Co Lending - Game Changer for the Last Mile Credit

Over the last decade, India's financial landscape has witnessed significant transformation, with innovative collaborations emerging to meet the diverse and growing credit needs of the population. One such noteworthy mechanism that has gained pace is the collaborative approach between the banks and NBFCs in the form of co-lending with co sharing of credit risk. This strategic partnership aims to leverage the strengths of both entities, creating a more inclusive and efficient lending ecosystem.

Under Co-lending, there is a joint participation of a bank and an NBFC in providing loans to borrowers. This pragmatic model allows both the financial institutions to combine their resources, expertise, and distribution networks to cater to a broader customer base to achieve the economies of scale as well as in help credit outreach to the last mile.

This collaborative lending model gained prominence after the Reserve Bank of India (RBI) introduced guidelines in 2018 to regulate co-lending arrangements.

Co-Lending can result in risk mitigation with the joint prowess of the bank-nbfc relationship by leveraging the bank's strong regulatory framework and access to low cost time and demand deposits and at the same time using the NBFC's new age financial technology for risk assessment as well as the geographical reach to cater to multiple customer segments in tier 2 , 3 cities and the hinterlands . Such a collaboration allows for the efficient utilization of technology and data analytics, streamlining loan processing, and reducing the time taken for approvals , thereby achieving the economies of scale for both the entities through diverse and blended product offerings to the borrowers.

The RBI's guidelines on co-lending require banks to assume at least 80% of the credit risk, with the remainder shared by the NBFC partner. This ensures that banks maintain the regulatory standards while fostering financial inclusion through increased lending.

The co lending partnerships need a seamless integration of operational processes, technology systems, and risk management practices between the bank and the NBFC. Both the entities must collaborate closely on credit risk assessment, ensuring a robust system for evaluating borrower profiles and maintaining the quality of the loan portfolio and maintaining compliance guidelines enunciated by the regulator

Co-lending in India is poised for continued growth, driven by the shared objectives of financial inclusion, risk mitigation, and operational efficiency through technology. As technology evolves and regulatory frameworks adapt, these collaborations will likely play a pivotal role in shaping the future of lending in the country. The symbiotic relationship between banks and NBFCs in India through co-lending has proven to be a game-changer, combining the stability of traditional banking with the agility, technology and market understanding of NBFCs.

Through the advent of modern day technology and tools like of Artificial Intelligence and Machine Learning in financial services, the co-lending model holds the potential to redefine the lending landscape, making credit more accessible and fostering economic growth across diverse segments of the population and help in furthering the Government's agenda of Financial Inclusion and credit democratization, akin to what JAM trinity ( Jan Dhan , Aadhaar and Mobile ) did to the Digital and Payment Ecosystem of the country.