From being tagged as “shadow banks” at one point to now claiming the centre stage in the country’s wealth creation journey, NBFCs in India have more than proven their worth and agility in the past few years.

But what do the next few years look like for NBFCs? How is the ecosystem evolving now that NBFCs are finally embracing digital transformation and innovative business models of working with Fintechs? What can you expect from new technology advancements and collaborations if you are an NBFC?

We’ll cover it all in this blog.

Modern Technologies: A Game-changer for NBFCs 

The JAM (Jan-Dhan Adhar Mobile) Yojna (JAM Trinity) by the government, as well as the increasing Internet penetration in India, especially during the pandemic, has proved to be a game changer in reaching out to the farthest sects and communities in the country. This credible, robust infrastructure has paved the way for financial institutions, including the NBFCs, to reach areas that were earlier dismissed as “unserviceable.”

Identity verification and authentication technologies like voice and face recognition have also played a vital role in making digital-only financial services trustworthy for both customers and regulators. Government regulations and the financial industry embracing modern technologies such as electronic Know Your Customer (e-KYC), video verification (KYC), Internet of Things (IoT), artificial intelligence (AI), digital signatures, and account aggregation systems have built a strong foundation for the future of digital-native financial services.

NBFCs are thus at a critical juncture right now. They have huge underserved markets to service, and technological advancements will be pivotal to their growth and success in the coming years. Embracing digital transformation, fostering customer-centricity, fortifying cybersecurity, and capitalizing on strategic partnerships are essential steps for NBFCs to emerge as leaders in the evolving financial landscape.

Digital Transformation: NBFCs road-to-success 

1. Evolving customer preferences

Today, customers want to easily get loans whenever they want and on whichever medium they want. According to an EY report, customer preferences regarding modes of payment are evolving fast. The survey suggests a 57% decline in cash usage and a 31% increase in payments using cards and other online methods. With customers going digital, NBFCs resisting investment in digital avenues of growth are bound to pay the price in the future.

2. Mobile adoption in underserved areas

With the increased availability of mobile-first services, technology adoption has increased massively, especially amongst the previously unreachable areas of society where banks are still not prevalent. Customers nowadays want to do everything on mobile – from applying for loans to e-KYC to making repayments. To stay up-to-date with this evolving landscape, NBFCs must reimagine their processes and prioritise digital touchpoints in their customer journey.

Addressing the audience at the ETBFSI NBFC Connect 2023 event, Sivakumar Nandipati, Chief Digital Officer (CDO) at Fedbank Financial Services, emphasised the significance of mobility to enhance customer experience, given the widespread adoption of smartphones in today’s society.

3. Leveraging data to unlock new growth opportunities

NBFCs have traditionally used customer account balances and credit scores as the basis for identifying and prioritising non-performing accounts and developing collection strategies.

However, as the next phase of growth for NBFCs is expected to come from accounts with limited or no credit history, NBFCs will need to harness broader datasets and enhance their capabilities for processing big data. This will enable them to extract and synthesise valuable insights from both current and previously utilised datasets pertaining to non-performing accounts, analysing extensive volumes of information.

4. Better operational efficiency
Technology can help automate the processes for loan application, underwriting and closing the loan at speed without hiring more staff. This means they can meet customer expectations for fast service. They can also use AI-powered chat options to quickly help customers without needing to hire more staff around the clock.

Future of NBFCs

Future of NBFCs

The NBFC-Fintech collaboration

NBFCs strategically invest in new technologies and partner with financial institutions and Fintechs. These initiatives aim to reduce costs associated with expanding their customer base, minimising customer acquisition expenses, serving their existing clientele more effectively, mitigating risks in their portfolios, broadening their range of services, and improving how they serve customers. 

Fintechs are nimble, they can bring the technology front, they can change faster, and adapt to customer behaviour but they won’t have the kind of balance sheet and the numbers that the bank would have. So the co-existence of the two will be the answer for the lending ecosystem to move forward. ~ Madhusudan E, Co-founder & CEO – Kreditbee (India Fintech Conclave 2023)

Case in point

According to a Financial Express article published last year, “Cholamandalam Investment & Finance Limited is betting big on fintech firms to drive credit growth to SMEs and consumer borrowers. The company has entered into strategic partnerships with BankBazaar, Kreditbee and Paytail and is in discussion with another 10 fintech firms”.

In another announcement later that year, the NBFC also announced its partnership with a Fintech startup, LendingKart, to disburse working capital loans to MSMEs and expand their reach to customers.

Fast forward to 2023, Chola’s new businesses – consumer & small enterprise loans and secured business & personal loans – have registered disbursements of Rs 1,055 crore and Rs 36 crore respectively in Q1 FY23.Currently, these new businesses account for 2% of the book and we look to grow this to 5%, over a period of time. The new businesses are doing good and that too with minimal NPAs.” Arul Selvan D, President & CFO, Chola, told Financial Express.

Role of Fintechs in building a customer-first business

NBFCs must find the right balance between making their onboarding and customer acquisition simple and yet effective enough to do sufficient due diligence. This is where Fintechs can be of immense help with their expertise in identifying the ideal strategies to effectively engage and win customers through detailed analysis of their online behaviour and preferences.

In the past, lenders used a one-size-fits-all method, where they assessed all customers based on the same credit rules. This approach led to the exclusion of many people who could actually be trusted to repay loans. Now, with the help of Fintechs, advanced AI/ML technology models and advanced data analysis, NBFCs can take a more personalised approach to lending. 

They can create specific guidelines for different customer groups and make decisions about lending based on these guidelines and credit scores from alternative data sources. This new approach should allow lenders to reach a wider range of customers and enable their sales teams to target more potential customers with products that match their credit scores.

Working with Fintechs after DLG

Up until now, NBFCs transferred the money into third-party/pool accounts – primarily owned by their Fintech partners, from where it was further disbursed by Fintechs to their borrowers. But after the Digital Lending Guidelines (DLG) issued by RBI came into effect on December 1st, 2022, it changed the complete money flow between the NBFCs and their Fintechs partners. 

One of the key regulations of the DLG is to eliminate any third-party/pass-through accounts owned by Fintech and ensure direct money transfer between the REs (Regulated Entities) / NBFCs and borrowers – both at the time of disbursal and recollection.

This new RBI guideline made many NBFCs and fintechs rethink their payment infrastructure and how they transferred money to their borrowers.

This is when we launched RazorpayX Digital Lending 2.0

To help NBFCs and their associated Digital Lending Apps (DLAs) / Loan Service Providers (LSPs) and Fintech partners comply with these new guidelines, RazorpayX Digital Lending 2.0 provides a full-stack lending suite that enables these lenders to –

– Automate direct money transfers between the lender’s and borrower’s account
– Manage multiple fintech partners under a single Current account
– Auto-reconcile millions of transactions with their transaction status.

Currently, the product is being used by many leading NBFCs & Fintechs like Credit Saison, Lendbox, MoneyTap Liquiloans, Smart Coin and many others.

RazorpayX Digital lending 2.0 adds a technology layer on top of Current Account and escrow accounts for NBFCs and fintechs, giving the best payout performance imaginable. The product utilises our payouts technology, facilitating large-scale money disbursement for businesses through API banking. With dynamic account routing, your disbursals are automatically directed to well-performing banks, mitigating any potential problems caused by failures or bank downtime. This approach ensures industry-leading success rates with minimal pending transactions.  

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    Author Kanika Singh

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    Disclaimer: Banking Services and Razorpay powered Current Account is provided by Scheduled Banks