FICCE-White-Paper

SHAPINGTHE FUTURE OF LENDING
for Non-Banking Financial Companies
TECHNOLOGY-LED INNOVATION WILL DRIVE
The next wave of growth for Indian NBFCs

Lender Type Wise Credir Growth Trends
Source : RBI, Annual Accounts od NBFCs & Mortgage lenders
and ICRA Research
0.0%
Mar - 12
Banks NBFCs HFC
Mar - 13 Mar - 14
10.0%
20.0%
30.0%
40.0%
urban areas, and financing activities like commercial
vehicles, retail trade and leasing. NBFC’s share of
banking assets has steadily grown from 10.7% in 2009 to
14.3% in 2014, and today it is clear that NBFCs have
established systemic importance. Uniquely, they are able
to offer innovative products while maintaining proximity
to the customers through the entire lending process and
this is what makes the NBFCs different from their
banking counterparts.
However, significant shifts in the regulatory
environment, increasing levels of interest rate volatility,
changing customer expectations, and heightened
competition have made it challenging for NBFCs to
maintain their historical growth rates.
To remain competitive, NBFCs must deliver innovative
products and services at a faster rate. Their price point
must be attractive for customers as well as profitable to
the organization. And most importantly, they must reach
the customers through wide ranging channels including
internet and mobile. In order to balance these
requirements, the modern-day NBFCs need to rely on
technology. By using the latest technologies, NBFCs can
improve customer experience while delivering
innovative products and services across multiple
channels. In short, technology can help them enhance
their business agility while also helping them to respond
to regulatory changes and competitive headwinds.
competitive headwinds.
ver the years, NBFCs have played an
instrumental role in the Indian economy. They
have powered the engines of growth in
financial intermediation across rural & semiO
01Technology-led Innovation will drive the next wave of growth for Indian NBFCs
NBFCs have registered an impressive growth in the last decade.
While the banks have grown steadily at a rate of 11.5%2 in
terms of total assets, NBFCs have grown at a rate of 21.36%3.
Credit growth has moderated over the past couple of years
following the slowdown in economic activity as reflected by the
reduction in IIP (Index of Industrial Production) growth to 0.1%
in 2013-14 against 1.1% in 2012-13. Amongst all Financial
Institutions, NBFCs saw the sharpest slowdown in growth falling
from 21% in 2012-13 to 12% in 2013-14, followed by HFCs (from
24% to 19%) and banks (14.0% to 13.6%)
NBFCs in India have played a vital role in meeting the
financing needs of a country whose GDP has grown 2.6
times in the last 10 years
(2004-14)1. While commercial banks account for 60% of
total assets, there are considerable gaps in the financial
system. There are gaps in the products that are offered,
the geographies that are covered and the customers that
are served. Many lines of business initiated in the sector
have later been taken up by the banks and eventually
became regular banking services. For instance, car
financing was started by NBFCs and has now become one
of the biggest revenue streams for banks. ICRA expects
NBFCs and HFCs to grow at a faster pace than banks due
to their superior service levels and customized lending
approach, which helps them broaden their customer
base.
sales@nucleussoftware.comwww.nucleussoftware.comwww.nucleussoftware.com sales@nucleussoftware.com
Growth in AUM of retail NBFCs (in USD billion)
63.861.7
49.2
39
3435.8
20.4
2007
0
20
40
60
80
Source : ASSOCHAM, Econamic Times, CRISIL, Dun and Bradstreet,
ICRA, ARANCA Research
2008 2009 2010 2011 2012 2013
The Growth Story so far…
India NBFC – An Overview

