Tech Products Can Give the Right Impetus to the Co-lending Model in India
Irfan Mohammed is the Chief Business Officer- Financial Services -CredAvenue and a Founding Member of the Vivriti Group. Instrumental in conceptualising and implementing the concept of CredAvenue marketplace, he has driven its adoption, since inception and scaled it to the current INR 65,000 Cr+ volumes.
The marriage of technology and financial products in the country is still at a nascent stage. The marriage of technology and financial products in the country is still at a nascent stage. With unified payment infrastructure and consent-based data access, India is headed towards building a robust fintech ecosystem.
Lack of access to finance and a dearth of funds for the country's MSME sector is well-known, with an IFC-Intellecap report pegging the credit gap at a whopping ₹16.66 lakh crore. While the Non-Banking Financial Corporations (NBFCs) are aiding the Indian economy, the traditional banks can provide loans at a lower cost to the MSME sector. To leverage the advantages of both, RBI had announced the co-lending model, allowing lenders greater operational flexibility while letting them share the risks and rewards, in turn providing continuous access to diverse credit products.
What is co-lending?
Co-lending is a joint lending process involving two financial institutions. One of them is a large lending institution like a bank and the other one is a relatively smaller institution such as – NBFCs, microfinance institutions (MFIs) or housing finance companies (HFCs).
Under the co-lending model, a bank and an NBFC co-originate and jointly underwrite the loan while conforming to the central bank’s regulatory guidelines. Next, the data flow happens at every stage of the loan cycle, and once both the lenders approve the loan, it gets disbursed to the customer account. To facilitate this, the Indian market required a robust technology platform. Even after top initiatives taken by the RBI, we could not see the desired results.
Challenges in the co-lending model
While co-lending allows borrowers easy access to loans at competitive rates due to the reach of the NBFCs and the low cost of funds from the banks, there are various impediments that this space faces.
As per the co-lending model, banks hold a minimum of 80% of the loan on their books, NBFCs will hold 20%, and continue to be the single point of contact for the borrower. This model requires that both the bank and the NBFC maintain the borrowers’ accounts and monitor this for the entire loan’s lifecycle for the respective exposure.
It is good to observe that mid to small-sized NBFCs/HFCs are signing co-lending arrangements with banks that enhance the outreach. However, for this to scale, there is also a lack of appropriate tools to evaluate the risk appetite in a transparent manner.
One of the other primary impediments that the co-lending space has been facing is the lack of solid technology infrastructure. The time taken to integrate systems (CBS) of any bank and NBFC for co-lending is anywhere between 3-6 months, which is very long. This has limited the growth opportunities and scalability in co-lending.
Boost to co-lending via technology
Fortunately, to bridge this gap, a few companies are already working in this area and have brought out technology platforms, such as – CredAvenue’s Co-Lend platform. For example, CredAvenue’s platform connects originators and lenders interested in co-lending and helps kickstart the evaluation process. Further, this enables credit and risk evaluation, program execution, including – disbursements, collections, operations, reporting and portfolio management, and analytics for both originators and lenders.
Such platforms simplify the co-lending processes of banks and NBFCs through deep integration between banking platforms and co-originator platforms. It is estimated that the banks using these platforms will be able to scale up their businesses quickly. Apart from this, the banks will be able to partner seamlessly with small NBFCs, being able to reach out to last-mile borrowers. Not only this, such products offer real-time reporting of the co-origination assets in banks’ core banking and loan processing systems, helping meet RBI compliance requirements.
Such platforms enable technology integration and a smooth journey right from – origination, underwriting, disbursement, collection to portfolio monitoring, along with settlement and invoice offerings.
Conclusion
Over the next five years, the digital lending opportunity would reach about USD 1 trillion, as per a BCG-Google 2021 report and the pandemic would accelerate that, resulting in the fast-tracking of digital adoption of almost everything.
