Is Co-lending The Ultimate Answer To The NBFC Crisis?
What is co-lending/co-origination of loan?
- Co-lending or co-origination of loan is positioning between a national
commercial bank and an NBFC to mutual issue credit and control the loans at the
- Co-lending or co-origination of loan lifts the load and risk of a complete loan
from the shoulders of a single entity.
- The exposure ratio of a bank and an NBFC mutual issue is 80:20 of all the risks
and rewards connecting them.
- Such co-originated loans can only be provided for “priority sector lending”.
What does Priority sector involve?
- Export Credit
- Social infrastructure
- Renewable energy, and others
Why is co-origination/co-lending of loans are very
- As stated by the RBI Master Circular, domestic scheduled commercial banks must
need to have the total priority sector lending (PSL) at 40% of the new adjusted
bank credit or credit equivalent amount of off-balance sheet
exposure, whichever is higher.
- There are also sub-targets for every section; mainly for agriculture and MSMEs.
- However, presently the banks, which hardly controls, and at times exceptionally
fail to correctly evaluate, assess, and underwrite the credit of the borrowers
of the urban PSL category due to insufficiency of resources,
that have less time and effort to spare for the remote geographies.
- Hence, banks are searching for new avenues to meet the targets without it being
very hard on their present resources, which supports the co-lending model.
- It is an experiment by the RBI to make sure that the flow of capital to the
priority section while mitigating challenges by the financial institutions in
How will co-lending actually work?
- Presently there are no guidelines by RBI to regulate co-lending. However, it
has soon promised to come up with them to systematically set up, develop and
manage or controls the co-lending model.
- The whole process of lending- right from co-origination of the loans to the
loan management/observation to the loan recovery and agreements will take place
digitally through automation, without any human interference,
as recommended by the SBI in an official statement.
In India how many entities are already a part of the
State Bank of India, Bank of Baroda, and the Union Bank of India has already
declared their ventures with respective NBFCs. Other banks are looking forward to
Is this really helpful for the NBFCs?
- From all the analysis it appears like though the model was chalked out due to
the increased challenges in the NBFC sector, it offers more as a medium for the
big banks to reach the grass-root level borrowers and MSMEs.
- However, to refuses that NBFCs do not help in the whole process would be
- It addresses the major problem NBFCs in India have been facing for a long time-
the lack of developed systems of the banks to decreases the risk of defaults.
- With co-lending, NBFCs can make use of the expertise and particular processes
of the banks to provide the loans, and also share the risk of default.
- It also inspires the NBFCs to go fully digital with their operations to expands
the transparency in the ecosystem
- Lastly, co-lending/co-origination of loans increases the growth, assets, and
profitability of the NBFCs without much expenditure.
The ultimate aim of the co-lending/co-origination lending model is to eventually
bridge the gap in micro-lending in the middle of the banks and the remote areas
which were otherwise don’t have access without the NBFCs.
However, still, it remains to be seen how, what looks so promising on paper, turns
out to be on execution.
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