What got you here, won’t get
you there
NBFCs have thrived on a business model distinct from
that of banks. NBFCs typically have several advantages
over banks due to their focus on niche segments,
expertise in specific asset classes, and deeper
penetration in the underserved and unbanked
markets.Unlike banks, NBFCs do not have mandatory
priority sector lending which gives them freedom to
operate in niche markets. On the flip side, they depend
to a large extent on bank borrowings, leading to high
cost of borrowings and face competition from banks
which have lower cost of funds.
They have designed products and services focused on the
needs of their target customers, which are either overlooked by
the commercial banks or are simply not served by banks due to
their tight regulatory requirements.
sales@nucleussoftware.comwww.nucleussoftware.comsales@nucleussoftware.com www.nucleussoftware.com
In recent times, the behavior of financial services customers has
changed significantly and the number of players providing
financial services has also increased. Today, the NBFCs are
competing not only amongst themselves & with the banks but
also with completely new categories of market players.
Recent changes in regulations by RBI have eroded the benefits
that NBFCs traditionally enjoyed over the banks. More stringent
prudential norms for systemically important NBFCs are aimed at
bringing them in-line with the norms for banks by 2018. This
will increase the reporting and documentation requirements of
the NBFCs. All of this poses a question as to how can the NBFCs
differentiate themselves from the other lenders and provide
better services to their customers.
NBFCs have targeted very specific segments of
customers. They are focused on niche segments which
are defined by region, income levels or a variety of other
factors. Therefore the reach of NBFCs is also limited by
the size of the segment they target.
The major focus of the NBFCs has been lending. They
have acted like innovators in financial services sector.
Bank's liability base are retail and
corporate deposits
Retail & commercial deposit
Bank liability profile
Savings Account Term Deposits Current Account
Borrowings Other
8%
0% 50% 100%
6%47% 12% 27%
While NBFCs rely on wholesale funds for growth
wholesale Funds
NBFC liability profile
Bank Commercial Papers NCD
Tier II Bonds
0% 50% 100%
4%35% 32% 29%
Need for
Change
Bargaining
Power of
Consumer: HIGH
-Many Alternatives
-Large number of NBFCs
-Banks
-P2P Lending Players
-Undifferentiated Services
-Marketing Strategies
Threat of
substitutes:
Moderate
Intensity
of Rivalry: High
Innovation by an Asset Finance Company
A transport finance company started by focusing on the
much-neglected small truck owners in India. They identified this
niche customer segment was not being serviced by any other
bank or NBFC. They also realized that even if the truck operator
was honest and had growth potential, the equity at his command
was not sufficient to support the credit levels required for buying
a new truck. So they decided to fund pre-owned trucks.
This was a perfect example of an NBFC achieving success through
innovation, designing a product specifically to meet the needs of
a customer segment. Today, this NBFC is one of the largest NBFCs
involved in commercial vehicle finance.
The need for a new strategy

Evolving Customer Behavior:
The Personalization Imperative
Innovation by an Asset Finance
Company
A new growth horizon:
Technology-led innovation
The increased penetration of the internet and
smartphones means that customers are better informed
than they were in the past. Various web aggregators
have also improved customers’ bargaining power by
providing comparison platforms to directly assess the
offerings of banks and NBFCs.
As most consumer goods are available online with high
levels of transparency, customers now expect the same
levels of transparency from their financial services
providers. Bank Bazaar has changed the lending
paradigm by enabling customers to move from “Apply
for a Loan” to “Shop for Loans”.
The examples of innovation from around the world highlight
where the future of financial services is moving. Systems and
processes are being designed with ease of access and customer
friendliness in mind. Put simply, revenue growth can be
achieved by either attracting new customers or getting more
value from existing customers. We have earlier talked about the
changes in customer behavior due to technology, so, to get
more business from the smart customer, we need to deliver
more value.
According to Gartner, the banking and financial services
industry has the second highest spending on IT. In the report, IT
Spending in Banking: A Global Perspective, Celent mentioned
that total bank IT spending across North America, Europe, and
Asia-Pacific would grow to US$196.7 billion in 2015, an increase
of approximately 4.6% over 2014. Research shows that 65% of
IT spending is required just to keep systems running, leaving
precious little to invest in new capabilities.
One Click Mortgage by a Korean bank to offer a fully
processed online mortgage product is a platform
developed to simplify the complicated mortgage process.
This product is processed in 5 steps; e-application,
e-underwriting, e-signing, e-document and e-closing.
During the process, the potential borrowers do not need
to visit offline branches. By adopting the One Click
Mortgage system, potential borrowers save time and
money because of online accessibility and efficiency.
Online Credit Process by a Poland based bank is a unique
lending method that offers a new process for online
payments. “The Installment Payment Method” allows a
customer to purchase products or services, complete the
loan application, and receive a credit decision and funds
with a single paperless process; without logging off from
the online store. Through the development of an
algorithm that enables a comprehensive evaluation of the
customer’s creditworthiness over the internet, customers
can not only apply for credit but also receive a decision
and funds within 90 seconds. Both the purchase
transaction and the loan process are completed in one
process through the revolutionary combination of income
verification and online verification of customer identity
that is accomplished without the customer having to visit
a branch or sign and deliver any documents.
Banks spend a lot on IT and it is increasing – most of which is
driven by regulations. In order to ensure regulatory compliance,
financial institutions need to hire extra man-power along with
investing into IT systems for reporting purposes.
While Grow and Transform spending accounts for a relatively
smaller percentage of overall IT spending in most financial
institutions, it is the portion of IT spending that has the
potential to reshape the industry dynamics and provide
maximum overall IT value.
When financial institutions make the IT investment decisions
with a focus on driving growth and transformation benefits, the
entire decision process is built around the concept of customer
centricity. Be it expansion into newer service channels, offering
specialized customer centric products, efficient and robust
processes etc, IT is of paramount importance to have a
competitive edge.
65% OF IT SPENDING IS JUST TO KEEP THE
BANK RUNNING*
Innovation from across the world
* Gartner Report

