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Can Co-Lending Be the Catalyst for the Resurgence of India’s MSME Sector?

Lending Lifecycle Management

The Micro, Small, and Medium Enterprises (MSME) sector contributes significantly to India’s growth trajectory, provides resilience to the economy, and generates a substantial number of jobs.

A total of 633.9 lakh MSMEs employed 93,94,957 people in the financial year 2022, as per IBEF. The sector has played a vital role in generating employment in rural and remote parts of the country. Their contribution to the Gross Value Added (GVA) in India’s GDP in FY 20 was 30%.

The above numbers underscore the contribution and importance of MSMEs. However, despite that, the sector faces many challenges, lack of easy availability of credit is one of them.

Co-lending model (CLM) offers a solution to this problem and can be instrumental in the resurgence of this sector. In this blog, let us explore the topic in detail.

Co-lending: Overview And Background

Co-lending or co-origination is a model where banks and non-banks come together to meet the credit needs of the underserved and unserved by extending credit to them jointly and sharing risk.

Banks and Non-Banking Finance Companies, NBFCs share the risk and rewards in the participation ratio. As per RBI guidelines, 80 percent of the loan reflects in the bank’s books, while the remaining 20 percent is in the NBFCs’ books.

The partnership allows NBFCs to source clients, perform credit appraisals and disburse a small part of the loan amount. Simultaneously, the arrangement enables a bank to lend out more funds to priority sectors and have a greater reach.

The Core of the Co-lending Model: Synergy and Agility

Therefore, the co-lending model synergises the strengths of banks and NBFCs; banks leverage their balance sheets while NBFCs can use their distribution network to provide loans to the MSMEs.

NBFCs specialise in underwriting micro, small and medium enterprises due to their in-depth knowledge of the local ecosystem and better credit assessment procedures.

How Will Co-lending Contribute to the Resurgence of MSMEs?

Co-origination of loans benefits all participants of the arrangement and the economy as a whole. Micro and Small Enterprises contribute to around 95% of the overall credit gap; the co-lending model can help revitalise the MSME sector by bridging this gap.

Here are 4 ways in which the model would impact the sector:

1. Co-lending Improves Credit Accessibility and Aids Financial Inclusion

Co-lending brings about transformation at the grass-root level and provides credit to MSMEs who traditionally do not qualify for a loan. Small businesses without credit history struggle to get loans from traditional banks. Banks are hesitant to lend to MSMEs; due to a lack of significant presence in remote parts, making credit assessment and collections a challenge.

Partnering with NBFCs allows banks to utilise NBFCs’ network and their ability to manage and spot risks. NBFCs, with their feet-on-street network and a structured approach to lending, make it less risky for banks to lend to MSMEs.

Thus, co-lending helps banks reach a larger pool of borrowers and NBFCs in scaling operations. Aided by technology, the model makes credit more accessible for MSMEs and drives financial inclusion.

2. Unlocks Dormant Funds

As per reports, only Rs 20 trillion is available against a credit demand of Rs 40-45 trillion from the MSME sector through the formal banking system. Despite structural reforms and policy changes by the government to increase credit to the MSME sector, the gap remains high.

RBI’s co-lending model proposed tackles this issue. The public sector banks (PSBs) dominate many of India’s liquidity reserves. Tapping into this liquidity with NBFCs as the front can infuse liquidity into the economy and increase credit availability for MSMEs. Subsequently, banks become more open to lending to MSMEs, leveraging the better reach and credit assessment capabilities of NBFCs, resulting in increased credit flow to MSMEs.

Co-origination of loans has been instrumental in unlocking dormancy by making small ticket loans economically viable for large lenders.

3. Co-lending Reduces Borrowing Cost

 

Co-lending aids the MSME sector growth by providing them with affordable credit.

Technology-driven CLM reduces the cost of customer acquisition and loan processing. Automating the loan origination process helps banks and NBFCs reduce operational costs and pass on benefits through lowered interest rates.

Additionally, the lower cost of funds due to the participation of banks, which house 80% of the loan, reduces the entire lending cost. The lower cost of funds and processing trickles down as a reduced cost of capital for MSMEs.

