SBI-led Committee to focus on boosting MSME credit through 'Co-Lending'

In a significant move to enhance the credit flow to Micro, Small, and Medium Enterprises (MSMEs), the Department of Financial Services (DFS) has announced the formation of a six-member committee spearheaded by the State Bank of India (SBI). This initiative aims to address the issues surrounding co-lending, bolster MSME credit, and manage the rapid growth of consumer loans.

Objectives and Formation of the Committee

The primary objective of the newly formed committee is to address the challenges and streamline the co-lending process, thereby boosting the credit availability to MSMEs. The committee's formation is a collaborative effort between the Reserve Bank of India (RBI) and the DFS, with the ultimate goal of fostering exponential growth in co-lending activities. This initiative comes as a response to the regulatory and liquidity challenges faced by Non-Banking Financial Companies (NBFCs) and banks engaged in co-lending.

A source familiar with the matter disclosed, "The Finance Ministry has created a committee comprising three banks and three NBFCs to look into resolving the issues of co-lending and improve volumes. RBI and DFS are working together to see what can be done to encourage co-lending because they want it to grow exponentially."

SBI at the Helm

SBI, India's largest lender and a pivotal player in the co-lending space, will lead the committee and is responsible for selecting its members. The committee, which was announced approximately two weeks ago, has already begun outreach to potential members. UGro Capital, an NBFC focused on MSMEs, is expected to be one of the committee members. Although UGro Capital has not commented on this development, its inclusion highlights the committee's focus on MSME credit enhancement.

The committee is tasked with discussing and presenting a comprehensive report to the RBI and DFS. This report will outline a framework to boost co-lending for MSMEs, identify existing bottlenecks, and propose necessary regulatory and policy changes to improve credit access.

Boosting MSME Credit and Managing Consumer Loan Growth

One of the critical aspects of this initiative is the anticipated increase in MSME credit through enhanced co-lending. This approach is expected to reduce the liquidity demands on NBFCs, enabling them to adopt a more asset-light model. Historically, the RBI has expressed concerns over NBFCs maintaining large balance sheets, and this move aligns with the regulator's prudential objectives.

Additionally, the committee aims to address the accelerated growth in consumer loans within the co-lending framework. Recent feedback from the regulator has highlighted the need for banks to exercise caution in their co-lending partnerships due to portfolio quality concerns.

"Co-lending was designed for priority sector loans (PSLs), including MSMEs. But some banks availed dispensation for non-PSL and suddenly consumer loans now account for 65-75 percent of total co-lending. The focus should be on PSL, and it is possible that at some point the regulator may feel that other segments should be slowed down or may not be allowed to be done at all," a source indicated.

Co-Lending Market Dynamics

According to a recent report by CRISIL, the assets under management (AUM) for co-lending are expected to have approached ?1-lakh crore in the five years since the model's inception. The report further details the composition of the co-lending book, with personal loans constituting 34 percent of the AUM, followed by housing loans at 20 percent. Unsecured MSME and gold loans each account for 13 percent, while secured MSME (including loans against property) and vehicle loans make up the remaining 20 percent. CRISIL projects the co-lending sector to grow at a rate of 35-40 percent in the medium term.

The Need for a Focused Approach

The SBI-led committee’s initiative to enhance MSME credit through co-lending is a timely intervention, given the critical role MSMEs play in the Indian economy. MSMEs contribute significantly to employment generation, GDP growth, and regional development. However, they often face challenges in accessing timely and adequate credit, which hampers their growth potential.

The committee’s efforts to streamline the co-lending process and address regulatory bottlenecks are expected to create a more conducive environment for MSMEs to thrive. By involving both banks and NBFCs, the committee aims to leverage the strengths of both types of financial institutions—banks with their extensive reach and regulatory robustness, and NBFCs with their specialized knowledge and flexible lending practices.

Regulatory and Policy Considerations

One of the significant tasks of the committee will be to propose regulatory and policy changes that can enhance the effectiveness of the co-lending model. This might include recommendations for simplifying the documentation process, improving the risk-sharing mechanisms between banks and NBFCs, and creating more transparent guidelines for the allocation of co-lending portfolios.

Given the recent concerns raised by the regulator about the quality of consumer loan portfolios under co-lending arrangements, the committee will also likely explore ways to ensure that co-lending remains focused on priority sector lending (PSL). This focus is crucial for maintaining the integrity of the co-lending model and ensuring that it serves its intended purpose of supporting sectors like MSMEs, which are vital for economic growth.