Finezza Blog

What Does the Implementation of the CFSS by the RBI Mean for NBFCs?

The Reserve Bank of India (RBI), through a circular, notified Middle Layer and Upper layer Non-banking Financial Services (NBFCs) to mandatorily implement Core Financial Services Solution (CFSS) as of October 1, 2022.

The CFSS is akin to the Core Banking Solution (CBS) adopted by banks, which enables the integration of different NBFC functions on a centralised database. CFSS also helps in providing a seamless digital customer interface.

This article helps us understand what the implementation of the CFSS means for the NBFCs and the timeframe within which it must be executed.

What is a Core Financial Services Solution (CFSS)?

The CFSS is similar to the Core Banking Solutions (CBS) adopted by banks.

CFSS has features like:

Customer onboarding
Managing deposits and withdrawals
Transaction management
Interest calculation and management
Payments processing (cash, cheque, RTGS, IMPS and so forth.)
Customer relationship management (CRM) activities
Designing new banking products and
Loans disbursal and management

The CFSS is a centralised system that gives benefits like:

1. Improved Customer Relationships by a Digital Front-end:

The CFSS allows customers to enjoy the benefits of location-independent banking by providing a hassle-free user interface to the customers in digital transactions.

For NBFCs involved in lending activities, this will also include checking loan eligibility, performing KYC, making EMI payments, accessing e-statements, updating personal details, contacting customer care, finding the nearest branches, et cetera.

2. Seamless Integration of NBFCs’ Functions:

CFSS is intended to provide seamless customer interactions with NBFC’s digital offerings and transactions. The adoption of CFSS to render centralised accounting records and databases enables NBFCs to handle many customers easily. It also helps create a Management Information System (MIS), which is required for internal and regulatory reporting purposes.

3. Improved Productivity:

CFSS has enabled operational efficiency by changing the operating models and simplifying the working through computerisation. This has helped to reduce redundancies and allow quick transaction processing. With increased and efficient performance, NBFCs can offer their customers a range of new products while increasing the chances of acquiring new customers.

4. Reduced Operational Costs:

With the ability to offer services through the internet, customers do not need to visit physical offices. This helps in employing fewer human resources and infrastructure.

The decreased footfall because of digitisation also allows for better customer handling and improved customer relationship.

5. Improved Decision Making

Data access and management have been made easy due to banking automation. All the data can be collected using a centralised database to facilitate quick decision-making.

The Core Financial Services Solutions generally have business analytics integrated into them. So, the data collected in the backend can be easily accessed and used to get valuable insights on time.

6. Increased Transparency:

Automating processes makes it difficult for any human-made error or fraud, which increases the transparency of the banking process and gains credibility in the eyes of the customers and the authorities.

The Timeframe for the Implementation of CFSS by NBFCs

As per the timeline prescribed in the circular, the two categories of NBFCs (Upper and Middle layers) must implement CFSS before September 30, 2025.

The Middle layer of NBFCs consists of all deposits taking NBFCs, irrespective of asset size, non-deposit-taking NBFCs with asset size of rupees 1000 crore and above. NBFCs undertaking activities, like standalone primary dealers, infrastructure debt fund- NBFCs, core investment companies, housing finance companies, and infrastructure finance companies, also fall in the Middle layer.

The Upper layer of NBFCs consists of those NBFCs that the RBI specifically identifies as warranting enhanced regulatory requirements based on a set of parameters and scoring methodology.

Middle and Upper layers NBFCs have to ensure that CFSS is implemented in at least 70% of their units on or before September 30, 2024.

NBFCs with less than 10 ‘fixed point service delivery units’ do not require implementing a CFSS in their operations. However, they can consider implementing it for their benefit.

A ‘fixed point service delivery unit’ is a place of operation from where an NBFC carries out business activity. It carries signage with the name of NBFC and functions under NBFC’s administrative control.

Further, a quarterly progress report on the implementation of the CFSS, along with various milestones as approved by the Board, shall be furnished by the NBFC to the Senior Supervisory Manager (SSM) Office of Reserve Bank starting from the quarter ending March 31, 2023.

