To successfully implement co-lending, NBFCs and banks must enter into a tripartite agreement with clients, says Mani Parthasarathy, Co-Founder of Habile Technologies

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To successfully implement co-lending, NBFCs and banks must enter into a tripartite agreement with clients, says Mani Parthasarathy, Co-Founder of Habile Technologies
To successfully implement co-lending, NBFCs and banks must enter into a tripartite agreement with clients, says Mani Parthasarathy, Co-Founder of Habile Technologies

Overall, the co-lending approach has enabled NBFCs to leverage technology and expand their reach while also partnering with larger banks to offer more competitive and innovative financial products to customers across the country

This is an exclusive interview conducted by Santosh Vaswani, Editor at CIO News with Mani Parthasarathy, Co-Founder of Habile Technologies

Co-lending – How will it help NBFCs?

Imagine a world where banks and non-banking financial companies (NBFCs) work hand in hand to bring financial aid to those who need it the most. This dream is now a reality with the advent of co-lending, a revolutionary credit product designed to empower priority sectors such as agriculture, micro, small, and medium enterprises (MSMEs), social infrastructure, education, and renewable energy.

Co-lending allows both parties to leverage their strengths and resources, resulting in an affordable and sustainable flow of credit to previously unserved and underserved areas of the economy. In this article, we will take a deep dive into co-lending, examining its mechanics, advantages, and challenges. We will also explore how co-lending can help NBFCs in the long run.

What is Co-Lending, exactly?

Co-lending, which is essentially an agreement involving cash-rich banks, non-deposit-holding financial institutions (NBFCs), and housing finance companies (HFCs), has become quite popular among many market participants. Banks would use their liquidity power to finance the majority of the loan, while NBFCs would handle the administrative and labour-intensive aspects of loan origination. With co-lending, both parties split the risks and benefits during the course of the loan.

The potential of NBFCs to penetrate smaller, more difficult-to-reach geographic areas through the use of contemporary loan origination software and banking methods has always been advantageous. This resulted in fantastic growth rates, but with constrained liquidity, NBFCs can only advance so far in the market.

In contrast, banks have a larger clientele, larger sums of money, and larger charge structures. By co-lending, banks can benefit from NBFCs’ market reach, expertise in loan origination, and clientele growth, while NBFCs can increase their liquidity, profitability, and clientele.

What is the Process of a Co-Lending Agreement?

To successfully implement co-lending, NBFCs and banks must enter into a tripartite agreement with clients, which involves a well-defined procedure that must be followed precisely. The process can be broken down into three main steps:

  1. The NBFC executes loan origination tasks using co-lending software first, screens potential customers, and then refers them to the partner bank along with the necessary
  2. The bank independently analyses the client’s requirements, evaluates his or her risk, and verifies the client’s
  3. The lending parties and the client enter into a three-way arrangement. The loan will be paid out of an escrow account from which the bank and NBFC combine their Even though both lenders will be responsible for keeping track of the client’s accounts, they must cooperate to share information and produce a single statement of accounts for the borrower to facilitate repayment.

The Co-Lending Model’s Pros

Banks and NBFCs have adopted the “co-origination” process, which includes a plethora of elements aimed at mutually benefiting both sides, ever since the Reserve Bank of India (RBI) established the co-lending financial model:

  • When providing loans to customers, banks and NBFCs often accept an exposure limit of 80%–20%, with the NBFCs being required to hold onto at least 20% of the funding for the duration of the
  • A partner bank will not fund the NBFC’s portion of the loan. The bank and NBFC will each handle loan provisioning on their own.
  • During the time of funding and the time of repayment collections, both parties’ funds must be gathered and distributed in the predetermined ratio so that neither side uses the other’s
  • The consumer must pay the “blended” interest rate, which can be set by any
  • The NBFC will be in charge of loan origination.
  • The NBFC and the partner bank will each take a risk.
  • NBFCs occasionally collaborate with several banks to deploy distributed capital; for instance, the NBFC contributes 25% of the loan, Bank A lends 40%, and Bank B contributes 35%.

Role of NBFCs in Co-Lending

Using the power of technology, NBFCs have been able to expand their lending operations to even the most remote areas. With sophisticated loan management software, they can onboard a large number of customers quickly and efficiently through the co-lending model.

Under the co-lending agreement, NBFCs are required to provide a predetermined amount of loan originations within a specified timeframe to their partner bank.

NBFCs must also educate their customers about the differences between their own product offerings and those under the co-lending category while also handling document sharing, customer service, and grievance redressals.

This added responsibility is crucial to ensuring a seamless and satisfactory customer experience and is essential to building trust and credibility with customers.

Overall, the co-lending approach has enabled NBFCs to leverage technology and expand their reach while also partnering with larger banks to offer more competitive and innovative financial products to customers across the country.

How Co-Lending Can Help NBFCs?

Co-lending has the potential to revolutionise the credit business, even if it is still in its early phases. According to rumours, NBFCs will take home most of the rewards.

Here’s how:

  • Co-lending enables NBFCs to target high-net-worth individuals without facing funding constraints, as their exposure is limited to about one-fifth of the
  • The co-lending framework provided by the central bank is transparent, which helps NBFCs avoid regulatory
  • By partnering with banks, NBFCs can observe and adopt best practises for loan origination and risk assessment to improve their operational efficiency, using co-lending software like
  • Co-lending partnerships require the creation of a business continuity plan, ensuring uninterrupted service to
  • Co-lending provides an opportunity for NBFCs to increase their assets under management (AUM) with the support of a well-established

Current Co-Lending Challenges

Co-lending has not taken off with NBFCs and banks in the way that was anticipated when it was introduced to the market. Some of these difficulties include:

  • The establishment of common credit approval standards to ensure consistency across the board
  • The integration of IT infrastructure to streamline origination and disbursement processes
  • The need to adapt to constantly fluctuating lending policies from both banks and NBFCs
  • Potential accounting challenges for both parties, which can be mitigated through the use of co-lending software.
  • Integration of credit and risk management systems (both digital and non-digital) of both parties
  • Differences in processing fees charged by banks and NBFCs, which can lead to challenges in collaborations

Co-lending is solely intended for the priority sectors because it is a fairly new idea. Global markets must stabilise and growth must pick up steam for it to take off.

Drive Digital in Co-Lending

Becoming digital for all elements of lending has become standard practise, as it is with the majority of NBFCs. Automated customer onboarding, document collection, online credit risk assessment utilising the customer’s credit history, EMI monitoring, and regulatory compliance updates for both banks and NBFCs are a few examples of digital initiatives.

Time is of importance these days. Co-lending partners can cut the turnaround time for loan origination and disbursement from a few days to just a few minutes by implementing a scalable IT infrastructure.

Future Co-Lending Roadmap

There is little question that co-lending will emerge in the coming years as the holy grail of business for NBFCs. Large banks like the SBI are making strides to collaborate with tech-heavy NBFCs to put this idea into practise. The game’s regulations are still being developed, so it’s unclear whether there will be instances in which several banks or NBFCs come to an agreement. What would each NBFC’s credit risk requirement be in that scenario? Yet it won’t be long before co-lending embraces mainstream industries and extends to other economies as a recipe for success.

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