More and more banks are tying up with NBFCs, and one bank may have multiple co-lending partners giving MSME more options to choose the most affordable solution.

4. Ensures Credit Availability on Time

Technology platforms have not only contributed to the growth of co-lending in India, but they are also essential for its smooth functioning.

With the help of automation and decision-making tools, lenders can process a larger number of applications and disburse more loans in a shorter span. Artificial intelligence and machine learning help banks make quicker decisions, accelerating the processing time and ensuring customers get credit on time.

MSMEs also benefit from the technology-enabled co-lending process, which improves the turnaround time and higher efficiency in processing loans.

Key Takeaway

Co-lending is a symbiotic relationship that helps banks and NBFCs benefit from each other’s strengths. MSMEs benefit from increased and improved access to credit at affordable rates, which can enhance their growth potential.

Banks and NBFCs need efficient solutions to ensure smooth functioning and a streamlined disbursal of loans to their customers.

Finezza’s Loan Management System is designed to be compatible with the co-lending model and offers numerous advantages like flexibility, agility, and efficient loan management.

Find out more about the intelligent solutions offered by us.

Call for a demo today!

Banking On Co-Lending To Serve Credit Demand: A Scaling Strategy For NBFCs

Lending Lifecycle Management

Co-Lending Model (CLM) is still in its infancy in India. RBI devised this specific lending model to improve credit availability to the underserved and unserved categories of the economy.

Generally, these segments are isolated from mainstream banking facilities due to their geographical or demographical characteristics. They include low and medium-income categories, Micro, Small, and Medium enterprises (MSME), economically weaker sections (EWS), etc.

While the Reserve Bank of India (RBI) first issued guidelines on the co-origination of loans in 2018, the pandemic-related credit crisis created greater significance and momentum for the model. Gradually, an increasing number of Non-banking Financial Companies (NBFCs) and banks are entering into co-lending arrangements.

The co-lending market is expected to achieve a volume of Rs.25,000- Rs.30,000 crore in FY 2022-2023. One can conclude that co-lending is ready for take-off with NBFCs and banks planning to issue Rs.50,000 crore credit, as stated by the kingpins of NBFC firms in a recent Banking, Financial Services, and Insurance (BFSI) summit.

 

6 Factors That Would Spur The Growth of Co-lending

The co-lending model intends to make affordable credit available to the economy’s priority sectors. The framework makes use of banks’ surplus funds and NBFCs’ outreach to provide low-cost loans to borrowers. This tripartite arrangement benefits all parties involved-the bank, the NBFC, and the debtor.

Let us delve into some key factors that will drive the co-lending growth in the coming days.

1. Continued demand for credit in the economy

In terms of credit, it is the supply rather than the demand which has been a challenge. Economic Survey 2022-2023 forecasts increasing demand for bank credit for the next fiscal year. The current year has seen a revival of economic activity, which is supported by a fundamentally stronger banking system and a robust corporate sector.

Non-food bank credit increased by 15.3% on a year-on-year basis in December 2022. This credit growth is visible across sectors like home loans, agriculture and allied activity loans, and MSMEs which are driving industrial credit.

The survey also predicts an active rise in credit in FY2024 if inflation declines and the real cost of borrowing does not increase.

In the co-origination model of lending, the benefit of low-cost capital trickles down to the borrower keeping the interest rate in check. Effectively, there will be more takers for such loans.

2. Increased government spending on infrastructure

Infrastructure spending often creates a bigger economic stimulus than other types of spending. Capital expenditure on infrastructure generates a multiplier effect on other sectors like real estate, cement, steel, and transportation.

Also, Infrastructure development projects provide NBFCs with lending opportunities in direct lending or equipment financing through co-lending.

3. The pressure of Priority Sector Lending (PSL) targets on banks

If a bank fails to meet its PSL targets for the year, it must invest the lending shortfall amount in Rural Infrastructure Development Funds (RIDF). They can also purchase excess PSL certificates from banks that have exceeded their lending target for the priority sector.

In this case, co-lending partnerships with recognised NBFCs will assist banks in meeting the PSL targets.

