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:

1. Customer onboarding
2. Managing deposits and withdrawals
3. Transaction management
4. Interest calculation and management
5. Payments processing (cash, cheque, RTGS, IMPS and so forth.)
6. Customer relationship management (CRM) activities
7. Designing new banking products and
8. 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:

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

Contact us to learn more about how we can provide end-to-end software solutions for all your banking needs!