NBFCs’ Financial Evolution with Core Financial Service Solution(CFSS)

February 6, 2024

The RBI, on October 22, 2021, mandated Non-Banking Financial Companies (NBFCs) with 10 or more branches to adopt the ‘core banking solution’ adopted by banks (‘CBS’). It is like an ultimate resource for NBFCs, making things smoother. RBI aims to blend operations, make connecting with customers easier, and have one big database. This means better services for you, anytime, anywhere. So, get ready for positive changes ! Let’s dive into what CFSS is all about and how it can enhance the power of NBFCs to stay on top of their game!

What is CFSS to NBFC?

CFSS is a digital platform similar to Core Banking Solutions (CBS) used by banks. It provides a centralized accounting system and database, enabling NBFCs to integrate multiple functions on one platform for a smooth digital customer experience.

CFSS Goals:

■ To Create a seamless customer interface to streamline digital transactions, simplifying the process for customers.
■ Integrate NBFC functions to unify various operations, enhancing efficiency across the organization.
■ Establish a centralized database and accounting system to effectively organize data and streamline financial processes.
■ Generate reports to meet both internal and regulatory needs using the MIS.

Why is CFSS Important for NBFCs?

■ Enhanced Operational Efficiency: Boost your efficiency by automating tasks and cutting unnecessary costs.

■ Seamless Customer Experience: Elevate customer satisfaction with a user-friendly digital platform, providing 24/7 access and personalized services.

■ Robust Risk Management: Safeguard your business by proactively identifying and mitigating risks through advanced data analysis and compliance tools.

■ Data-Driven Decision Making: Harness the power of your data for informed and strategic business decisions.

■ Regulatory Compliance: Simplify your compliance journey with automated reporting and streamlined data management.

Mandatory Implementation of CFSS:

As per the Circular dated February 23, 2022, NBFCs – Middle Layer and NBFCs – Upper Layer with 10 or more ‘fixed point service delivery units’ must implement the Core Financial Services Solution (CFSS) by September 30, 2025. CFSS, akin to CBS, ensures seamless digital customer interface, integrates NBFC functions, centralizes database and accounting records, and generates management information systems (MIS) for internal and regulatory reporting. Alignment with modern digital practices is required by October 1, 2022.

Timeline of Implementation

Mandatory implementation of CFSS by September 30, 2025, applies to Middle Layer (ML) and Upper Layer (UL) NBFCs with 10 or more fixed service units. UL NBFCs need 70% implementation by September 30, 2024. Encouraged for Base Layer (BL) NBFCs and ML/UL NBFCs with <10 units, CFSS adoption isn’t compulsory but offers benefits like enhanced efficiency and regulatory compliance. This phased approach ensures operational enhancement while accommodating smaller NBFCs.

Quarterly Progress Reporting

As per RBI, NBFCs must submit quarterly progress reports on CFSS from March 31, 2023, to the Senior Supervisory Manager. Timely and accurate reporting demonstrates commitment, meeting regulatory requirements. These reports, detailing achievements and challenges, not only fulfill guidelines but also enhance transparency, supporting RBI oversight and your NBFC’s successful CFSS implementation.

Target Audience segment

NBFC-Upper Layer (UL) and Middle Layer (ML) with 10+ branches: By September 30, 2025 (UL: 70% by Sep 30, 2024).

NBFC-Base Layer (BL) and ML/UL with less than 10 branches: Not mandatory, but highly encouraged.

Both deposit-taking and non-deposit-taking NBFCs can fall under the UL, ML, or BL categories based on their asset size and activity level.

CFSS Key Metrics and Software Essentials:

Implementing CFSS for your NBFC involves tracking key metrics and ensuring your chosen software fulfills specific requirements:

■ Operational efficiency – It is measured by the time taken for loan origination and account opening, the average resolution time for customer inquiries, the number of manual tasks automated, and the reduction in operational costs achieved through streamlined processes.

■ Customer account – This is evaluated based on metrics such as customer satisfaction score, Net Promoter Score (NPS), the volume of digital transactions, and the time it takes for customers to access their account information.

■ Risk management – It involves tracking loan defaults, PAR ratio, identifying early warning signs, and ensuring regulatory compliance for financial stability and security.

■ Data Governance – It ensures accuracy, efficiency in processing, and timely regulatory reporting for compliance and operational efficiency.

■ Managing customer relation – It involves incorporating features to comply with KYC/AML regulations, facilitating account opening and management processes, offering diverse customer interaction channels (online, mobile, etc.), and providing personalized product and service offerings.

■ Loan account – This involves credit assessments, loan processing, repayment procedures, and debt collection. It ensures loans are given responsibly, payments are managed effectively, and any overdue payments are handled promptly for financial stability.

■ Accounting and Reporting- It involves automating accounting tasks, ensuring compliance with regulatory reporting requirements such as CRR and ALM, and providing management information through analytics dashboards.

■ Deposit Management (for deposit-taking NBFCs): CFSS helps manage customer deposits efficiently, ensuring regulatory compliance, security, and transparency.

■ Profit and Loss( P&L) account statement –Automate loans and deposits, follow accounting standards, ensure compliance, and customize statements for insights.

Additional Requirements for Seamless CFSS Implementation

■ Secure Transactions: It can be done through dual control (Maker-Checker), requiring two approvals, and multi-factor authentication for enhanced access security, providing robust protection and accountability.

■ Efficient Data Management: It involves centralizing storage at the head office and enabling real-time data sharing between branches to ensure accurate reporting and streamline operations.

■ Backup and Security: Enhance reliability with cloud storage for data backup.

Safeguard sensitive information through robust encryption measures.

As of Feb 4, 2024, NBFC-ULs (10+ units) aim for 70% CFSS implementation. Others have until Sep 30, 2025.

Moving Ahead:

The introduction of Core Financial Services Solution (CFSS) by the Reserve Bank of India heralds a critical phase for NBFCs. The mandated implementation presents not only a regulatory necessity but an opportunity for operational refinement and future resilience. Imagine NBFCs taking a smart road with CFSS. It makes things smooth, keeps customers happy, and follows the rules. RBI says go digital, be efficient. Reporting on time, using the right tools, and choosing good software are key. Right now, big NBFCs are aiming for 70% CFSS. It is advisable to go with the flow, be efficient, and make transactions strong. CFSS is the key for NBFC success, helping them grow and stay strong in finance.

CA Manish Mishra

Seasoned Chartered Accountant with over 15 years of industry experience. As a Virtual CFO and Startup Advisor, I'm passionate about supporting startups and small businesses on their journey to success. With a dedicated team by my side, we offer simple and practical financial advice to help you achieve your goals. Virtual CFO | Startup Advisory | NBFC & FinTech I Building Startup ecosystem to support the startups.

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