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 facility level.
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?

Agriculture
MSMEs
Export Credit
Education
Housing
Social infrastructure
Renewable energy, and others

Why is co-origination/co-lending of loans are very important?

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 doing so.

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 co-lending model?

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 following them.

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 ignorance.
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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