What Does Implementing the CFSS Mean for the RBI and the NBFCs?

The CFSS is being introduced to increase the RBI’s control over non-banking financial companies (NBFCs) through computerisation.

Implementing CFSS will help NBFCs meet growing customer needs and dynamic market challenges. Digitisation will allow the RBI to better monitor and increase transparency for depositors by monitoring the services provided by NBFCs.

The CFSS will also permit NBFCs to offer their services more conveniently to their clients and will assist them in developing Management Information Systems both for internal functioning and external compliance. This will help minimise their operation costs and help in managing their accounting records better.

Bottom Line

The aim of the RBI through the circular for the implementation of CFSS is to enable the NBFCs to offer their customers an easy and transparent banking experience.

By implementing Core Banking Solutions (CBS), the banking system has become smarter and more accessible for customers. Automating many processes has enabled banks to reduce their operational costs significantly and provide superior banking services to their customers. The RBI aims to replicate the success of the Core Banking Solutions for the NBFCs through CFSS.

At Finezza, we have created one of the most comprehensive AI-powered CFSS systems to aid your implementation process:

Collection Delinquency Management system: New-age SaaS lending and collection system.
Bank Statement Analyser: Exhaustive bank analyser for the lender.
Credit Bureau Data Analyser: To analyse the customers’ credit.
Loan Origination System: A digital-first and API-enabled ecosystem that integrates with different APIs.

How Finezza’s Co-lending LMS Can Benefit Your Co-lending Process

Lending Lifecycle Management

Loan syndication by banks has always existed for large business loans. The real challenge is in the small and medium-sized enterprises (SMEs) market, which represents a significant share of the digital lending landscape in India. A conservative estimate puts this market at a whopping $300-$400 billion by 2025!

The Indian finance industry has long used the co-lending model of credit. The CLM has gained much more significance and has become a viable solution to liquidity and credit access issues due to the recent expansion of fintech resources and abilities.

After discussions with some of India’s leading NBFCs and fintechs, we at Finezza have built a co-lending compatible LMS (Loan Management System) that can streamline the lending process for all parties involved.

This new functionality has been precipitated by the keen interest and agreement of several large fintech non-banking financial companies (NBFCs) who have approached us based on our domain understanding.

What Makes Finezza’s LMS Highly Compatible With Co-Lending?

Our co-lending compatible LMS is designed to handle the operational intricacies of co-lending effectively so that customers are not troubled in any way.

Co-lending involves the proportionate sharing of risks and rewards of loans between banks and NBFCs. This can present challenges in underwriting, loan processing, sharing of interest, charges collected, apportioning costs, and risks of loan defaults. When NBFCs have multiple co-lending partners, the process becomes even more complex.

An NBFC or a lender facilitates the loan and is the only point of contact for the customer. The RBI requires the NBFC to contribute at least 20% of the loan amount; the remainder can be from one or more co-lending partners. These partners can have different agreements with the facilitating lender regarding the distribution of interest, charges, penalties, and defaults.

Finezza’s LMS can handle all the complexities of different agreements so that customers can see their loans as a single entity. Let’s get into the core features of this platform.

Features of Finezza’s LMS That Will Raise The Efficiency Of Co-Lending

Finezza’s Loan Management System is designed to cater to the unique needs of the co-lending model as it simplifies complex co-lending procedures and offers numerous competitive advantages.

1. Streamline the Splitting of Risks and Rewards

When it comes to co-lending, businesses can face multiple challenges. Even though the bank and NBFC might lend at an agreed ratio, the bank and NBFC will often have different costs of funds.

So the most significant inefficiency the platform will handle is processing fees, delayed interest, and penal interest between banks and NBFCs. Splitting the money based on these different terms won’t be an operational nightmare when EMIs start coming in.

2. Personalised and Multi-View

The bank needs a clear view of its 80% stake in the loan, and the co-lending platform will provide this by creating three views of the loan – 100% for the customer, 20% for the NBFC, and 80% for the bank. This way, the parties involved will clearly understand their investment.

3. Automated KFS Sharing

RBI’s guidelines state that the lender should share a Key Facts Statement (KFS) with the borrower. Finezza’s co-lending compatible LMS will automate this process.

