NBFC vs Fintech Lender: Who Actually Holds the Loan

A non-banking finance company (NBFC) is what a lender is registered as. The company holds the loans it makes on its own balance sheet and funds them by borrowing in the market. A fintech lender is how a lender operates, through software rather than a branch. The two are not alternatives. One question separates any two lenders: who holds the loan, and who funds it.

One of these two words gets set against the other because somebody put them in the same sentence. An article said a fintech lender was taking share from finance companies. A pitch said the business was not a finance company but a technology platform. A friend said the application on a phone was not a real lender. So the question forms itself: which of the two is this, and which of the two is better?

Here is the difficulty, and it is worth meeting straight away rather than at the end. The two words are not answers to the same question. One of them names what a business is registered as. The other describes how it goes about its work. Asking which one a business is, is like asking whether a vehicle is a truck or a diesel. A truck can be a diesel. A diesel can be a car. The two words are not measuring the same thing, so neither is wrong and neither can be ranked against the other.

One line carries everything that follows. Fintech is a description of how a lender operates and a finance company is a legal position, so the only question with an answer in it is which arrangement a particular loan was made under, and that is settled by who ends up holding the loan.

So the arriving comparison goes aside and a working question takes its place. Both words need defining in full first, on their own terms, before either is set against anything. A loan can actually be made under three arrangements, and six criteria run across all three of them in the same order, starting with the one that decides everything else.

What is a non-banking finance company, exactly?

The phrase is longer than the idea inside it, so take the plainest version first. A non-banking finance company is a company registered to lend. Such a company hands over money, expects it back with interest, and holds what it has lent on its own balance sheet. The one thing it does not do is take deposits. Where a bank funds its lending largely with money the public has placed with it, this lender funds its lending by borrowing in the market from somebody who expects that money back on a stated date at a stated rate.

Three properties follow, and everything below is downstream of the first two.

The company holds the asset. The loan is on its books as something it is owed. Not on somebody else's books, not on a platform's books, not on a pool's books somewhere out of sight. Its balance sheetThe statement listing what a business holds and what it owes, on one date. Reading one is settled separately and is used here rather than explained again. carries the loan at a number, under its own name.

Its funding has a rate and a repayment date of its own. This is the part readers skip and it is the part that decides how the business behaves. Rukmini Finance Limited, invented, holds assets under managementThe total of what a lender holds and is responsible for. Here it is the whole loan book of the business, taken as one number for one year. of Rs 18,000 crore. Behind that sit borrowings of Rs 14,400 crore and its own net worthThe money the business itself has in the game, being what would be left if everything it holds were realised and everything it owes were paid. How it is built up is settled separately. of Rs 3,600 crore. Borrowings and net worth add to the Rs 18,000 crore exactly, and that is the point: every rupee it has lent is a rupee it either borrowed or put in itself. The borrowings are 4.0 times its net worth and 80.0 per cent of assets under management.

The third property is the one nobody advertises. The company carries the loss. When a repayment does not arrive, the shortfall lands in this lender's own accounts and nowhere else, unless it has separately arranged for somebody to stand behind part of it. Holding an asset means exactly that: the income and the disappointment arrive at the same address.

The conditions on which such a company is registered, what it must hold behind its lending, and what it is permitted to do once registered are set by the Reserve Bank of India at rbi.org.in, and they move.

What does the word fintech describe about a lender?

Now the other word, defined on its own terms and not against the first one. Fintech describes how a lender operates. OriginationThe work of finding a borrower and getting a loan made: the application, the checks, the sanction and the paperwork behind it. Covered separately in its own right. happens through an application rather than across a counter. The decision to lend runs through software rather than through a person reading a file. ServicingEverything that happens after the money goes out: taking instalments, keeping the record straight, answering questions and following up what has not arrived. runs through the same channel, so instalments, statements and reminders arrive on a screen instead of in an envelope.

