Co-lending, which is also known as the co-origination of loans, is a collaborative lending model in India. Simply put, it is an arrangement where two lenders jointly disburse loans. It involves a partnership between two types of lenders: traditional banks (like your regular bank) and non-banking financial technology companies, commonly known as fintech. In this lending approach, both the bank and the fintech work together to provide loans to borrowers. They combine their strengths and resources to make the lending process smoother and more efficient.
While the exact process may differ between lenders to lenders, here is a general explanation of how the co-lending arrangement of financing works.
a) A regular bank and an NBFC or a fintech get into a partnership to jointly lend loans. They agree on a specific ratio to share the risk of the loans.
b) After that, a tripartite agreement is formed among the customers (borrowers), the bank, and the NBFC.
c) The customers, banks, and NBFCs all sign an agreement together, and the NBFCs become the main point of contact for the customers.
d) This agreement outlines the terms and conditions of the loan. Here, the NBFC acts as the primary point of contact for the customers. Loan applications, documentation, and customer service – all these aspects are managed and handled by the NBFC.
e) After reviewing the loan application, the bank and NBFC jointly decide on approving and disbursing the loan.
f) Both the bank and NBFC share the risks and rewards of the loan in proportion to their contribution to the lending process.
g) The repayment of the loan and the interest payment is shared between the bank and the NBFC basis of the terms of the agreement.
Co-lending is seen as the future of lending. The credit penetration that co-lending has managed to do and considering its untapped potential, it is no wonder that the loan market is expecting this joint lending arrangement to rule the domain in the coming times. The reason for such strong is the 360° benefit it offers i.e. the co-lending arrangement is beneficial to all the parties.
a) Better risk management: Co-lending enables lenders to collaborate and combine their expertise and resources, leading to more informed lending decisions. By sharing risk, they can reduce exposure to potential defaults, making their lending practices more secure and stable.
b) Better reach: Co-lending allows lenders to extend loans to segments like MSMEs (Micro, Small & Medium Enterprises), LIG (Low-Income Groups), and EWS (Economically Weaker Sections) categories. This broader reach helps improve financial inclusion and enables these borrowers to access low-cost funds from banks they may not have had access to otherwise.
c) Efficient operations: With co-lending, lenders can streamline their processes and share administrative responsibilities. This efficiency allows for quicker loan disbursals and a smoother overall lending experience, benefiting both lenders and borrowers.
d) Reduces liability: When lenders collaborate, they can divide the liability for each loan, minimizing individual exposure to risks and potential losses. This risk-sharing approach safeguards their financial health and allows them to be more open to offering larger loan amounts.
e) Enhanced product offerings: Co-lending allows banks and NBFCs to combine their product portfolios, offering borrowers more diverse and tailored lending options. This flexibility provides borrowers with better-suited loan products, meeting their specific needs and fostering stronger customer relationships.
f) Increased capital efficiency: By co-lending, lenders can make the most of their available capital, as they can join hands to fund larger loans without straining their individual balance sheets. This efficient use of capital allows them to lend more while maintaining financial stability.
a) Easy Access to Funds: Co-lending provides borrowers with easier access to funds as they can tap into the combined resources of multiple lenders. This increases the chances of loan approval and ensures a smoother and quicker loan disbursal process, fulfilling their financial needs promptly.
b) Competitive rate of interest: With multiple lenders collaborating, borrowers have the advantage of competitive interest rates. Co-lenders may offer better terms and rates to attract borrowers, allowing them to secure loans at more favourable terms compared to traditional lending options.
c) Higher financial inclusion: Co-lending facilitates financial inclusion by reaching out to a broader spectrum of borrowers, including those in remote or reserved areas. It allows lenders to extend loans to individuals and businesses that may have been overlooked or rejected by traditional lending institutions, promoting a more inclusive financial landscape.
d) Flexible loan products: Co-lenders often bring different loan products to the table, giving borrowers a range of options to choose from. This flexibility enables borrowers to find loan products that align with their specific requirements, ensuring a more personalized and suitable borrowing experience.
e) Improved loan approval chances: Co-lending allows lenders to share the risk, making them more willing to consider borrowers with diverse credit profiles. This increased risk appetite means borrowers who may have faced rejection before now have a better chance of loan approval and fulfilling their financial goals.
As per a KPMG report, by 2025, the fintech market in India is projected to grow at a CAGR of 22.7% from 2020 to 2025 with an estimated market valuation of $31 billion. This growth in the fintech market is expected to drive the co-lending market of the country. The popularity of co-lending has been growing steadily, and it is considered the future of lending in India. As technology continues to play a crucial role in the financial sector, the co-lending model of financing proves to be highly successful in reaching out to economically poor sections or those who do not have a great credit score.