4. Automated Reporting

The NBFC and bank must report their loan share to the credit bureau. The platform can also automate this operational hassle.

5. Automated Bookkeeping

The platform will also automate bookkeeping for this complex setup by generating the ledger and trial balances in line with the share of the participants on loan. The NBFC will know how much to return to the bank, and the latter will know how much to take from the NBFC.

Wrapping Up

The co-lending concept allows all stakeholders to be more adaptable, take bigger risks, and generate more revenue. It also enables the customer to obtain a loan from the formal credit market at a low-interest rate.

Co-lending also presents a fantastic business opportunity for banks and NBFCs in India. By partnering, they can fund many credit-underserved customers. The success of this business model depends on the technical competence of the co-lending LMS.

Finezza’s Co-lending Loan Management System removes operational inefficiencies and helps scale your lending operations. Our system makes it easier to process loans under the co-lending model and eliminates many of the inefficiencies that come with it.

Contact Finezza to book a free demo if you are a financial institution wanting to improve your Loan Management System.

Why Do Higher Interest Rates Highlight Supply Chain Finance?

Lending Lifecycle Management

The global economy is currently navigating troubled waters. Many countries face the impending threat of recession as their economies slow down and inflation rates touch all-time highs. The crisis, caused by a double whammy of pandemic curbs, and the ongoing military escalation in Europe, has disrupted supply chains around the world, driving up the cost of goods. Central banks worldwide have increased interest rates to put a lid on rising prices.

Accessing funds through borrowing becomes more expensive for suppliers as the interest rates increase. Tightened financial conditions will create bottlenecks along the supply chain, adding to the existing cost crises. In such a time, supply chain financing (SCF) can be the most cost-effective way to access working capital in a high-interest economy.

The Economic Significance of Supply Chains

Supply chain networks consist of activities, like procuring raw materials, producing goods and services, and distributing and delivering finished products to consumers. Supply chain networks are critical to a country’s domestic and international commerce. Independent economies are well connected through international supply chains and rely heavily on such networks to import basic commodities into their markets.

According to a recent study, economic growth positively correlates with the length and depth of supply chain networks. The study was conducted by an interdisciplinary research team of experts from the University of Oxford and Harvard University. They observed that lengthy supply networks have more opportunities for innovation and for accumulating the benefits of technology upgradation. Consequently, long production chains reduce the cost of goods faster, facilitating quicker gross domestic product (GDP) growth.

Another study by MIT researchers published in 2017 considers the supply chain economy as a distinct economic category that constituted 37% of private employment in the USA for the year 2013. This category paid higher average wages to its employees, 57% more when compared to business-to-consumer (B2C) industries. Furthermore, the supply chain economy has a higher concentration of Science, Technology, Engineering, and Mathematics (STEM) jobs than other categories.

Inflation, Interest Rates, and Supply Chain Disruption: A Vicious Cycle

Governments try to control rising inflation by increasing interest rates. But the critical issue is whether this measure is effective in demand-pull inflation situations, when supply chains keep hitting roadblocks.

The cost of funds increases with high-interest rates. Consequently, accessing working capital through traditional lending options becomes more difficult for businesses. Shortage of funds will force suppliers and buyers to roll back their operations and reduce labour and inputs. This worsens inflation because the supply-demand gap widens due to reduced production, and layoffs raise unemployment rates. Supply chain financing offers a smart solution to ease the stress of rising interest rates and maintain the stability of supply chains.

Why Supply Chain Financing is Gaining Prominence in High-Interest Rate Environments

The true impact of rising interest on a business depends upon the size of the business, the industry it serves, its position within the supply chain order, and the length of the rate hikes. High interest rates could severely undermine smaller companies’ ability to survive. Some adverse effects include:

Increased materials cost
Shortage of inputs and products
Extended average collection periods
Higher borrowing costs
Increased warehousing costs

Supply chain financing cushions the impact of high interest on the supply networks. Since SCF programs are for short durations and self-liquidating, they offer many advantages over conventional loans and advances.

