With more than 1.4 billion in India, nearly 63% of the population still live in rural areas, with a significant part remaining unaware of formal financial services. Even today the LIG (Low-Income Group), the EWS (Economically Weaker Sections) categories, the priority sector (including agriculture, the micro, small, and medium enterprise (MSME) segment), and other critical sectors are finding it difficult to access the liquidity required for their daily working capital needs.
The people in these segments contribute majorly to India’s economic growth so making financial services available to these categories is crucial. For instance, the MSME sector alone contributes about one-third of the economic growth of India, which is also expected to contribute $1 trillion to India’s exports by 2028.
The Reserve Bank of India identified this gap faced by the MSMEs and other priority sectors and introduced a policy change of which Co-Lending is a major component. While the adoption of formal financial services has been slow in these segments, the co-lending model is preferred by these people for the ease of cash transactions.
Co-lending is a lending arrangement where a traditional lender such as a bank, partners with a non-banking financial company (NBFC) to provide loans so that both lenders in conjunction can improve the credit flow to the underserved sectors at affordable rates. While the NBFCs (Non-Banking Financial Companies) would do the grunt work of loan origination and paperwork, banks would offer their liquidity strength to finance a majority of the loan. This partnership creates a symbiotic relationship where both parties benefit and share the risks and rewards throughout the loan lifecycle.
NBFCs have always benefited from their ability to pierce smaller, harder-to-reach geographical areas through the use of modern loan origination software and banking practices. Banks, on the other hand, have bigger wads of cash, and bigger fee structures. But the problem is banks were not able to reach the underserved population and the NBFCs don’t have enough cash to serve these segments. Co-lending is a give-and-take model by which NBFCs can improve their liquidity, profitability, and client base. At the same time, banks can take advantage of the market outreach, loan origination, and servicing acumen of NBFCs.
The co-lending book of NBFCs is expected to reach Rs 1 trillion by June 2024, after more than 5 years since the model came into being. This indicates significant growth in the adoption of co-lending arrangements.
The priority sector has ever since played a crucial role in advancing financial inclusion and the overall growth of the economy. However, the traditional lending approach followed by the banks makes it a challenge for the priority sectors to access liquidity. While NBFCs that are in close connection with this segment lack the liquidity to bridge this gap. As per statistics, bank credit growth in India will be in the range of 14-14.5% for the financial year 2024-25. These numbers highlight the potential for growth in India’s banking sector, underscoring the importance of including banks in the meaningful expansion of credit. The co-lending model acknowledges that banks dominate vast liquidity reserves and presents an opportunity to leverage this untapped potential.
On one hand, co-lending gives credit access to a higher number of individuals and business entities served by NBFCs. On the other hand, banks can utilize technology in back-end operations, KYC processes, and documentation. This enables seamless credit flow to the underserved. This means banks can extend credit to borrowers, whose loan applications would otherwise be rejected. This leads to greater financial inclusion.
On 5th Nov 2020, RBI released a notification titled ‘Co-Lending by Banks and NBFCs to Priority Sector‘ that served as a revision to the 2018 loan co-origination scheme, amended to include Housing Finance Companies (HFCs) under the umbrella term of Non-Banking Financial Companies (NBFCs). The following are some of the typical terms of the agreement between the parties,
Here are the 4 steps on how Co-Lending works,
Co-lending has been adopted by various financial institutions including banks, credit unions and online lenders across the world. Sometimes, NBFCs can also tie up with multiple banks for a distributed capital deployment; for example, the NBFC puts a 25% stake, Bank A lends 40% and Bank B gives 35% of the loan amount.
Also when multiple lenders are involved in the lending process, the borrower’s credit will be evaluated by more than one lender. This increases the chances of approval for a loan. Also, co-lending results in a lower interest rate for the borrower as the lenders offer more competitive rates due to shared risk.
Given the higher risk weights imposed on personal loans by the Reserve Bank of India (RBI) in November 2023, there is a potential shift in focus towards other asset classes like loans to micro, small, and medium enterprises (MSME) and home loans.
Presently, personal loans are one-third of the overall co-lending book. Housing loans (20%), unsecured MSME loans (13%), gold loans (13%), and secured MSME loans including loans against property and vehicle loans comprise the rest 20%.
While co-lending books for all asset classes will grow, the pace of growth for personal loans is expected to be slower (25-35% in fiscal 2025) than in the recent past (~35% in fiscal 2024) due to the revision in risk weight of unsecured consumer credit to 125% from 100%. Banks are likely to be more inclined to partner with NBFCs for business loans and secured loans instead of personal loans, given the higher risk associated with unsecured personal loans. The share of personal loans could decline in fiscal 2025, with MSME and home loans expected to increase their share, supported by government initiatives.
Growth in co-lending is supported by the controlled asset quality observed so far in the co-lending portfolios of banks and NBFCs. For the co-lending model to be successful in the long run, it is crucial to sustain asset quality and monitor regulatory developments related to the co-lending model.