4. Regulatory modifications by the RBI

The RBI has made significant regulatory changes affecting NBFCs and fintech lending in the last two years. The scale-based lending framework for NBFCs focuses on strengthening the NBFCs’ governance, capital adequacy, and technological infrastructure.

RBI’s new digital lending guidelines aim for transparency and efficiency in fintech lending. These regulatory changes reinforce the fundamentals of the co-lending model.

5. The Untapped credit market in tier-2 and tier-3 cities

Tier-2 and tier-3 cities in India are quickly emerging as development hotspots. The most recent budget authorised the establishment of an Urban Infrastructure Development Fund (UIFD) of Rs.10,000 crore per year for the development of infrastructure in these cities.

Compared to traditional banks, NBFCs have a more substantial presence in tier 2 and tier 3 cities. Through co-lending partnerships, NBFCs can use this advantage to enter the untapped credit market in these geographies.

6. Reduced cost of funds for NBFCs

When the RBI tightens monetary policy, the cost of funds for NBFCs rises, making their loans more expensive for borrowers.

Co-lending enables NBFCs to obtain low-cost funds from banks for onward lending to customers.

 

Some Hurdles The Co-Lending Model Has to Overcome

The growth of co-lending poses some challenges to lenders as well. Understanding and overcoming those obstacles is critical for maintaining a sustainable business model.

1. Complex process model– Banks and NBFCs share risks and rewards in the co-lending model. Proportionate allocation of benefits and drawbacks necessitates complex accounting methodologies, complicating the lending model even further.

2. Banks unaware of their customers’ risk profiles– In a co-lending arrangement, NBFCs become the customer-facing entities engaged in sourcing, onboarding, and servicing the borrowers. Here, banks are unable to assess the risks posed by their borrowers. Hence NFBCs must improve their underwriting capabilities because they are responsible for maintaining the co-lending asset quality.

3. Different regulatory compliances for the lenders– Apart from general compliance procedures like Know Your Customer (KYC), other regulatory and compliance requirements for both lenders differ, making reporting difficult.

4. The demand-supply disparity in the PSL segment– When banks fall short of their priority sector lending targets, they rely on other banks and NBFCs to purchase PSL certificates or engage in Inter-bank Participation Certificates (IBPC) transactions. However, NBFCs’ exposure to priority sector loans is far lower than banks’ demand. PSL may not gain traction unless co-lending takes off.

5. Integration of loan management functions– Co-lending necessitates using an agile Loan Management System (LMS) capable of handling the nuances of NBFC-bank relationships. LMS must efficiently manage the various stages of the credit management process while shielding the customer from the troubles of the fragmented loan processes. It must also accurately deal with complex bookkeeping and reporting functions.

Winding Up

Co-lending is, undeniably, a long-term, scalable model. The challenge is to maintain the lender partnerships to continue leveraging the framework. Driven by credit demand and expedited by fintech tools’ support, the model has the potential to reach new heights of progress very soon,

Finezza’s Loan Management System is one such fintech tool ideal for co-lending firms seeking to grow their business. Our LMS’s embedded capabilities capitalise on the synergies of NBFCs and their banking partners.

Besides that, we also offer analytics and a suite of other specialised solutions that streamlines and automates critical business processes.

 

Contact us today to learn more about our LMS.

How Can Co-lending Benefit Banks, Customers, and NBFCs?

Loan Origination System

The co-lending model, introduced by the Reserve Bank Of India (RBI) in 2018, is a mechanism where banks and non-banks join hands to provide credit to the priority sector.

The co-lending arrangement allows NBFCs (Non-Bank Financial Companies) which operate in deeper geographies and lend to the MSME Sector (Micro, Small and Medium Enterprises), LIG (Low-Income Group) and the EWS (Economically Weaker Sections) categories, to access low-cost funds from banks.

Banks usually shy from lending to these groups due to high operation costs and credit risk.
The coming together of banks and NBFCs is a synergetic relationship that benefits both the parties and the borrowers. Let us explore the advantages of Co-lending and how it can create a vibrant financial ecosystem.