The Merits

Economical means to access working capital: In the long term, borrowing working capital at higher rates will negatively impact businesses. Supply chain financing helps small firms access funds on reasonable terms.
Overcomes the lag in invoice settlements: Speedy settlement of invoices benefits both suppliers and vendors. Buyers can maintain their credit periods, and the suppliers get paid sooner, relieving both parties from a possible liquidity crunch.
Helps regularise uneven cash flows: Timely availability of cash enables small suppliers to stabilise their procurement, sales, and payments cycles. Supply chain financing helps businesses control their cash flows and maintain a healthy liquidity position.
Speeds up manufacturing cycles: Longer production cycles or production lead times increase the cost of production. It also causes stock-outs creating market disruptions. An adequate supply of working capital reduces lengthier production cycles.
Helps small firms leverage the time value of money– Inflation erodes the purchasing power of money. Hence cash received early will have more value than cash received when the invoice is settled.

Ending Notes

Physical supply chains and financial supply chains are both important to the economic progress of nations. Given the current state of affairs, it is clear that global supply chains must function smoothly to avoid recession. But the supply networks are still under pressure due to high inflation levels in many countries. According to a World Bank report, central banks will have to raise interest rates further to reduce global inflation. This means we cannot expect interest rate cuts any time soon. In such a scenario, supply chain financing is the prudent funding option needed to keep the supply conveyor belt running.

Finneza’s innovative Loan Management System (LMS) provides agile and flexible solutions to your lending business. Our LMS includes features for managing multiple loan types, varying repayment frequencies, flexible payment modules, non-performing asset (NPA) management, and much more. Book a free demo today to learn about Finezza’s Loan Management System.

Is Co-lending Changing the Credit Landscape in India?

Lending Lifecycle Management

The concept of co-lending has existed in the banking, financial services, and insurance (BFSI) sector for some time. However, the Reserve Bank of India (RBI) issued guidelines in November 2020 permitting non-banking financial companies (NBFCs) and banks to loan money to the underserved segments of the economy by leveraging the lower cost of funds from banks and the massive reach of the NBFCs.

For a growing modern economy like India, the co-lending model promptly provides access to financial products to every individual and business, which is necessary to maintain the current growth trajectory.

Understand how the co-lending model benefits lenders by minimising their risk and providing credit to consumers at lower interest rates and quick loan disbursal, which plays an important role in the economy’s growth.

The Rise of Alternative Modes of Payment

Credit cards carry the negative connotation of being a debt trap in India, which has primarily been a debit card-driven market. However, this narrative has changed with growing credit card issuance in the last decade. Consumers’ changing mindsets and increased awareness of using credit cards and Buy Now, Pay Later (BNPL) for daily expenditure by the new-age startups further accelerates growth.

Unified Payments Interface (UPI) has risen as one of the most popular payment mechanisms in the country, showing impressive volume numbers compared to debit and credit cards. However, the value for all three modes of payment remains similar.

In the last few years, the credit sector has also seen significant contributions by neobanks like Jupiter and InstantPay.

A neobank is a tech company that provides banking services via a mobile app or website. The services may include transferring money electronically, paying bills, receiving direct deposits, and checking bank balances.

The Need for Co-lending in the Economy

Indian banking and financial services have been unable to bridge the significant gap in the formal credit sector, leaving many people underserved when it comes to credit. This provides lenders an opportunity and a challenge to meet the demands of this section.

With the rise of digital payments and innovation in the banking sector, it has become much easier to track individuals’ payments, cash flow, and credit scores beyond the formal sector’s reach. New fintech players have disrupted the market by introducing new and innovative financial products to consumers like credit cards, Buy-Now and Pay Later (BNPL), and credit EMIs in the underserved/unbanked segment, which were limited only to the home, auto, and personal loans before.

Problems That Co-lending Can Solve in the Indian Economy

Co-lending partnerships can significantly impact the fortunes of small businesses and customers throughout the country who do not have access to traditional forms of credit.

1. Liquidity Problems

Liquidity denotes financial institutions’ ability to fund their assets’ growth and meet financial obligations. As one of the world’s fastest-growing economies, India needs quick access to capital to meet its ever-growing needs. The fintech sector has played a pivotal role in bridging any gaps that might arise.