The difference in how the work is done is real and consequential. Software changes the cost of reaching somebody, the time between an application and a decision, and the number of loans one process can carry. None of that is small. The limit of the word is narrower and sharper than any of it.

The word describes a channel, and a channel is not a balance sheet. Four things it leaves open, and all four of them are the things worth knowing. The word does not say who is registered to lend. Nor does it say who holds the loan. Nor does it say who funded it or at what rate. And it says nothing about who carries the loss when a repayment does not arrive.

Consider a shop down the road that started accepting cards last year. The card machine changed how customers pay and how quickly the shop knows it has been paid. The machine did not change who has bought the stock, who is on the rent agreement, or who is out of pocket if nothing sells. The channel moved. The position did not.

Why does comparing the two answer nothing?

Set the two definitions side by side and the trouble is visible without any argument. One of them is a legal position: registered to lend, holding the loan, funding it, carrying the loss. The other is an operating style: the work running through software from the first tap to the last instalment. A single business can be both at once, and a great many are. Ranking one word against the other therefore produces a question with no answer in it.

Worse than having no answer, the question hides the one that does. While the two labels are being weighed, nobody has asked whose books the loan is on. And that single unanswered fact is carrying who takes the loss, who has to hold capital behind the loan, whose funding cost is inside the price, who the borrower actually owes, and what would stop happening if the funding stopped arriving.

So the honest comparison is not between the two words at all. The comparison worth making is between the arrangements a loan can be made under, and there are three of them. In the first, the business is itself the registered lender and holds the loan. In the second, it holds nothing and sources, services or collects for a lender that does. In the third, the loan is shared and each lender holds and funds its own part. Every one of the three can be run entirely through software, and every one of the three can be run on paper. The labels therefore cannot sort them, and the arrangement can.

Who holds the loan in each arrangement?

Who holds the loan is the first criterion, and it sorts everything after it. Read the three arrangements in order, and notice that the only thing changing is where the loan sits.

The own book. The business is registered to lend, and the loan it made sits on its own lending side. Rukmini Finance Limited is this. Whatever it originates, it carries: its funding side of borrowings and net worth is standing behind every rupee of it, and it stops originating when that funding side stops stretching.

The service role. The business holds nothing. Such a business finds the borrower, runs the application, sometimes takes the instalments in, sometimes follows up what has not arrived, and hands all of it to a lender that holds the loan. The party doing this is called the lending service provider. Its lending side never made a loan, so no loan sits on it.

The shared loan. Two lenders each hold a part of the same loan, each funds its own part, and each carries the loss on its own part. Suvarna Commercial Bank Limited, also invented, is the kind of party that sits on the other side of one of these with a finance company.

Here is the household version, and it does clarify the distinction. A wedding is being catered. One arrangement is that the caterer takes the order, buys the vegetables with their own money, and eats the loss if half the guests do not turn up. Another is that somebody finds the family a caterer, takes a fee for the introduction, and is not out of pocket whatever happens to the vegetables. A third is that two caterers split the order and each buys their own half. All three can be arranged over a phone, and all three can be arranged over a printed form. The channel says nothing about which of the three is in front of anybody, and whose vegetables they are says everything.

Who funds it, and at what cost?

The second criterion is where the three arrangements stop looking similar, so it is worth working all the way through with figures. Rukmini Finance Limited is the first arrangement, so its whole year can be laid out in one build.

Rukmini Finance earns 14.50 per cent a year on assets under management of Rs 18,000 crore, or Rs 2,610 crore. The company pays 8.50 per cent a year on borrowings of Rs 14,400 crore, or Rs 1,224 crore. Net interest incomeWhat a lender earns on its lending less what it pays for the money behind it, before any other cost. Struck here on one year and on one base. is the difference, Rs 1,386 crore, and that is 7.70 per cent of the same Rs 18,000 crore of assets under management.