Delivering Better Services:
The Ultimate Customer Experience
NBFCs have to play an innovative role in the Indian
financial services sector. In a sector with intense
competition, NBFCs have to innovate with solutions built
around the customer. IT has to be at the heart of that
drive, enabling them to deliver better services and
improved customer experience. NBFCs need to continue
investing in IT not only to tackle the ever increasing
competition but also to focus on customer centricity.
Traditional service channels
Basic products & services
Service quality dependant
on individuals
Manual Processes to reduce
NPL levels
High Maintenance costs reducing
ability to invest for the future
Run The Bank
Omni channel presence
Market leading, insight driven
products
Leveraging the combined
knowledge at point of contact
seamless credit quality checks
and scoring for lower NPL
Dramatically lower TCO freeing
funds to invest for growth
Change The Bank
By delivering
better services
By maintaining
better
relationships
By venturing into
new regions
By venturing into
new businesses
Sell more to
existing
customers
Sell to more
customers
Growth Focus
Expansion
Enhancement
0 2 4 6 8 10
Healthcare Providers
Retail
Insurance
Transportation
Government
Manufacturing
Banking and Securities
Communications, Media
India, Vertical Industries, IT
Spending CAGR %, 2014-2017
NBFCs must listen to their customers and understand their
needs to deliver better services to the customers. Customer
service is a primary driver for growth, especially in lending
where the reputation of the financial services firm and word of
mouth influences wide number of consumers in India. Thus, the
investment in improving customer experience brings benefits
not only to existing customers but also attracts new customers
as well.
Below are the three primary components to drive ultimate
customer experience:
Personalized offerings (“Know-Me”): Offer customers the
products and services that they need.
Omni-channel Experience (“Serve-me-promptly”):
Integrated cross-channel experience to provide
accessibility and convenience.
Customer Engagement (“Respect-my-time”): Engage with
the customer with relevant content about contextual
offers through the right channel at the right time.
Through this whitepaper, we look at “delivering better
services” as one of the ways to achieve growth.

Channel
Innovation
Customer
Engagement
Product
Innovation
Product Innovation:
Customize and personalize
offerings
Product innovation is not only about enriching existing
products and services but also about additional offerings
which will complement current ones to create a more
comprehensive package. It often involves creating a
bundle of products and services which address a specific
problem or need that the customer is facing. Customers
are now getting cautious about the price they are paying
and the services they are availing.
In financial services, it is increasingly difficult to
differentiate on products and services. Instead,
differentiation can be achieved through pricing and
distribution to the relevant customers, but to do this,
the most important step is to understand the customer.
Personalized services can be offered through insights
into individual customer and peer-group preferences
and matching their needs to banking products and
services using analytics.
Enhanced risk assessment can be performed by NBFCs
for customers based on intelligible finance and risk data
gathered for the customers in that segment.
Customer demands and usage patterns are undergoing a shift
from the traditional channels like branches to direct channels.
This shift has resulted in direct channels emerging as a vital
route to reach a larger audience at a much lower cost. Client
preferences such as demand for convenience and transparency
have increased the need for multi-channel interconnectivity.
The advent of technology has led to the evolution of multiple
channels from where customers can view and fulfil various
requirements for their applications and place service requests.
NBFCs need to deliver these features by leveraging innovative
technologies and solutions for a seamless and personalized
experience. There is a need to invest in the channel networks to
make them more customer-centric and user-friendly, which
could, in-turn, also improve the channel efficiency for better
return on investment and increased profitability.
Expanding the services to various advanced channels will not
only increase the reach of the services but will also reduce the
cost of processing, reduce the turnaround time and boost
cross-selling of the products.
Mahindra Finance has adopted product innovation to tap the
rural markets of India. They realized that to serve rural
customers they needed to design a product which suits the
requirements and repayment ability of the rural population.
While all home loans are EMIs, a lot of rural loans by Mahindra
finance offer half yearly or quarterly repayments as a farmer
gets money once in six months. While most players charge a
pre-payment penalty Mahindra Finance encouraged pre
payments because they realized that when a farmer has had a
good harvest, it is better to take money from him instead of him
putting it under his bedding. While most of the players give a
floating rate of interest, Mahindra Finance was the only one to
offer a fixed rate of interest because that was easier to
understand and plan for.
Channel Innovation: Mahindra Finance
Better Service to the
Customers
Channel Innovation:
Convenience and consistency

