Fintech startups apply for NBFC licence as lending pays off big

Illustration: Rahul Awasthi Fintech startups such as OkCredit, Khatabook, BharatPe and NiYo are applying for a Non-Banking Financial Company (NBFC) licence, people familiar with the developments said, as they look at lending as a key revenue stream. The aim is to maintain their own loan books instead of sharing the profit spread with partners. If they manage to get an NBFC licence, it will significantly lower cost of capital and quicken the loan disbursal process. However, building credit assessment and collection processes, as well as using technology to detect frauds and leakages will be key to scaling up operations, industry observers said. “It is a natural progression for not just fintech companies, but for most tech-based consumer- facing businesses,” said Akash Gehani, cofounder of Instamojo, a financial services startup that caters to MSME vendors and merchants. OkCredit, Khatabook, BharatPe and NiYo did not respond to emails seeking comment as of press time on Thursday. Currently, most fintech companies that are into the business of lending cross-sell services with a registered bank or NBFC. Startups such as RazorPay, Instamojo, Enkash, BharatPe and Paytm partner with some of the largest banks in the country to offer loans to their existing customers. “It is fundamentally clear that there is no money in payments. The core business model is lending. As UPI grows more through our platform, we can disburse more loans through our partners,” Ashneer Grover, cofounder of BharatPe told ET in a recent interview. Several fintech players say their growing expertise in underwriting loans through a stack of customer data can help them evolve into primary lenders — a transition that may see their revenue models change from fee-based to the more lucrative interest-based incomes. “My guess is that when you work with these partner banks and NBFCs, some of the learning spills over to you. The bigger concern is not only underwriting, but also recovery of these loans. Things can get a bit tricky,” said Gehani. Instamojo may also consider applying for an NBFC licence in the near term, he added. Several risks could, however, curtail the banking ambitions of these fintech companies, industry experts said. The crisis in the shadow banking sector, which unfolded with Infrastructure Leasing and Financial Services (IL&FS) defaulting on its debt obligations in September 2018, had dented market confidence in the sector. The effect of the collapse of one of the most systemically important NBFCs snowballed into a greater risk to the real financial sector, prompting the central bank to tighten regulations for these non-banks. “We have seen over the last 18 months the RBI cancelled hundreds of licences after a long time,” said Naveen Surya, chairman of the Fintech Convergence Council, an industry body of over 300 fintech companies. “Getting licences may be less of an issue for these fintech companies, but maintaining compliance could pose a challenge,” Surya said. The startups could, however, get approvals faster due to their “enhanced due diligence processes” and a lack of legacy issues, he added. “In India, everyone can give loans, but the real challenge is in the recovery of these assets,” said a top industry executive highlighting the business side risks for these startups.Follow and connect with us on Twitter, Facebook, Linkedin

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