Co-Lending: An Overview

Co-lending, also known as co-origination, occurs when two lenders get into an arrangement to disburse loans jointly. Under this arrangement, the bank and the NBFC share the risk in an 80:20 ratio. Also, the customers, banks and NBFCs enter a tripartite agreement, and the NBFCs act as the single point of contact for the customers.

The RBI developed co-lending guidelines in 2018 that allowed banks and NBFCs to co-originate loans. These guidelines were amended in 2020 and are now known as Co-Lending Models (CML). The modified guidelines included Housing Finance Companies (HFCs), also in the framework apart from making other changes in the original policy framework.

Many banks and NBFCs are looking at enhancing the co-lending tie-ups in current times, especially when many NBFCs are struggling against the liquidity crunch. Co-origination gives the banks a chance to claim priority sector status for their share of the credit.

The co-lending model will likely touch a total volume of over Rs 30,000 crore by the end of FY 2022-23.

What Are the Benefits of Co-lending for All the Stakeholders?

The CLM offers benefits to all stakeholders of the credit ecosystem by empowering them on multiple fronts. NBFCs and HFCs can leverage their robust presence, while commercial banks offer synergy through the availability of funds for loan disbursal.

Let us delve deeper into this topic.

Benefits for Banks and NBFCs

  • Better Risk Management

NBFCs are in a position to manage and spot risk much better compared to large banks. NBFCs and HFCs are more adept at assessing the creditworthiness of niche customer segments, which are usually not the core target group of banks. With a more structured approach, local focus and specialised skill set, they can evaluate credit applications better and reduce the risk exposure for themselves and banks.

A modern Loan Management System can help tackle challenges like proportionate sharing of risks and rewards, especially when an NBFC has multiple co-lending partners.

  • Increased Reach of the Lending Ecosystem

Co-origination is based on the symbiotic association between NBFCs and banks. Public Sector Banks (PSBs) in India have access to the most affordable source of funds in the economy, and banks release 80% of the credit, which reduces the overall cost of funds. NBFCs can benefit from this and offer loans to their customers at lower rates vis-a-vis their competitors.

PSBs stand to gain from a partnership with NBFCs and fintechs as it enhances their last-mile reach. Instead of a one NBFC one bank contract, co-lending can be imagined as an open digital marketplace in the future. The co-lending framework will enable smooth and faster credit flow to SMEs, with NBFCs acting as the last mile link.

  • Efficiency In Operations

With the use of automation and decision-making tools, co-lending allows lenders to have higher margins by processing more applications and disbursing more loans in a shorter span. The deployment of Artificial intelligence can help FIs analyse customer patterns and predict default probability, helping them make faster and more data-backed decisions.

  • Prevents Systemic Liability

Banks and NBFCs can manage capital efficiently and decrease their liability through co-lending. They can scale their operations by finding lending partners with a good product-market fit. To ensure no negative impact on the profit and loss statement, the on-balance sheet spread that is lesser than or at most equivalent to the off-balance sheet spread can prevent any negative impact on the profit and loss statement.

As co-lending is a collaboration between banks and NBFCs, both partners focus on increased compliance and maintain it, thus preventing system liability.

Advantages for Borrowers

  • Easier Access To Funds

Co-lending allows NBFCs to act as a link between groups which traditionally do not have access to credit and banks by providing them with easy availability of loans. Small businesses and people in the remotest part of the country can get a loan quickly with the help of a mobile application. Fintech has also made manual loan processing redundant through the partnership between prominent banks and NBFCs.

  • Lower Rates

Low cost of funds, automation of the loan process, and established network of NBFCs help lenders reduce their cost of operation. They pass on this benefit to the borrowers through lower interest rates. The co-lending model allows grassroots-level borrowers to get credit at affordable and competitive rates.

  • Financial Inclusion

Co-lending focuses on providing credit to the underserved and unserved groups of the economy. Leveraging the co-lending model, the low cost of funds from the banks and the broader reach of NBFCs allows people usually ignored by banks, mainly due to disparities in their credit risk management approach and core target segment.

Typically, banks take a cautious approach when lending to some sectors to avoid the risk of systemic liability. Partnering with NBFCs allows them to lend to the priority sector while keeping their risk levels in check.

NBFCs can capture a larger market share and process more loans which pump more credit into the economy.

