Shaping the Future of Co-Lending in India: The Role of Technology

Discover how technology can enhance and support the growth of the Co-Lending Model in India, driving collaboration, partnerships, and operational excellence.

What is Co-Lending?

Co-lending is a model where two financial entities collaborate to provide loans to borrowers, such as individuals, small businesses, or micro-enterprises.

Typically, banks partner with Non-Banking Financial Companies (NBFCs), housing finance companies, microfinance institutions (MFIs), or FinTech firms.

This partnership combines the strengths of both institutions. Banks contribute low-costing capital, supported by customer deposits, while NBFCs provide hyperlocal customer reach, a deep understanding of local credit needs, and enhanced customer experiences.?

Co-lending makes loans accessible to a wider audience, especially those who may have trouble obtaining loans through traditional channels.

Additionally, co-lending helps banks meet their Priority Sector Lending (PSL) targets, which focus on supporting sectors like rural housing, small businesses, and underserved communities, thus contributing to economic growth and job creation.

The Current Landscape of Co-Lending

In FY23, the co-lending industry in India lent around INR 47,000–52,000 crores. This number is expected to grow five times, reaching INR 2,00,000–2,50,000 crores in the next five years.

A breakdown of the co-lending portfolio reveals:

• 34% for personal loans
• 20% for home loans
• 13% for gold loans
• 13% for MSME unsecured loans
• 12% for vehicle financing
• 8% for secured MSME loans

Some key partnerships in co-lending include:

• IIFL Home Finance with Punjab National Bank
• U Gro Capital with IDBI Bank and Kinara Capital
• Indel Money with IndusInd Bank for gold loans
• Bank of India with MAS Financial Services
• Small Business FinCredit (SBFC Finance) with ICICI Bank

Understanding the Co-Lending Model

Co-lending involves shared responsibilities for providing loans. Banks usually lend a larger portion, while NBFCs contribute a smaller part, and both share the risks and rewards. There are two common models used in India:

Co-Lending Model 1:

1. Agreement and Collaboration: The bank and NBFC sign an agreement on data sharing, risk management, loan servicing, and revenue sharing.
2. Finding Borrowers: The NBFC identifies potential borrowers and collects their information using the Account Aggregator (AA) framework and other data sources.The AA framework makes it simple and safe to share a borrower’s financial data from different banks and institutions with lenders, but only if the borrower agrees.
3. Application Review: The NBFC shares the borrower's profile details with the bank for review. The NBFC performs e-KYC or offline KYC, which the bank verifies.
4. Joint Underwriting: Both the bank and NBFC work together to decide if the loan should be approved, checking for fraud and following necessary procedures.
5. Loan Offer: Once approved, the loan offer is made, which includes the sanction letter, a loan kit (documents explaining the loan), and an agreement that the borrower signs. The borrower also sets up an e-mandate for payments.
6. Pre-disbursement Checks: Both the NBFC and bank do final checks before disbursing the loan.
7. Loan Disbursement: After final checks, the loan is disbursed by both parties into an escrow account, and the funds are transferred to the borrower.
8. Customer Servicing: The NBFC acts as the main point of contact for loan servicing and repayments.

The Co-Lending Model works best for larger loans where the higher earnings justify the setup and operational costs, and is more suitable for loans requiring processing time rather than instant loans.

Co-Lending Model 2:

In this simpler model, the NBFC takes the lead in identifying borrowers and disburses the loan as per the master agreement with its partner bank.?

The bank then reimburses its share (typically 80%) to the NBFC. The NBFC retains responsibility for customer servicing and loan repayments. This model is suited for smaller, quicker loans with shorter processing times.

The Role of Technology in Optimizing the Co-Lending Model

Managing co-lending partnerships efficiently can be complex. Technology can make the entire process smoother, faster, and more transparent. Here are some key ways technology supports the co-lending model:

1. Unified Platform for Streamlined Operations

A unified platform helps co-lenders manage loans collaboratively by providing a single interface for all stages of the loan lifecycle:

• Shared Access to Data: Both co-lenders can access borrower and loan data in real-time, reducing errors and improving document and data management.
• Seamless Workflow Management: The platform integrates all stages of lending, ensuring efficient collaboration and timely task completion.
• Clear Role Division: It automates and clarifies each co-lender's responsibilities, reducing confusion.
• Data Analytics & Optimization: The platform tracks loan performance and borrower behavior, helping co-lenders refine risk models and tailor loan products.
• Enhanced Transparency & Trust: Every action is recorded, ensuring transparency and building trust between partners.
• Scalability: The platform handles large data volumes and varied processes, supporting business growth without disruption.