Customer Engagement:
Relevant content and customer
loyalty
Customer retention will be a key factor in the growth of
NBFCs. In the face of enhanced competition from
traditional and non-traditional players, decreasing loyalty
especially among young customers who are distanced
from their bank and loss of customer intimacy due to
self-service channels, customer retention is becoming a
challenge. To cope with this challenge NBFCs have to find
new ways to improve customer engagement.
The Road Ahead:
Modernize or Perish
There is a significant shift in the behavior of customers and the
NBFCs need to ensure they take advantage of it. So, while
customer demands from NBFCs are growing, the tools to meet
these demands are also at their disposal. As true leaders of
innovation, NBFCs need to ensure that they remain a step
ahead of the customer by taking a holistic, integrated and
consistent approach towards customer service. Technology-led
innovation can help them not only keep up, but also drive sales,
loyalty, profitability and growth in the years to come.
Customer engagement can be increased either by
improving how a customer approaches the NBFC or by
improving how a NBFC approaches a customer. For
instance, a more refined segmentation approach taking
into account customer aspiration, attitude and behavior
or moving from product oriented customer
communication to a product communication tailored to
specific customer could improve significantly how an
NBFC approaches a customer. On the other hand,
strengthening the traditional distribution channels like
branches and kiosks with social media outreach can
improve how a customer approaches an NBFC.
It provides a unique customer experience with
re-designed Internet and mobile banking fully leveraging
modern technologies to deliver state-of-the-art,
end-to-end customer experience and unparalleled sales
effectiveness. The new platform delivers the next
generation of digital banking, with a mix of
customer-centric interfaces, advanced and integrated
money management features, quick search, gamification,
real-time customer relationship management (CRM),
merchant-funded rewards, Facebook integration and
video banking.
For an American Bank, BAC Ticket
The BAC Ticket enables customers to select a bank branch
closest to their location from their mobile device, generate an
electronic ticket and virtually stand in line for teller transactions
or customer service. The app shows the current number of
customers in each branch and estimated waiting times. It sends
a notification when the customer’s turn is approaching. Upon
arrival at the branch when the ticket is called upon the customer
simply presents the electronic ticket on their mobile device to a
bank officer. This in turn prompts the app to display a
satisfaction survey which is used to measure the quality of
service provided in real time.
The Next Generation Digital Bank

Mr. Arup Das is the Vice President and Lending Product Head (P&L Management) at
Nucleus Software where he is responsible to lead the ﬂagship product to the next level
of global leadership. Before joining Nucleus, he has played various roles in strategy and
product management with leading companies like CISCO, IPValue and Mphasis.
Author email id: arup.das@nucleussoftware.com
Arup Das
Lending Product Head (P&L Management), Nucleus Software
Mr. Sanjeev Kumar is the Lending Product Manager at Nucleus Software where he is
responsible for managing P&L for the ﬂagship product, FinnOne Neo for India and
Japan region. Before joining Nucleus, he has played various roles including Product
Marketing, Business Development and Alliance Strategy with leading companies such
as Microsoft, Citi Group and SunTec.
Author email id: sanjeev.kumar@nucleussoftware.com
Sanjeev Kumar
Lending Product Manager, Nucleus Software

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