In Conclusion

The co-lending model offers a win-win for borrowers, NBFCs and banks. Borrowers get loans at lower rates than they would have gotten on a standalone basis from the NBFC. They also get a steady flow of dependable and economic sources of funding, and banks benefit from better deployment of their funds that reach the last mile.

Therefore, co-lending is a suitable way forward. If executed well, the process can benefit the economy as a whole. Finezza offers a suite of customised solutions to optimise co-lending and other financial operations to enable organisations to tackle credit and lending challenges, technology integration, and ground-level executions. For example, we help banks, NBFCs, and other lenders track and manage credit applications, process KYC documents faster, assess lending risks, and streamline the entire lending process.

Talk to our experts to know more!

How Finezza’s Co-lending LMS Can Benefit Your Co-lending Process

Lending Lifecycle Management

Loan syndication by banks has always existed for large business loans. The real challenge is in the small and medium-sized enterprises (SMEs) market, which represents a significant share of the digital lending landscape in India. A conservative estimate puts this market at a whopping $300-$400 billion by 2025!

The Indian finance industry has long used the co-lending model of credit. The CLM has gained much more significance and has become a viable solution to liquidity and credit access issues due to the recent expansion of fintech resources and abilities.

After discussions with some of India’s leading NBFCs and fintechs, we at Finezza have built a co-lending compatible LMS (Loan Management System) that can streamline the lending process for all parties involved.

This new functionality has been precipitated by the keen interest and agreement of several large fintech non-banking financial companies (NBFCs) who have approached us based on our domain understanding.

What Makes Finezza’s LMS Highly Compatible With Co-Lending? 

Co-Lending-Diagram-Wide

Our co-lending compatible LMS is designed to handle the operational intricacies of co-lending effectively so that customers are not troubled in any way.

Co-lending involves the proportionate sharing of risks and rewards of loans between banks and NBFCs. This can present challenges in underwriting, loan processing, sharing of interest, charges collected, apportioning costs, and risks of loan defaults. When NBFCs have multiple co-lending partners, the process becomes even more complex.

An NBFC or a lender facilitates the loan and is the only point of contact for the customer. The RBI requires the NBFC to contribute at least 20% of the loan amount; the remainder can be from one or more co-lending partners. These partners can have different agreements with the facilitating lender regarding the distribution of interest, charges, penalties, and defaults.

Finezza’s LMS can handle all the complexities of different agreements so that customers can see their loans as a single entity. Let’s get into the core features of this platform.

Features of Finezza’s LMS That Will Raise The Efficiency Of Co-Lending

Finezza’s Loan Management System is designed to cater to the unique needs of the co-lending model as it simplifies complex co-lending procedures and offers numerous competitive advantages.

1. Streamline the Splitting of Risks and Rewards

When it comes to co-lending, businesses can face multiple challenges. Even though the bank and NBFC might lend at an agreed ratio, the bank and NBFC will often have different costs of funds.

So the most significant inefficiency the platform will handle is processing fees, delayed interest, and penal interest between banks and NBFCs. Splitting the money based on these different terms won’t be an operational nightmare when EMIs start coming in.

2. Personalised and Multi-View 

The bank needs a clear view of its 80% stake in the loan, and the co-lending platform will provide this by creating three views of the loan – 100% for the customer, 20% for the NBFC, and 80% for the bank. This way, the parties involved will clearly understand their investment.

3. Automated KFS Sharing

RBI’s guidelines state that the lender should share a Key Facts Statement (KFS) with the borrower. Finezza’s co-lending compatible LMS will automate this process.

4. Automated Reporting

The NBFC and bank must report their loan share to the credit bureau. The platform can also automate this operational hassle.

5. Automated Bookkeeping

The platform will also automate bookkeeping for this complex setup by generating the ledger and trial balances in line with the share of the participants on loan. The NBFC will know how much to return to the bank, and the latter will know how much to take from the NBFC.

Wrapping Up

The co-lending concept allows all stakeholders to be more adaptable, take bigger risks, and generate more revenue. It also enables the customer to obtain a loan from the formal credit market at a low-interest rate.

