FinTech has been quite a buzzword in the Indian financial space for the last few years. Because of its vast potential to disrupt the current and traditional banking system, the FinTech space is now gaining traction in the areas of lending, asset management, deposits, and credit system. Not just that, the present-day FinTech companies are efficiently making use of new-age technologies like Machine Learning (ML) and Artificial Intelligence (AI) to be able to detect fraud, minimize the compliances, and reduce a lot of efforts, as compared with banks.
Non-banking financial companies (NBFCs) are the financial institutions that do not need any license to offer banking and financial services to the borrowers. FinTech startups, though operating under different revenue models, also act as the right supplements to traditional banking institutions, but only more technologically equipped than the NBFCs. These services include loans like private education loans, home loans, personal loans, and retirement planning.
The process of lending with NBFC is free of hassles since most NBFCs and Fintech startups and companies are now attempting to replace the CIBIL score system with an alternative crediting process. With the working mechanism completely paperless, customers have the option to apply for a loan online and submit it. The time taken for a loan to be sanctioned here is less than or equal to 12 hours.
What stands out with NBFCs and FinTech companies as compared with banks is that that banks solely work on the traditional model of lending through interests, while NBFCs and FinTech companies work on the capital needs of the customers. There are deposit-accepting NBFCs, non-deposit accepting NBFCs, non-deposit holding NBFCs, and systemically important NBFCs.
Advantages of lending through NBFCs and Fintech companies:
- It is a lot cheaper to even set up the business and later, to expand, because of minimal regulations.
- Loans are disbursed quickly and easily, without any hassles.
- Faster speed if you would like to make an international money transfer.
- The documentation process and registration is very minimal because it is not mandatory to seek assurance from a collateral.
- Borrowers who do not have enough CIBIL score have an alternative credit scoring system in case of NBFCs.
- Reliable fraud management, thanks to the technological intervention.
- Financial data is transparent and can be stored flexibly and can be retrieved whenever needed.
But since NBFCs and Fintech companies hold a certain stand as compared with banks, also thanks to the similarity in the way they work, it is about time there is a definite consolidation between both NBFCs and Fintech companies.
Why should there be a consolidation?
The Indian market has seen most of the FinTech disruption in the last few years, making it a bigger FinTech space than even the United States of America. Most startups in the FinTech market, though fall under the same roof as NBFCs, do not possess the NBFC license to be able to disburse any amounts. But usually, these licenses are granted to categories like Investment companies, Microfinance companies, Infrastructure debt funds, and Asset financing companies.
This license is also dependent on the deposit the company holds and the size of the minimum capital requirement. So, it is essential that fintech companies level up and apply for an NBFC status to achieve enough credibility and act as a completely legal institution.
An authorized license and status will only give more weight to these tech-savvy Fintech companies and expose them better to the customers, giving them a significant competitive edge. Hence, it is all the more reason for them to achieve the NBFC status and operate on par with the regular NBFCs.
Apart from these factors, Fintech companies and NBFCs rely more on technology and less on banking. By the way, things are going at the moment, Fintech can possibly transform the way basic banking is done. Banks are generally surrounded by regulations and compliances and the technology help would automate a lot of things and push maximum impact into regulations.
While in the context of technology, plenty of Fintech companies are making the best use of data analytics and business intelligence to help customers make better financial decisions. For example, the market-based lending companies in India these days are now a boon to Small and Medium Enterprises (SMEs), making it easier for the borrowers to choose the most flexible option, according to their financial requirements.
The dire need for this collaboration
It is also now clear that data analytics, Blockchain, and Artificial Intelligence are going to give institutions like NBFCs a great leverage over the traditional banking systems and drive maximum growth possible. It has to become that the success of an NBFC or a FinTech company is largely dependent on its ability to make the best use of data.
What NBFCs have is the large base of customers and what FinTech companies have is the right technological support to amplify the processes.
Everything said and done, though NBFCs have the advantage of having the traditional systems, the technological assistance FinTech companies have will only add more leverage but not any disadvantages. The right collaboration between NBFCs and FinTech companies will only yield positive results for both the parties and also the borrowers.