Co-lending creates a framework through which traditional banks can help close these gaps through innovative products and technologies by providing their lending strength and credibility to the NBFCs.

2. Systematic Stability

Systematic stability refers to the financial system’s capacity to reliably provide the loan intermediation and payment services required to maintain the economy’s current development course.

Co-lending guarantees a high level of standardisation, compliance, fiduciary care, and consumer protection. It is a collaboration between two regulated institutions — a bank and an NBFC. Borrowers are underwritten twice by two entities, and risk governance is a mutually reinforced exercise with adequate checks and balances.

Advantages of Co-lending to Different Stakeholders

New-age startups and fintech firms are disrupting the banking space by bringing technology into the traditional working model of a bank. Their varied benefits for banks, fintechs, and customers are listed below.

To Banks:

Greater reach: Since fintechs and NBFCs can reach the economy’s remotest and most underserved groups, banks can get more customers and businesses to lend to.
Better customer experience: Fintechs rely on technology to manage customer interactions; the Big Data collected in this digitised era help banks identify the most profitable customers and provide them with repeat credit in the future.
Lower risk: Due to the risk division between banks and NBFCs, there is an added sense of security.

To Fintechs:

Credibility: New-age startups can gain brand credibility by collaborating with traditional banks.
Lower interest rates: Banks can help NBFCs by providing loans at a lower interest than their competitors.
Better capital utilisation: NBFCs can utilise their limited capital efficiently in the co-lending mechanism.

To Customers:

Better banking experience: Fintechs ensure that their customers get a better banking experience to retain them for a long-time.
Low-interest rates: Customers can avail of low-interest rates in borrowing.
Borrowing opportunities: Credit-underserved communities in rural areas with less documented credit history find it easier to access borrowing through the co-lending process.
Increase in financial knowledge: Banks and NBFCs offer a personal touch and educate the customer.

Choosing the Right Co-lending Partner

Apart from the obvious financial risks involved, co-lending arrangements should be considered with the utmost caution, as the other party’s actions could affect the entire brand image.

Some things to consider would be:

Focus area: The similarity of focus areas becomes important while entering into an arrangement.
Risk appetite: The potential partner must be willing to match your risk-taking capacity and willingness.
Ticket size: The average loan amount must be agreed upon while entering a co-lending arrangement to avoid future disputes.

The Bottom Line

Co-lending has evolved from a buzzword to being recognised by the RBI and is slated for country-wide implementation. Several startups and banks are collaborating to lend to niche segments of the economy.

In addition, co-lending comes with numerous risks. With non-performing assets (NPAs) constantly in the spotlight, co-lending arrangements must prove their robustness and fundamentals going forward.

This is where AI-powered platforms like Finezza can help automate the lending process through its wide variety of products, including:

Finezza can make your banking and lending decisions efficient and accurate. Contact us to know more!

Easy Tips to Secure a Working Capital Loan

Lending Lifecycle Management

Running a small business is not an easy feat. One has to manage finances, ensure product fulfilment, and manage customer service. Seasonal fluctuations or drops in sales lead to a host of challenges, many of which need a working capital loan to be resolved.

A working capital loan provides businesses with financial assistance to stay afloat. It helps fund daily expenses, pay employee wages, purchase inventory, and pay overhead. However, a loan application can be challenging and time-consuming.

What is a Working Capital Loan?

A working capital loan is used to finance a business’s short-term expenses, such as wages, rent, etc. A financial organisation or lender provides this type of loan.

Small to medium-sized companies that cannot meet their day-to-day operations avail of this loan. The loan tenure is six to 12 months, and the interest lies between 11-16%.

Below are the features:

Loan amount: The amount varies for each business and depends on the business’s requirements, preferred tenure, etc.
Interest rate: The interest rate varies depending on the bank and lending organisation.
Collateral: The loan can be secured or unsecured, i.e., you may or may not be required to pledge collateral to obtain the loan.
Loan applicant: Entrepreneurs, private or public companies, sole proprietors, self-employed people, MSMEs, and partnership firms can apply for the loan.