As more financial institutions realize the numerous benefits of the Co-lending model, it is expected to reach an upward trajectory in the future. The growth momentum for co-lending is projected to be healthy at 35-40% annually over the medium term, amid rising interest from both NBFCs and banks.
Going forward, the integration of co-lending with blockchain technology can provide a secure and transparent platform, making the process even more efficient, transparent, and cost-effective. The use of blockchain can reduce the risk of fraud, which increases the overall trust among lenders and borrowers.
With the Reserve Bank of India (RBI) tightening its vigil on the co-lending segment, lenders are expected to become more selective about the type of credit they operate in. Top public and private sector banks such as the YES Bank, State Bank of India, and Punjab National Bank have collaborated with NBFCs over the years since the co-lending model came into existence.
With India marching towards digitization at an unprecedented pace, its liquidity issues are poised to resolve faster than usual. As the co-lending model continues to mature as the RBI intends, it will definitely be a catalyst in the financial industry to uplift the priority sector from its current economic hardships.
The overall efficacy of the Co-lending model depends on successful KPIs like the accuracy in risk assessment, lower cost of lending, high operational flexibility, seamless regulatory compliance, and a convenient repayment schedule. All this can be achieved only through digitization which allows for faster disbursals and ease of reconciliation. A robust digital stack with digital lending software features like CreditBureau, CYKC, Alternate data and Financial Analysis that helps in validating the document, fast decision making and quick disbursal.
CloudBankin’s end-to-end co-lending software offers technology-driven solutions for financial institutions. It’s an all-under-one-roof fully automated solution that helps manage the entire loan lifecycle, with a loan origination system and loan management system. Unlock seamless collaboration and smarter lending with Cloudbankin’s Co-lending software—Redefine your lending process today! Book a demo!
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Significance of Each Segment in the Uniform Credit Reporting Format
Do you recall the days when you would have to
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After smartphone penetration, people are not watching their SMS at all. They use SMS only for OTP related transactions. That’s it.
But What can a Lender see in your SMS after you consent to them?
Lender can see income, expenses, and any other Fixed Obligation like (EMIs/Credit Card).
1) Income – Parameters like Average Salary Credited, Stable Monthly inflows like Rent
2) Expenses – Average monthly debit card transactions, UPI Transactions, Monthly ATM Withdrawal Amount etc
3) Fixed Obligations – Loan payments have been made for the past few months, Credit card transactions.
It also tells the Lender the adverse incidents like
1) Missed Loan payments
2) Cheque bounces
3) Missed Bill Payments like EB, LPG gas bills.
4) POS transaction declines due to insufficient funds.
A massive chunk of data is available in our SMS (more than 700 data points), which helps Lender to make a credit decision.
An interesting insight on vehicle loans for lenders.
A trend we are seeing today – the first-hand vehicle ownership is decreasing with time. Why? People are upgrading their vehicles in every few years because of technological advances. And, this can be seen more with the millennial generation.
So, what should a lender do in terms of financing?
– Estimating the residual value of the vehicle at the start of the financing period.
– Charging a borrower only for the residual value (which is the difference between the value after a few years and the current value)
Example: A bike currently is INR 1 lakh. You want to buy the vehicle for 2 years. A lender will estimate the residual value of that bike today and what it would be after 2 years. If the estimated residual value = INR 45,000, the lender will charge you only that (say, INR 55,000 with interest for this instance) during your tenure.
At the end of 2-year period, you have 3 choices:
1. Return the bike and upgrade to a new one without going through the struggle of selling it.
2. Pay the lump sum remaining amount to own the vehicle outright.
3. Extend the financing and own it by keep paying the EMIs for the remaining amount of the vehicle for the next 12 or 18 months.
Benefits for the borrowers?
– Flexibility to use a vehicle and upgrade to a new one.
– Affordability to not pay for the complete value of the vehicle with the intention to use for a lesser amount of time.
– Convenience in owning the vehicle.
Say goodbye to the old lending option and embrace the new way of financing for vehicle by lenders!
How many of us know this?
1) Tiktok does Lending ( is it an entertainment company or social media company or a fintech company?
2) Youtube China does Lending
3) Top 100 internet companies in China(no matter what business they are in) do Lending
The team which was heading Lending in Tiktok was the Advertisement team. If we do Ads, we do X no of revenue. But if we do lending, we’ll get X+30% more revenue. This is on the same Ad spot.
Ad team has transformed into a lending team, and in today’s world, it’s possible because the subject matter expertise can be put in as an API and given to you.
Embedded Lending as a service is becoming popular in India too, and I am happy to be part of this ecosystem.
The answer is No. Only the top 10 crore people have access to many credit products in India. Almost all Banks focus on this market.
Once you go beyond that, the credit access rate has dropped significantly due to multiple factors.
1) Customers who are having low income(30-40K per month)
2) Not earning from an employer who belongs to Category A or B
3) Not from Tier 1 or 2 cities
NBFCs and Fintechs focus on the above segment, pushing another 10 crores of people.
But in India, 70 crores more people are formally or informally employed, which still needs to be tapped.
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