Co-lending: A pathway to inclusive finance and economic advancement

The issue of limited credit access looms large among the 1.4 billion Indians. While numerous factors can be attributed to this concern, they can be distilled into three primary barriers—limited availability of credit for underbanked communities, unaffordable interest rates, and limited awareness of the various formal credit options available.

The exclusion from credit accessibility remains a pressing challenge, significantly impacting low-income groups and economically weaker sections of society.

Collaborative financial models, such as co-lending, present a powerful means to overcome barriers and foster credit accessibility in India. By bringing together diverse stakeholders, co-lending initiatives have the potential to penetrate underserved communities, empower individuals, and catalyse economic growth.

This article will guide you through how credit access in India can be enhanced through a strategic co-lending approach, harnessing the power to empower historically underserved populations.

Navigating co-lending arrangements

Co-lending is a collaborative arrangement between leading banks and non-banking financial companies (NBFCs) in India aimed at providing financial support and underwriting loans for underserved communities and sectors.

This lending model targets segments, including the MSME sector, low-income groups, and economically weaker sections —who face challenges in accessing credit through traditional and often intimidating banking channels.

The collaborative approach enables NBFCs, banks, and consumers to unite under a single lending umbrella, allowing them to leverage the benefits of their mutual relationships. The co-lending model delivers a comprehensive and beneficial experience for all stakeholders involved.

The workings

Co-lending combines banks’ low cost of funds with NBFCs’ low cost of operations to serve the underbanked community of the country. In a co-lending arrangement, some of the common terms between the two parties are: 

• 80:20 ratio: Loans are deployed in a minimum 80/20 capital deployment ratio between the banks and the NBFC. Most of the capital flows from the banks, and the NBFCs are responsible for the sourcing, collection, and customer experience. 
• Risk-Return Split: The 80/20 split mentioned applies to the risk and return distribution between the two entities. The party that affords a higher risk also enjoys a greater return. 

In 2018, the Reserve Bank of India (RBI) played a pivotal role in driving co-lending initiatives by issuing comprehensive guidelines for banks and NBFCs. These guidelines laid the foundation for banks and NBFCs to collaborate in originating, servicing, and disbursing loans to eligible borrowers.

The collaborative approach not only enhances credit availability across India but also paves the way for tailored financial solutions, empowering historically underserved populations. As a result, inclusive growth is fostered and economic advancement becomes accessible to all sections of society. 

Benefits of co-lending for the bank 

Expanded reach for banks

Co-lending collaborations present fresh opportunities for banks to expand their presence into traditionally underserved communities and untapped customer segments. These alliances empower banks to leverage the well-established networks and proficiency of NBFCs, thereby connecting with borrowers who were once beyond their space. 

Distributed risks

Co-lending inherently partitions the risk between the bank and the NBFC. This mechanism of distributing risk empowers banks to participate in lending to segments that might have been considered higher risk if pursued independently. As a result, it broadens their lending portfolio while upholding a well-balanced risk profile.

Enhanced customer experience through NBFCs

NBFCs frequently boast an intimate comprehension of customer requirements and inclinations, honed through their specialised operations. This comprehension results in customised customer experiences that banks can exploit. By utilising NBFCs' customer-centric methodology, banks can furnish more bespoke financial remedies, ultimately amplifying customer contentment.

Benefits of co-lending for the NBFC

More favorable interest rates

Partnering with banks grants NBFCs access to funding at reduced expenses. This favourable borrowing stance empowers NBFCs to extend more appealing and attainable loan options to borrowers, thereby increasing the appeal and accessibility of their loan products.

Enhanced credibility via well-established banking institutions

Collaborating with esteemed banks enhances the credibility of NBFCs, particularly among prospective borrowers, who may be hesitant regarding borrowing from independent financial entities. Affiliating with renowned bank brands cultivates trust and nurtures heightened customer assurance.

Benefits to customers 

Reduced interest rates 

The cooperative dynamics of co-lending frequently result in diminished interest rates for borrowers. As banks provide funding at more economical rates, borrowers can enjoy decreased interest costs, rendering credit more cost-effective and promoting conscientious borrowing practices.

Hassle-free and convenient customer experience

Co-lending harnesses the advantages of both banks and NBFCs, resulting in a harmonious and efficient client experience. Borrowers can relish the ease of obtaining credit through an integrated platform, streamlining the procedures for application and approval.

Educational empowerment

NBFCs offer more than just credit. They also play a pivotal role in enhancing borrowers' financial literacy. The educational facet of co-lending surpasses transactional lending operations.

NBFCs can enlighten borrowers about loan particulars, contractual commitments, and effective financial administration, equipping them to make knowledgeable choices and enhance their holistic financial health.

Conclusion

Co-lending initiatives have the potential to revolutionise India's banking landscape and promote greater financial inclusion. By leveraging the strengths of both traditional banks and non-banking financial companies, these collaborations can bridge the credit gap and reach underserved segments of the population.

The synergistic partnership between lenders not only enhances access to credit but also promotes efficient risk management and fosters innovation in financial products and services. Embracing co-lending initiatives can lead India towards a more inclusive and robust financial ecosystem, empowering individuals and fueling economic growth. 

Santanu Agarwal is the Deputy Managing Director of Paisalo Digital Limited.