5 Tips for Securing a Working Capital Loan

Filling out loan applications can be tedious and time-consuming. The loan-granting process takes even more time. So, read the following tips to improve your chances of obtaining a loan.

1. Know the Different Working Capital Loans

There are several working capital financing options. You must be aware of them and select them based on your business needs.

Short-term or long-term loans – Short-term loans have a tenure of 96 months, whereas long-term loans have a tenure of up to 8 years.
Unsecured loans – They don’t require collateral.
Secured loans – They require collateral such as property, assets, etc.

2. Ensure Your Credit Scores Meet the Lender’s Requirements

A credit score is a number that rates a person’s creditworthiness and represents the business’s capacity to repay the loan. While sanctioning loans, lenders check the business’s credit score. Most lenders prefer a credit score above 750.

The following factors decide your credit score:

Credit history
Payment history
Unpaid debt

Other factors, such as the age of the business and cash flow, also make a difference. For example, if your company has existed for more than two years and you have a consistent cash flow, you can avail of the loan.

To improve your business’s credit score, pay your bills on time, ensure the business debt is low, pay EMIs on time, and keep credit balances low.

3. Prepare Your Bank Statements and Other Documents

Lending organisations check bank statements to assess the financial position of your company. They analyse the cash inflows and outflows to check your repayment ability. They also check your finances to know whether you maintain cash reserves in your account.

Moreover, bank statements provide the transaction history, including withdrawals, deposits, credit card payments, bank service fees, etc. The lender will analyse the transaction history based on the bank statements to assess your ability to repay the loan.

In addition to the bank statements, the lender will ask for other documents, such as:

Application form

2 Valid identity proof

Address proof
Latest ITR

The documents you’ll require will vary based on the type of business. So, check with your lender for the documents you’ll need for the loan application. Then, keep these documents ready to speed up the application process.

4. Have a Clear Reason for Taking the Loan

A business may require a working capital loan for several reasons. Some examples include:

Meet day-to-day business operations
For purchasing inventory or increased operation costs
Hiring new employees to grow the team
Replace broken equipment and tools with new ones
Pay rent and moving costs
Cover marketing costs

5. Maintain Cash Flow

A lender chooses a loan applicant who is more likely to repay the loan on time. Your cash flow figures reflect if you can repay your debt.

Here are some tips for managing your cash flow:

Reduce unnecessary expenses
Pay bills and debts on time
Send invoices quickly and include terms related to late payment
Offload inventory that doesn’t sell
Pay invoices in your business’s name
Incentivise customers with discounts for paying before the time

Bottom Line

The tips above will help you qualify for a working capital loan to accomplish your goals. Additionally, you should have a loan repayment strategy to maintain a good credit history.

Finezza’s lending lifecycle management platform and credit evaluation system help lenders optimise their lending operations so they can offer faster loans to businesses. Finezza’s solutions will help you organise and streamline your lending operations.

The Loan Management System and Loan Origination Software help lending organisations process KYC documents and loan applications. Contact our team today for more details.

New Digital Lending Guidelines and Their Impact on NBFCs

Lending Lifecycle Management

The fintech lending ecosystem in India was largely unregulated for a long time. A large section of the population that was ignored by the traditional banking industry received timely financial assistance, thanks to new technologies and innovative products. But the digital lending sector was beset with problems such as exorbitant interest rates, unrestricted employment of third parties, unethical sales and recovery measures, data privacy violations, etc.

To ensure the orderly growth of digital lending while protecting customer interests, the Reserve Bank of India (RBI) constituted a Working Group on Digital Lending (WGDL) in January 2021. Based on the recommendations of WGDL, RBI published detailed Guidelines on Digital Lending on September 2nd, 2022.

Some provisions in the new digital lending rules call for changes in the existing operating models of some regulated entities (REs), especially Non-Banking Financial Companies (NBFCs). Some NBFCs will have to completely revamp their systems and procedures to comply with different requirements concerning information disclosure, data privacy, grievance redressal, corporate governance, etc.