The base moves once, and that move is the only trap in the arithmetic. Watch it carefully. The 8.50 per cent a year is struck on borrowings of Rs 14,400 crore, not on the whole book. Put the same Rs 1,224 crore over assets under management of Rs 18,000 crore instead and it reads 6.80 per cent a year. Both numbers are correct and they are not the same number. A funding cost is meaningless until the base it is struck on is stated, and the gap between 8.50 and 6.80 per cent a year here is entirely the choice of denominator.

Every figure in the right-hand column is struck on the same Rs 18,000 crore, and that shared base is what lets them add and subtract down the column. The column reads as a sentence: of the 14.50 per cent a year the book earns, 6.80 goes to whoever lent the money, 3.00 goes to running the business, 2.20 goes to repayments that did not arrive, and 2.50 is left before tax.

Now carry that build across the other two arrangements, and notice how much of it simply stops existing.

In the service role, not one line of that table belongs to the business at all. The business holds no book, so there is no Rs 18,000 crore to strike anything on. Nothing was borrowed against that book, so there is no funding cost. No loan is held, so no credit cost lands on it, unless the business separately agreed to stand behind some of the loss, and that is a different arrangement covered separately. Instead there is a payment for work done, and no figure for that payment appears anywhere in these accounts. The bounds that can still be put around such a payment come below.

In the shared loan, each lender carries its own share of every line. Rukmini Finance funds its part at 8.50 per cent a year on its own borrowings. Suvarna Commercial Bank funds its part out of its own funding side at whatever that costs it. SpreadThe gap between the rate a lender earns on lending and the rate it pays for the money, in percentage points over a stated period. on the same loan is therefore not one number but two, and the price the borrower sees sits above a blend of the two rather than above either one. The sharpest consequence follows: funding cost belongs to the holder rather than to the loan, so one loan can contain two different funding costs.

Who does the borrower actually owe the money to?

The third criterion is the one a borrower cares about more than any other, and the one analysts skip fastest. The answer is different in each arrangement, and in exactly one of them it is a genuine surprise.

In the own book, the party the borrower dealt with and the party the borrower owes are the same party. Rukmini Finance found the borrower, decided, disbursed, and holds the loan. One name across the whole thing.

In the service role, they are not the same party, and this is the sentence the whole part exists for. The application the borrower filled in, the brand on the screen, the number that sent the reminder, all of that belonged to a business that holds no loan at all. The money is owed to the lender standing behind it, and the lender holds the loan on its own books, funded it, and carries the loss on it. The party the borrower dealt with was acting for that lender.

In the shared loan, the borrower owes two parties at once, each for its own part, whatever the front of the arrangement looked like.

The shape is familiar from somewhere entirely non-financial. A train ticket booked through an agent: the agent took the money and sent the ticket, and the agent is not the railway. If the train is cancelled, the agent cannot decide anything about it. Every question that actually matters goes to the party whose service it is. The practical cost of not knowing who the lender is, is that nothing which depends on knowing can be exercised. A correction to a record, a question about a charge, a complaint that needs to go somewhere: each of them needs the name of the party that holds the loan, not the name on the screen.

Disclosure to a borrower about who the lender actually is, and about the role of any party acting for that lender, is set by the Reserve Bank of India at rbi.org.in, and it moves.

Who answers when something goes wrong?

The fourth criterion, and the general shape can be stated without stating any rule. Responsibility for the conduct of a party acting for a lender does not disappear because the work was given to somebody else. Giving a job away moves the doing of it. The answering for it does not move.

The everyday version is instant. A contractor hired to paint a flat sends two painters, and the painters spill paint on the stairs. Nobody chases the painters. The contractor is the party that was engaged, so the complaint goes back to the contractor. Nobody finds this confusing until the same shape appears with a loan in the middle of it.

So the useful habit, and it works on any arrangement: do not ask who did the thing, ask whose name the loan is in. A reminder sent at a rude hour, a charge nobody explained, a record that says something untrue: the party whose conduct is being complained about may be a partner, and the party that answers for it is the one holding the loan. The requirements on a lender that gives part of its lending process to another party are set by the Reserve Bank of India at rbi.org.in, and they move.

