Co-Lending ? will be the marketplace for borrowers and lenders?

 

Co-lending

Co-lending or co-origination is a set-up where banks and non-banks enter into an arrangement for the joint contribution of credit for priority sector lending. To put it simply, under this arrangement, both banks and NBFCs share the risk in a ratio of 80:20 (80 percent of the loan with the bank and a minimum of 20 percent with the non-banks)

How does a co-lending model work?

In simple terms, banks will lend to NBFCs, and NBFCs will pass it on to the priority sectors, since they have a greater reach.

NBFCs will be the single point of interface for the customers and enter into a loan agreement with the borrowers. The agreement should contain the features of the arrangement and the roles and responsibilities of NBFCs and banks.The ultimate borrower would be charged an all-inclusive interest rate.

Considering the lower cost of funds from banks and greater reach of NBFCs, the primary focus is to improve credit flow to the unserved and underserved sectors of the economy, also known as priority sectors, and make funds available to the ultimate beneficiary at an affordable cost.The primary aim of CLM is to improve the flow of credit to the unserved and underserved segment of the economy at an affordable cost. This happens as banks have lower cost of funds and NBFCs have greater reach beyond tier-2 centres.

As per RBI norms, a minimum 20 percent of the credit risk by way of direct exposure shall be on NBFC’s books till maturity and the balance will be on the bank’s books. Upon maturity, the repayment or recovery of interest is shared by the bank and NBFC in proportion to their share of credit and interest.

This joint origination allows banks to claim priority sector status in respect of their share of credit. NBFCs act as the single point of interface for the customers and a tripartite agreement is done between the customers, banks and NBFCs.

How is co-lending beneficial for lenders and borrowers?

The partnership allows banks to lend more funds to sectors and regions they do not have reach in. With the greater reach of NBFCs, the model allows banks to meet their total priority sector lending (PSL), while NBFCs get bigger and top rated borrowers on its books.

It also allows NBFCs to source clients, perform credit appraisals and disburse a small part of the loan amount, and enables banks to expand their lending business.

The end borrower gets accessibility to loans at very affordable and competitive rates, and is in turn included in the country’s financial ecosystem.

Advantages of Co-Lending

To banks:

1. Greater reach: NBFCs usually have a greater reach to the remotest areas of the country, underserved target groups and digital penetration. Hence banks can benefit from a wider pool of businesses and customers to lend to.
2. Better customer experience: NBFCs and Fintechs have customer centricity as their main goal and thus the entire customer management process of the banks gets handled by the modern partner in the arrangement with its smooth and convenient processes, which helps in conversions and repeat lending opportunities in the future.
3. Skin-in-the-game: Since the NBFCs also need to mandatorily put in at least 20% of the capital, this puts a lot of banks at ease about the quality of customers being forwarded to it and thus underwriting efforts are greatly reduced for the bank.
4. Risk management: Due to the risk division between the two partners, banks can benefit from an added sense of security and minimisation of losses in-case things go south.

To NBFCs:

1. Less interest rates: Banks have the enviable position of having access to the cheapest source of funds in the economy. Hence NBFCs can take advantage of a co-lending arrangement to extend loans at lesser interest rates as compared to their competitors.
2. Credibility: New-age companies looking to enter the lending business can build credibility for their brand in the eyes of the customers, through co-lending partnerships with big banks.
3. Risk management: Due to the risk division between the two partners, and with banks employing the majority of the capital, NBFCs can reduce the losses on their loans in case of any bad debts.

To Consumers:

1. Better consumer experience: New-age partners like fintechs make sure that the customer has the smoothest experience during the entire process, so as to retain them for a long time and cross-sell financial products in the future.
2. Lower interest rates: Consumers do not need to pay extremely high interest rates just to go through a convenient lending process, as they get considerably lower interest rates due to banks being on board.
3. Underserved customers: Traditionally credit-deprived communities in rural areas and people with less credit history find a good fit in co-lenders as they finally get access to lending products, albeit indirectly, from banks.
4. Knowledge dissemination: NBFCs and fintechs offer the personal touch and go the extra-mile to not only source but also educate the final customer about the terms and conditions of the lending contract, thus contributing to financial literacy of underserved customers as well.

conclusion

Newer players (fintech and NBFCs) usually have a wider target audience for loans because of their customer-centric approach and the rise of social-media and digital acquisition of potential customers, however they lack cheap access to large funds to extend loans to their customers.

Established players (banks) on the other hand have a large quantum of funds ready to be deployed to the right set of customers, however their customer acquisition strategy is not keeping updated with digital penetration and they mostly stick to their offline acquisition strategies.

Co-lending helps both these types of entities come together under one lender-umbrella and take advantage of their respective synergies to deliver a holistic experience to the benefit of all stakeholders in the arrangement.

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