India’s fintech ecosystem has rapidly evolved into one of the most dynamic and innovative sectors in the world. While payments, digital banking, and other services have played an important role, lending has emerged as the primary driver of profitability. As a result, many fintechs are now keenly eyeing the coveted Non-Banking Financial Company (NBFC) license.
Let’s explore the reasons behind this trend, the challenges fintechs face in securing an NBFC license, and the potential opportunities that come with it.
The Lending Game: Pathway to Profitability
At the core of the fintech revolution is lending, and securing an NBFC license provides fintechs with a significant advantage in this domain. Here’s why:
1. Direct Control Over Lending
With an NBFC license, fintechs can directly lend to consumers without relying on traditional banking partners. This is a game-changer because it allows fintech companies to retain small-ticket loans on their books. These small-ticket loans, typically catering to individuals and SMEs, form a reliable revenue stream that fintechs can manage more effectively when they have control over the entire lending process.
2. Revenue Streams from Interest and Fees
Once fintechs own the lending process, they can earn not only from the interest charged on loans but also from additional fees, such as processing or late payment fees. With growing demand for small-ticket loans among underserved segments, especially young professionals and low-income customers, the potential for consistent revenue generation becomes significant.
3. Enhanced Profitability
In India’s highly competitive fintech market, profitability is elusive for many startups. Most fintechs focus on growing user bases through payments, digital wallets, or other services, but they often struggle to convert this user base into a sustainable revenue stream. Lending, however, provides a direct pathway to profitability by ensuring fintechs can earn recurring income through interest payments, making it an attractive option for growth-focused companies.
Unlocking Cross-Selling Opportunities
While the lending business itself is a profitable venture, having an NBFC license opens doors to cross-sell other financial products, thereby increasing the Average Revenue Per User (ARPU). Here’s how:
1. Bundling Financial Products
Fintechs can offer a suite of financial products to their existing customer base, including insurance, investment products, and other loan options, all from a single platform. The ability to cross-sell or bundle services enables fintechs to maximize customer lifetime value and deepen relationships with their users.
2. Control Over Customer Experience
While many fintechs have successfully partnered with banks for lending, these collaborations often come with limitations in terms of customer experience, product design, and speed. Owning the NBFC license means fintechs can have full control over how they design, deliver, and manage their services, ensuring a more seamless and cohesive user experience.
The Challenges of Obtaining an NBFC License
Despite the benefits of owning an NBFC license, acquiring one isn’t an easy process. The Reserve Bank of India (RBI) maintains strict regulations for NBFCs, and the competition is fierce, with over 9,300 NBFCs already in operation. Let’s break down the key challenges:
1. Stringent RBI Regulations
The RBI sets stringent compliance norms for NBFCs to ensure the safety and stability of India’s financial system. Fintechs applying for a license must adhere to high standards of governance, risk management, and transparency. This requires fintechs to invest in compliance systems, robust internal processes, and regular audits.
2. Risk Management Expertise
Running an NBFC requires a deep understanding of risk management, particularly when it comes to loan underwriting, credit scoring, and collections. Fintechs must be able to assess borrower creditworthiness effectively, manage defaults, and have a strong collections framework in place. Any missteps in these areas could lead to significant financial losses and regulatory penalties.
3. Capital Requirements
NBFCs are also subject to minimum capital requirements, which can be a significant barrier for fintechs, especially those in the early stages. These capital reserves are meant to provide a cushion in case of defaults or financial stress, but raising this capital can be challenging for new entrants.
NBFC Takeovers: A Strategic Play
Given the hurdles involved in securing a new NBFC license, many fintechs are now exploring the possibility of NBFC takeovers or strategic partnerships with existing NBFCs. This approach comes with several advantages:
1. Faster Market Entry
Acquiring an existing NBFC allows fintechs to bypass the lengthy regulatory approval process involved in applying for a new license. This enables them to start offering loans and other financial services much more quickly, gaining an edge over competitors.
2. Leveraging Existing Infrastructure
NBFCs that are already operational often come with established risk management systems, credit assessment processes, and recovery mechanisms. By taking over such an NBFC, fintechs can leverage this infrastructure while focusing on scaling the business and improving customer engagement.
3. Unlocking Opportunities in Underserved Markets
India’s underserved credit markets, particularly in the SME sector, represent a massive opportunity for fintechs. The SME credit gap in India is estimated to be around $500 billion. Fintechs that hold an NBFC license are well-positioned to cater to these SMEs, offering them access to much-needed credit that traditional banks may not provide.
By focusing on the underserved SME sector, fintechs can tap into a vast market and contribute to the growth of India’s entrepreneurial ecosystem.
Conclusion
The allure of an NBFC license is clear. It empowers fintechs to take control of the lending process, boost profitability, and unlock new revenue streams through cross-selling. However, the challenges—ranging from regulatory compliance to risk management—mean that only well-prepared fintechs will succeed in this space.
For many, the solution may lie in strategic partnerships or NBFC takeovers, allowing fintechs to fast-track their entry into the lucrative lending business. As India’s fintech market continues to grow, the role of NBFCs will remain critical, particularly in serving underserved segments like SMEs. Fintechs that secure an NBFC license now are likely to be the ones driving the next wave of innovation in India’s financial services sector.
The race is on, and the winners will be those who can balance agility, innovation, and regulatory compliance.