"Co-lending has enabled access to multiple sources of credit with competitive pricing and product structures to cater to one's needs."

How does co-lending contribute to expanding access to credit for a wider range of borrowers in India?

CLM is a model in which two financial services entities, be it banks or NBFCs, co-originate loans. Inherently, the model aligns the interests of one entity that can raise and undertake funding with another entity, who would have the technological capabilities and expertise in certain segments like MSMEs, MFIs, Consumer Lending, etc. and are deeply rooted in lending activities.

From the borrower’s perspective, the accessibility to credit has increased significantly through the advent of digital lending avenues in the market such as phone-based applications and online portals (web site-based lending), in addition to increased presence of specialized NBFCs across the country. Coupled with a quick underwriting turnaround, customers can now obtain financing at the ease of operating from their homes.

How does CLM address the financing needs and challenges unique to mid-market enterprises (MMEs) in India?

MMEs in India face challenges in getting access to credit due to limited credit history, long timelines or having little to no collateral backing. This limits the extent of financing that they would get from larger banks and NBFCs where the lending criteria is more stringent.

Under a co-lending model, the underwriting is done at a grass root level with risk assessments happening through credit teams who are specialized in the businesses of the MMEs. The underwriting process factors in industry specific conditions and potential growth in the businesses to sanction loans with limited collateral. Further, as a process, the quick turnaround also enables MMEs with time-bound requirements to get immediate access to the finances.

Can you explain the risk-sharing mechanism between banks and NBFCs in the co-lending model and its impact on lending practices?

In the backdrop of an everchanging regulatory landscape, the risk appetite of banks and NBFCs vary based on their internal policies and expertise. CLM allows entities to absorb varying degrees of risk based on their appetite. Between co-lending partners, the risk in the underlying borrowers is taken up in various ratios like 90:10, 80:20 and so on.

As a mechanism, this ensures that more borrowers are brought into the ambit of financial inclusivity for these financing entities where independently, the borrower may not have met the lending criteria for either co-lending entity. This automatically brings in flexibility for the borrowers in terms of where credit can be accessed and in terms of credit structures which will be an amalgam of lending policies of both co-lenders. The fulcrum of CLM revolves around a borrower meeting the credit assessment criteria that has been set after understanding the typographical and demographical profile of the borrowers. Therefore, this results in improved credit quality of the end borrowers.

How do you foresee CLM evolving to better serve the growing needs of borrowers and the changing financial landscape?

There is a shift in the financial services landscape to technology enabled lending and this is being embraced by all the banks and NBFCs operating in this space. There are also several Fintech companies who have established a strong platform for credit access for mid-market enterprises and end-use consumers.

The co-lending model is evolving with these shifts and becoming increasingly tech-enabled with digital underwriting and loan management processes. This inclusion has a direct bearing on the extent, speed and quality of lending while ensuring the essential adherence to regulations, which form the core of the business, are met. Considering the prevalence of smart phones in the country today, credit platform applications are a simple download away for borrowers.

The turnaround time on most platforms today range from a few minutes to a few hours at best. Since the underwriting process is also digital, KYC validation and credit assessment happens quickly, and algorithms determine the credit quality of the borrower based on information and intelligence that is available at the backend. This is a huge advantage for smaller businesses and consumers who require access to credit. Many co-lending entities have access to such digital lending applications and due to the combination of the platforms and credit available with the co-lenders, the financial services landscape has evolved significantly.

Could you provide examples of sectors or industries in India that have notably benefited from the co-lending model and explain their success stories?

• MMEs and SMEs?– These sectors are typically underserved in terms of credit due to their nascent credit history, collateral and smaller ticket sizes which are difficult to cater to by larger lending organizations. Through co-lending, the on-field pervasiveness of sectoral NBFCs and their expertise in assessing these businesses combined with banks and NBFCs who have the lending power, has resulted in enabling such business to expand through asset purchase, employment generation and working capital.
• Agriculture and related industries –?Agriculture and related sectors also suffer from lower credit presence due to the increased risk in lending to such sectors. There are several banks and NBFCs who have been able to penetrate these sectors through co-lending and help boost the economy.
• Consumer lending –?In today’s environment, digital lending processes have enabled several banks and NBFCs to get into co-lending relationships, banking on the technological expertise and lending platforms of their co-lending partners to disburse consumer loans. Consumers who were earlier out of the purview of banking and NBFC lending have been getting into the credit system through co-lending.

What potential implications does CLM have on interest rates and overall borrowing costs for customers?

Loan pricing in the market is curated to the end borrower. There is a dependence on the cost of funds of the lending entity to be able to serve multiple segments of borrowers. Through co-lending, credit providers have access to multiple sources of funds at varying pricing which are then funneled through to the right end borrower based on their credit profile and risk assessment. From the borrower’s perspective, co-lending has enabled access to multiple sources of credit with competitive pricing and product structures to cater to their needs in the most appropriate manner.

For example, a borrower with a high credit score and low risk of default can get access to very low interest rates for their loans, even when borrowing from lending platforms. This is enabled by the co-lending relationship behind the platforms which come from banks and large NBFCs who have access to low-cost credit.

Disclaimer:

The views provided in this blog are the personal views of the author and do not necessarily reflect the views of Vivriti. This article is intended for general information only and does not constitute any legal or other advice or suggestion. This article does not constitute an offer or an invitation to make an offer for any investment. ?