2. Automating Loan Application Fulfillment with AI

A Gen AI-powered system can simplify and speed up loan applications for co-lenders by automating key tasks. Here’s how it works:

• Data Collection from Borrowers: Co-lenders can integrate the Gen AI system to instruct it to contact borrowers for gathering necessary information and documents like ID proof and income statements. This data and document collection can easily be done through popular communication platforms like WhatsApp.
• KYC Compliance: It verifies borrower details against regulator-approved databases, ensuring compliance with regulations without manual effort.
• Answering Questions: Borrowers can ask the AI system questions via chat or voice, which it answers instantly, making the process smoother and more transparent.
• Seamless Application Progression: Once all borrower data and documents are verified, the system ensures the application moves quickly to the underwriting stage.

Speaking on the topic, Himanshu Gupta, Chief Operating Officer (COO), iorta Technology Solutions, elaborates, “Dot, our Gen AI-powered assistant, can completely transform how co-lenders work. It can collect borrower data, verify documents, and handle KYC checks automatically, helping speed up the application process and reduce costs. Dot can also answer borrowers' questions and guide them through the process, making it smooth and hassle-free. With Dot, co-lenders can handle more applications, grow their business, and get things done faster while staying accurate and efficient.”

3. Escrow Management Software

Escrow management software enhances the basic escrow functions provided by banks. While banks manage automated disbursements and repayments, escrow management software offers:

Customizable Solutions: Tailored to co-lenders' needs, with advanced analytics, performance management, borrower tracking, and other features as needed.

Unified Platform: The software offers a single platform for co-lenders working with multiple banks or vice versa, streamlining transaction management and enhancing coordination.

Faster Integration: Escrow management software, pre-connected to major escrow systems, enables quick setup, avoiding delays common with direct integrations to escrow providers’ systems.

Advanced Data Insights: AI-powered analytics provide deeper insights into borrower behavior and repayment trends.

Simplified Borrower Experience: The platform offers a user-friendly interface, making it easier for co-lenders to interact compared to traditional banking systems.

4. AI-Powered Credit Scoring Software for Co-origination

Credit scoring software powered by AI and machine learning enhances the loan underwriting process:

• Broader Data Integration: It evaluates not only traditional credit scores but also spending habits, past account balances, and cash flow.
• Improved Risk Assessment: Using the Account Aggregator Framework, it creates a comprehensive borrower profile for better decision-making.
• Advanced Scorecards: Co-lenders can combine their approval criteria and create a unified scorecard, making it easier to assess creditworthiness.

5. Co-Lending Marketplace

A co-lending marketplace brings together banks, NBFCs, and borrowers on a single platform. This platform allows:

• Discovering Partnerships: Banks and NBFCs can explore potential co-lending partnerships, while borrowers can find the best lenders.
• Data Sharing: Co-lenders can easily share data, ensuring quick borrower assessments.
• Regulatory Compliance: The platform helps manage workflows according to RBI guidelines.
• Loan Application: Borrowers can apply for loans directly, streamlining the process and making it more transparent.

Conclusion: The Future of Co-Lending in India with Technology

The co-lending model has immense potential to enhance financial inclusion in India, particularly for underserved communities and small businesses.

By adopting advanced software solutions, banks and NBFCs can improve efficiency, reduce operational costs, and provide better services.

As technology continues to evolve, it will play an even greater role in shaping the future of co-lending, driving growth in India’s lending ecosystem, and enabling millions of people to access the credit they need.

How We Can Help

At iorta, we specialize in cutting-edge financial services software, trusted by industry leaders like Edelweiss, ICICI Bank, Aditya Birla Capital, Aviva, and Pramerica.?

If you're a lender exploring the tech side of co-lending, let’s discuss how our expertise can streamline your operations and drive growth. Do reach out to us at [email protected]