A Broad Outline of New Digital Lending Norms

Before examining how the new digital lending norms will affect the NBFCs, one must understand what the new guidelines signify. At the outset, the WGDL has grouped digital lenders into three categories. The first group includes those entities authorised and regulated by RBI to enter the lending business. Institutions that fall outside the purview of the RBI but are authorised to lend under other statutory or regulatory provisions belong to the second category. The third group consists of organisations that lend outside the scope of any regulatory framework. RBI has specified that the new norms will only apply to the first group. This includes Regulated Entities (REs) and the Lending Service Providers (LSPs) employed for rendering various digital lending services.

The new rules cover three main domains:

Customer protection and conduct issues
Technology and data requirements
Regulatory framework

The guidelines will apply to new loans as well as existing loans. RBI has given REs time till November 30th of this year to ensure compliance of existing loans to the new norms.

Significance of New Guidelines on NBFCs

Many NBFCs already adhere to these requirements. For others, the new norms will increase the operational intensity and compliance expenses. The conditions in this circular change the existing lender-borrower relationship in the digital lending environment, impacting the operating model of NBFCs. Let us examine the ramifications of new guidelines on the existing NBFC working structure in fintech lending.

1. Impact on Existing BNPL Model

The new regulations mandate that the disbursements and repayments flow only between the bank accounts of the lender (REs) and the borrower. It prevents routing funds through intermediary accounts belonging to LSPs or other third parties. This will affect the preferred Buy Now, Pay Later (BNPL) service and other prepaid payment instruments (PPIs) funded through credit.

Under the current BNPL operating model, many fintech LSPs have been responsible for disbursing the loans and recovering the EMIs. They act as facilitators between the lender and the borrower. This relationship will change with the new guidelines; consequently, NBFCs must modify their operating structures.

2. Need to Restructure the Underwriting Process

Barring the initial one-time access with the customer’s explicit consent, the REs and the Digital Lending Apps (DLAs) are prohibited access to the smartphone data of the borrower, such as contact list, files, documents, call registry, etc. This norm will significantly change the existing underwriting process of digital loans.

Digital lenders use tools like Robotic Process Automation (RPA), Machine Learning (ML), Artificial Intelligence (AI), etc., for underwriting loans. Automated underwriting resorted to phone scrubbing (reading mobile phones) to gain customer information. NBFCs will now have to reorganise their underwriting methods.

3. Changes in First Loss Default Guarantee Models

In First Loss Default Guarantee (FLDG) arrangements, the fintech companies agree to compensate their partner REs (digital lenders) a certain percentage of the customer default loans. In the digital lending guidelines, RBI has instructed REs to follow The Master Direction on Securitisation of Standards Assets provisions. FLDG is an important feature of many NBFC digital lending business models. Change in regulations necessitates revamping the existing FLDG structure.

4. Impact on the Data Storage Requirements

The new guidelines place strict provisions for protecting customer data. REs will have to formulate comprehensive policy guidelines concerning the collection, storage, usage and sharing, and destruction of customer information. Data collection must be need-based and only with the customer’s explicit consent. Also, the norms permit the storage of customer data only on servers located in India. NBFCs that do not currently follow this requirement must comply with these regulations.

5. Refashion the Current Collaboration Model With the LSPs

The new guidelines on digital lending have made the REs more accountable on matters related to customers. Their responsibility extends beyond the core lending activities. From disclosure of information to supervising the operations and conduct of their LSPs and DLAs, the regulated entities will have a bigger role in the revised framework of digital lending.

NBFCs will need to adjust their business models and operating structures to fit into the new order. They must strengthen their due diligence, audit, and compliance models, remodel their contractual relationships with the LSPs and DLAs, and revise their customer loan contracts to align with the new rules.

Closing Notes

While the new regulations may seem stringent, causing a significant impact on the operating models of some NBFCs, and adding to their operational costs, they will benefit the NBFCs in the long run. The new guidelines aim to curb malpractices and bring transparency to the digital lending process. A regulated market will improve customers’ trust and confidence in digital lending and increase growth potential.

Finezza’s robust Loan Origination and Document Management tools help NBFCs and other lending institutions manage their loan portfolios efficiently. Contact us right away to learn more about our products.