Co-lending also presents a fantastic business opportunity for banks and NBFCs in India. By partnering, they can fund many credit-underserved customers. The success of this business model depends on the technical competence of the co-lending LMS.

Finezza’s Co-lending Loan Management System removes operational inefficiencies and helps scale your lending operations. Our system makes it easier to process loans under the co-lending model and eliminates many of the inefficiencies that come with it.

Contact Finezza to book a free demo if you are a financial institution wanting to improve your Loan Management System.

Is Co-lending Changing the Credit Landscape in India?

Lending Lifecycle Management

The concept of co-lending has existed in the banking, financial services, and insurance (BFSI) sector for some time. However, the Reserve Bank of India (RBI) issued guidelines in November 2020 permitting non-banking financial companies (NBFCs) and banks to loan money to the underserved segments of the economy by leveraging the lower cost of funds from banks and the massive reach of the NBFCs.

For a growing modern economy like India, the co-lending model promptly provides access to financial products to every individual and business, which is necessary to maintain the current growth trajectory.

Understand how the co-lending model benefits lenders by minimising their risk and providing credit to consumers at lower interest rates and quick loan disbursal, which plays an important role in the economy’s growth.

The Rise of Alternative Modes of Payment 

Credit cards carry the negative connotation of being a debt trap in India, which has primarily been a debit card-driven market. However, this narrative has changed with growing credit card issuance in the last decade. Consumers’ changing mindsets and increased awareness of using credit cards and Buy Now, Pay Later (BNPL) for daily expenditure by the new-age startups further accelerates growth.

Unified Payments Interface (UPI) has risen as one of the most popular payment mechanisms in the country, showing impressive volume numbers compared to debit and credit cards. However, the value for all three modes of payment remains similar.

In the last few years, the credit sector has also seen significant contributions by neobanks like Jupiter and InstantPay.

A neobank is a tech company that provides banking services via a mobile app or website. The services may include transferring money electronically, paying bills, receiving direct deposits, and checking bank balances.

The Need for Co-lending in the Economy

Indian banking and financial services have been unable to bridge the significant gap in the formal credit sector, leaving many people underserved when it comes to credit. This provides lenders an opportunity and a challenge to meet the demands of this section.

With the rise of digital payments and innovation in the banking sector, it has become much easier to track individuals’ payments, cash flow, and credit scores beyond the formal sector’s reach. New fintech players have disrupted the market by introducing new and innovative financial products to consumers like credit cards, Buy-Now and Pay Later (BNPL), and credit EMIs in the underserved/unbanked segment, which were limited only to the home, auto, and personal loans before.

Problems That Co-lending Can Solve in the Indian Economy

Co-lending partnerships can significantly impact the fortunes of small businesses and customers throughout the country who do not have access to traditional forms of credit.

1. Liquidity Problems

Liquidity denotes financial institutions’ ability to fund their assets’ growth and meet financial obligations. As one of the world’s fastest-growing economies, India needs quick access to capital to meet its ever-growing needs. The fintech sector has played a pivotal role in bridging any gaps that might arise.

Co-lending creates a framework through which traditional banks can help close these gaps through innovative products and technologies by providing their lending strength and credibility to the NBFCs.

2. Systematic Stability

Systematic stability refers to the financial system’s capacity to reliably provide the loan intermediation and payment services required to maintain the economy’s current development course.

Co-lending guarantees a high level of standardisation, compliance, fiduciary care, and consumer protection. It is a collaboration between two regulated institutions — a bank and an NBFC. Borrowers are underwritten twice by two entities, and risk governance is a mutually reinforced exercise with adequate checks and balances.

Advantages of Co-lending to Different Stakeholders

New-age startups and fintech firms are disrupting the banking space by bringing technology into the traditional working model of a bank. Their varied benefits for banks, fintechs, and customers are listed below.

To Banks: 

  1. Greater reach: Since fintechs and NBFCs can reach the economy’s remotest and most underserved groups, banks can get more customers and businesses to lend to.
  2. Better customer experience: Fintechs rely on technology to manage customer interactions; the Big Data collected in this digitised era help banks identify the most profitable customers and provide them with repeat credit in the future.
  3. Lower risk: Due to the risk division between banks and NBFCs, there is an added sense of security.

