Let Regulatory Procedures Not Be Indian Fintech's Achilles Heel
Regulation is key to fintech's success in India and below is OptaCredit's journey through India's regulatory maze.
As Fintech space gets hotter, more entrepreneurs and VCs jump into the fray, it is often the less glamorous component of fintech that gets ignored. Regulation is key to fintech’s success in India and below is OptaCredit’s journey through India’s regulatory maze.
Following are certain points that new fintech entrepreneurs in the alternative lending space have to keep in mind while approaching RBI.
Getting Your NBFC License
- Be clear about your requirements : Understand how you want to operate, which licenses you need and what RBI’s role will be in the whole process. For instance if you are applying for a NBFC - MFI (micro finance) or a Core Investment Company License, the process and RBI’s requirements will be different.
- Most of these details are available on the official website (www.rbi.org.in) .Alternative lenders can choose to either act as a marketplace or a lender themselves, which would decide the necessity of an NBFC License. OptaCredit being an alternative digital lender chose to operate with an NBFC license, as our focus was to lend rather than act as an intermediary. Since OptaCredit was to be an NBFC, we had options of choosing between Deposit-taking(Category A), or Non-deposit taking (Category B) licenses. Being clear about these choices makes the documentation process clear and you know what all you need to submit.
- Plan in advance : A novice would estimate that this process would take 2-3 months. That may not be the case as the vetting process by RBI involves a lot of two-way communication and at many steps an applicant maybe asked to furnish additional documents. Don’t get frustrated because the regulator is only doing its job. They like to be absolutely thorough.
- License Route :There are two options available to NBFC license aspirants – (i) Apply for a new License , or, (ii) Acquire an existing one. Both the routes require RBI Approval, but the second route necessitates a thorough due diligence of all the books of accounts of the NBFC since legacy transactions might have taken place.
- Be Professional : When you are dealing with the apex bank of the country, a basic level of preparedness and professionalism is necessary. Despite what people might say, from personal experience, I can state that RBI is a very open-minded organisation and startups can definitely feel welcomed. However, don’t expect to jump the queue or bypass process.What could not work in your favour, is approaching RBI for something irrelevant or utterly basic. Make your mind before you get into the business of acquiring permissions or licenses.You maybe in hurry but you’ve got to respect the system they’ve put in place.
- Do your homework: One big mistake everyone does is to ignore their website. The website is up-to-date and is a gargantuan repository of everything RBI has done. Every latest guidance, Master Circular, Notification is posted online on their website. It is prudent for anyone approaching RBI to have gone through the website. An understanding of the requirements and procedures is crucial and the website details those perfectly. I, fortunately, had gone through the website and read through their circular (In our case Notification No. DNBR.(PD) 029/CGM(CDS)-2015 dated July 09, 2015), which helped in understanding what was needed from our end.
- Keep your documents ready: RBI works in a certain style and overtime you will understand that documents and checklists are compiled in a certain logic. Documentation is extremely crucial.
- Process : By and large, all the necessary applications and supporting documents need to be physically submitted. In our case, since we took over an existing NBFC Company, all relevant documents relating to change in management and ownership were supervised and vetted thoroughly. Nevertheless in case of any clarifications, the concerned officers were available for clarifications.This is another oft-ignored aspect,i.e, Directory of Officials is listed on RBI’s site and updated regularly. This will help you find out whom to reach out to for relevant approvals.
- Constant Interaction: Be ready to talk. Another surprise in store for us was the constant two-way interaction. It simply is not a place where one could lodge an application or request and forget about it. There was constant feedback and additional requests, which helped us understand where our application was and what needed to be done.
- Quality of Management : Since NBFCs deal with the public directly or indirectly (Either Deposit-taking or Non-deposit taking NBFC), RBI is focused on the quality of incoming Management, their integrity and financial strength. Professionals having relevant experience or track record is a definite plus.
- Financial Strength :NBFCs have minimum Net Owned Fund (NOF) requirements, and as a result, RBI might ask for a statement confirming that the applicants/proposed owners have the necessary financial strength or backing to conform to the necessary capital requirements.
- Due Diligence :RBI being the apex bank has specialised access to data validation and collection, and has its own method of conducting due diligence on applications. It is prudent that an Applicant is totally transparent as falsified data will be unearthed by them, no matter how cleverly you cover your tracks .If there are issues, state them and discuss with the relevant authoritiesand explain the situation. That would help.
- Approachable :This is one misconception that I would like to clarify. RBI Officials are definitely approachable and will help you out in case of any clarifications or issues,but as stated earlier, you need to be clear about your requirements.
Disclaimer : This is not what RBI might look at, but simply something I have understood out of my experience. Hence, cannot be taken as set in stone.