Notice how little of this depends on the channel. The criterion is about who holds the loan, not about how the work reaches the borrower. A lender operating entirely through software and a lender operating entirely through branches therefore sit in exactly the same position on it.

What can this record bound, and what can it not?

Two of the three arrangements have no figures anywhere behind them. A second lender in a shared loan reports its funding cost in its own accounts and nowhere in the first lender's, and a payment to a business that holds no book is buried inside somebody else's expense line. A hole like that admits three responses. An invented number, and everything said alongside it becomes untrustworthy. Silence. Or working out what the figures that do exist force to be true, naming the gap out loud, and stopping there. Some absences are bounded on one side, some on the other, and some are not bounded at all, so an absence is worth classifying rather than apologising for.

A ceiling: what a partner could have been paid

The record carries no fee line, so the payment itself cannot be stated. A cap can still be put on it. A payment to a party that sources, services or collects for Rukmini Finance is a cost of running Rukmini Finance, so it sits inside the operating expense line. The operating expense line for the year is Rs 540 crore, being 3.00 per cent of assets under management of Rs 18,000 crore. Nothing can be taken out of a line larger than the line. The largest such payment possible in this year is therefore Rs 540 crore. The other end is Rs 0/-, because the first arrangement uses no partner at all. Two endpoints, then, and both of them printed: Rs 0/- and Rs 540 crore. Where between them the truth sits is not in this record.

A floor: the yield below which the book stops covering itself

Every cost in the build is struck on the same Rs 18,000 crore, and that shared base is what makes this floor provable. Funding takes 6.80 per cent a year of that base, running the business takes 3.00 per cent and credit cost takes 2.20 per cent. The three add to 12.00 per cent a year, being Rs 2,160 crore. Below a yield of 12.00 per cent a year on assets under management, this book stops covering its own costs before tax, whatever else is happening. Again two endpoints rather than a vague range: the floor is 12.00 per cent a year and the book actually charges 14.50 per cent a year, and the distance between the endpoints is 2.50 percentage points of the same base, which is the Rs 450 crore in the last row of the table.

An unknowable: how a shared loan splits

Here nothing can be bounded at either end, and it is worth being exact about why rather than merely asserting it. Every figure this record carries for Rukmini Finance is a total across its whole book. The Rs 18,000 crore is not broken down anywhere, by product, by borrower type or by arrangement, and no such breakdown exists to be consulted. Any split whatsoever is consistent with the same total, so a total places no bound at all on how one loan inside it is divided. The second lender's own funding cost is unbounded in the same way: no rate for any second lender exists here, so nothing can be derived, capped or floored. The third arrangement is therefore described by its shape and carries no figure of its own, and the funding segment in the drawing above is hatched rather than filled.

Where does each arrangement stop?

Limits rather than a ranking close the comparison, and the limits differ in kind rather than in size.

The own book stops where the capital and the funding stop. Everything Rukmini Finance originates it must carry, so its Rs 3,600 crore of net worth and its Rs 14,400 crore of borrowings are the ceiling on how much book there can be. Growing the book means growing one of those two first. The funding side is a real constraint, and it binds well before anybody runs out of borrowers.

The service role stops where the volume stops. The business earns for work done rather than for holding an asset, so it grows with the number of loans passing through it rather than with a book. There is no leverageHow many rupees of assets a business carries for each rupee of its own money in it. The measure and its uses are settled separately. to pull on, because there is no book to lever, and equally there is no book to lose money on.

The shared loan stops where agreement stops. Two parties must say yes to the same borrower on the same terms at the same time, and that is a slower and narrower gate than one party saying yes alone.

None of these three limits is a fault, and none of the three arrangements outranks the others. The three are different shapes with different constraints, and a favourite among them is the wrong thing to take from the comparison.

All six criteria in one place make the pattern visible at once: the first row is doing the work in every other row.