, banks are unable to assess the risks posed by their borrowers. Hence NFBCs must improve their underwriting capabilities because they are responsible for maintaining the co-lending asset quality.

3. Different regulatory compliances for the lenders– Apart from general compliance procedures like Know Your Customer (KYC), other regulatory and compliance requirements for both lenders differ, making reporting difficult.

4. The demand-supply disparity in the PSL segment– When banks fall short of their priority sector lending targets, they rely on other banks and NBFCs to purchase PSL certificates or engage in Inter-bank Participation Certificates (IBPC) transactions. However, NBFCs’ exposure to priority sector loans is far lower than banks’ demand. PSL may not gain traction unless co-lending takes off.

5. Integration of loan management functions– Co-lending necessitates using an agile Loan Management System (LMS) capable of handling the nuances of NBFC-bank relationships. LMS must efficiently manage the various stages of the credit management process while shielding the customer from the troubles of the fragmented loan processes. It must also accurately deal with complex bookkeeping and reporting functions.

Winding Up

Co-lending is, undeniably, a long-term, scalable model. The challenge is to maintain the lender partnerships to continue leveraging the framework. Driven by credit demand and expedited by fintech tools’ support, the model has the potential to reach new heights of progress very soon,

Finezza’s Loan Management System is one such fintech tool ideal for co-lending firms seeking to grow their business. Our LMS’s embedded capabilities capitalise on the synergies of NBFCs and their banking partners.

Besides that, we also offer analytics and a suite of other specialised solutions that streamlines and automates critical business processes.

 

Contact us today to learn more about our LMS.