The co-lending model, aided by robust technology products, will ensure that MSMEs get quick access to credit. CredAvenue for one is partnering with multiple partners like Axis Bank, Federal Bank, Utkarsh Bank, and more to further grow the prominence of co-lending in India. There are multiple factors that are set to give the co-lending model a boost in India and position it as the future of credit development in India.
The marriage of technology and financial products in the country is still at a nascent stage. The marriage of technology and financial products in the country is still at a nascent stage. With unified payment infrastructure and consent-based data access, India is headed towards building a robust fintech ecosystem.
Lack of access to finance and a dearth of funds for the country's MSME sector is well-known, with an IFC-Intellecap report pegging the credit gap at a whopping ₹16.66 lakh crore. While the Non-Banking Financial Corporations (NBFCs) are aiding the Indian economy, the traditional banks can provide loans at a lower cost to the MSME sector. To leverage the advantages of both, RBI had announced the co-lending model, allowing lenders greater operational flexibility while letting them share the risks and rewards, in turn providing continuous access to diverse credit products.
What is co-lending?
Co-lending is a joint lending process involving two financial institutions. One of them is a large lending institution like a bank and the other one is a relatively smaller institution such as – NBFCs, microfinance institutions (MFIs) or housing finance companies (HFCs).
Under the co-lending model, a bank and an NBFC co-originate and jointly underwrite the loan while conforming to the central bank’s regulatory guidelines. Next, the data flow happens at every stage of the loan cycle, and once both the lenders approve the loan, it gets disbursed to the customer account. To facilitate this, the Indian market required a robust technology platform. Even after top initiatives taken by the RBI, we could not see the desired results.
Challenges in the co-lending model
While co-lending allows borrowers easy access to loans at competitive rates due to the reach of the NBFCs and the low cost of funds from the banks, there are various impediments that this space faces.
As per the co-lending model, banks hold a minimum of 80% of the loan on their books, NBFCs will hold 20%, and continue to be the single point of contact for the borrower. This model requires that both the bank and the NBFC maintain the borrowers’ accounts and monitor this for the entire loan’s lifecycle for the respective exposure.
It is good to observe that mid to small-sized NBFCs/HFCs are signing co-lending arrangements with banks that enhance the outreach. However, for this to scale, there is also a lack of appropriate tools to evaluate the risk appetite in a transparent manner.
One of the other primary impediments that the co-lending space has been facing is the lack of solid technology infrastructure. The time taken to integrate systems (CBS) of any bank and NBFC for co-lending is anywhere between 3-6 months, which is very long. This has limited the growth opportunities and scalability in co-lending.
Boost to co-lending via technology
Fortunately, to bridge this gap, a few companies are already working in this area and have brought out technology platforms, such as – CredAvenue’s Co-Lend platform. For example, CredAvenue’s platform connects originators and lenders interested in co-lending and helps kickstart the evaluation process. Further, this enables credit and risk evaluation, program execution, including – disbursements, collections, operations, reporting and portfolio management, and analytics for both originators and lenders.
Such platforms simplify the co-lending processes of banks and NBFCs through deep integration between banking platforms and co-originator platforms. It is estimated that the banks using these platforms will be able to scale up their businesses quickly. Apart from this, the banks will be able to partner seamlessly with small NBFCs, being able to reach out to last-mile borrowers. Not only this, such products offer real-time reporting of the co-origination assets in banks’ core banking and loan processing systems, helping meet RBI compliance requirements.
Such platforms enable technology integration and a smooth journey right from – origination, underwriting, disbursement, collection to portfolio monitoring, along with settlement and invoice offerings.
Conclusion
Over the next five years, the digital lending opportunity would reach about USD 1 trillion, as per a BCG-Google 2021 report and the pandemic would accelerate that, resulting in the fast-tracking of digital adoption of almost everything.
The co-lending model, aided by robust technology products, will ensure that MSMEs get quick access to credit. CredAvenue for one is partnering with multiple partners like Axis Bank, Federal Bank, Utkarsh Bank, and more to further grow the prominence of co-lending in India. There are multiple factors that are set to give the co-lending model a boost in India and position it as the future of credit development in India.
