What does Banks and NBFCs Co-Lending entail?

Updated On : Jan 2023

What is a co-lending model in India?

The Co-lending Model (CLM) means two lenders, i.e., banks and NBFCs, together provide credit facilities to the customers.

In November 2022, the Reserve Bank of India (RBI) issued guidelines for co-lending by banks and NBFCs to the priority sector. The aim of introducing CLM was to provide a credit facility to an unserved sector of the economy and make the funds available to this sector at an affordable cost.

The arrangements meant joint contribution of credit facility by both bank and NBFC lenders and sharing both risks and rewards. This arrangement was made keeping in mind the lower costs of funds from banks and the greater reach of the NBFCs.

As per the RBI’s model, banks can co-lend to registered NBFCs, including housing finance companies (HFCs). Banks will take their 80% share of individual loans on a back-to-back basis in their books. NBFCs will facilitate loan origination and collection and retain a minimum of 20% of the individual loans on their books. NBFCs will be the point of contact and will sign the agreement with the customers or borrowers. The agreement that is signed will have the highlights of the arrangement and the roles and responsibilities of banks and NBFCs. The borrowers will have to pay an all-inclusive interest rate.

Limitations in co-lending:

• Banks at the risk:
  As per the CLM, the NBFCs should retain a 20% share of individual loans on their books, which means 80% of the risk is borne by banks if the borrower makes a default.
• Entry of corporates:
  The RBI has not yet officially allowed the entry of big corporate houses into the banking space, but the NBFCs are mostly filled with corporate houses. This is risky business because in the past, DHFL, SREI, IL&FS, and Reliance Capita have collapsed regardless of strict monitoring by the RBI.
• Limited reach of NBFCs:
  NBFCs with 100 branch networks will not be able to serve the underserved and unserved sectors properly.

Benefits of co-lending to borrowers and lenders:

• Co-lending will enable banks to provide credit to a customer segment where they do not currently have a reach.
• With the help of NBFCs' reach, the CLM will allow banks to achieve their goal total PSL (Priority Sector Lending), and NBFCs will get top-rated borrowers on their books.
• NBFCs will be able to acquire more customers, do credit appraisals, and disburse a small number of loans.
• Banks will be able to expand their lending business.
• The borrowers will have access to the loans at an affordable rate.

Following are the co-lending agreements:

• U Gro Capital signed an agreement with IDBI Bank, and they will be co-lending to underserved MSMEs.
• MAS Financial Services signed an agreement with the Bank of India and will be providing credit to MSMEs.
• Punjab National Bank signed an agreement with IIFL Home Finance
• Paisalo Digital signed an agreement with the State Bank of India (SBI).
• Indiabulls Housing Finance Ltd. signed an agreement with Yes Bank to offer home loans.

Now many startups are collaborating with banks to adopt this co-lending model. To increase efficiency, achieve better decision-making and reduce turnaround time, financial institutions will have to automate their processes.

Nelito Systems’ Fincraft^TM Integrated Lending Management Software (ILMS) for NBFCs will help to expand your business rapidly and innovate.