To Fintechs:

  1. Credibility: New-age startups can gain brand credibility by collaborating with traditional banks.
  2. Lower interest rates: Banks can help NBFCs by providing loans at a lower interest than their competitors.
  3. Better capital utilisation: NBFCs can utilise their limited capital efficiently in the co-lending mechanism.

To Customers:

  1. Better banking experience: Fintechs ensure that their customers get a better banking experience to retain them for a long-time.
  2. Low-interest rates: Customers can avail of low-interest rates in borrowing.
  3. Borrowing opportunities: Credit-underserved communities in rural areas with less documented credit history find it easier to access borrowing through the co-lending process.
  4. Increase in financial knowledge: Banks and NBFCs offer a personal touch and educate the customer.

Choosing the Right Co-lending Partner

Apart from the obvious financial risks involved, co-lending arrangements should be considered with the utmost caution, as the other party’s actions could affect the entire brand image.

Some things to consider would be:

  1. Focus area: The similarity of focus areas becomes important while entering into an arrangement.
  2. Risk appetite: The potential partner must be willing to match your risk-taking capacity and willingness.
  3. Ticket size: The average loan amount must be agreed upon while entering a co-lending arrangement to avoid future disputes.

The Bottom Line

Co-lending has evolved from a buzzword to being recognised by the RBI and is slated for country-wide implementation. Several startups and banks are collaborating to lend to niche segments of the economy.

In addition, co-lending comes with numerous risks. With non-performing assets (NPAs) constantly in the spotlight, co-lending arrangements must prove their robustness and fundamentals going forward.

This is where AI-powered platforms like Finezza can help automate the lending process through its wide variety of products, including:

  1. Collection Delinquency Management
  2. Bank Statement Analyser
  3. Credit Bureau Data Analyser.

Finezza can make your banking and lending decisions efficient and accurate. Contact us to know more!

Simplify and Scale Your Co-lending Business With Finezza’s LMS

Loan Origination System

The co-lending Model (CLM) of credit is not new to the Indian finance sector. Due to the proliferation of fintech resources and capabilities, the CLM has gained a lot of significance and has emerged as a viable solution to liquidity and access to credit issues. Efficient co-lending Loan Management Systems (LMS) can leverage the inherent capabilities of this lending model and create a win-win situation for all the stakeholders, including banks, NBFCS, and borrowers.

Finezza presents a robust and agile Loan Management System (LMS) that caters to the unique requirements of the co-lending model. We understand the operational, regulatory, and technological prerequisites needed for the functioning of CLM. Our in-depth expertise has integrated these functionalities into our LMS to provide comprehensive and seamless loan lifecycle management. Finezza’s co-lending LMS simplifies complex co-lending procedures and offers numerous competitive advantages.

How Our LMS Enhances the Efficiency of Lending Operations

Co-lending works on the proportionate sharing of risks and rewards of loans between the banks and the NBFCs. This presents challenges in underwriting, loan processing, sharing of interest and charges collected, apportioning costs and risks of loan defaults, etc. The process becomes especially complex when NBFCs have multiple co-lending partners. Implementing these operational intricacies must not trouble the customers in any way. The borrower must interact solely and directly with the lending facilitator (NBFC) throughout the loan lifecycle. Our co-lending compatible LMS takes care of each of these functionalities in the most effective manner.

  1. Simplifies Sharing of the Cost of Funds– The cost and the proportion of funds contributed by each lending partner vary in a co-lending arrangement, and the cost of funds will be higher for NBFCs compared to the banks. According to the RBI guidelines, NBFCs have to contribute 20% of the loans while the banks contribute 80% of the funding. As the repayment starts, calculating the proportionate share of interests, fees, charges, penal interests, etc., from the monthly EMIs becomes challenging. Our platform accurately handles such complex computations.
  1. Provides only Pertinent Reports to the Stakeholders– Our co-lending LMS provides customised Management Information Systems (MIS) for each participant in the arrangement. The platform creates three views of the loan- 100% for the customer, 80% for the bank, and 20% for the NBFCs, giving these parties a clear view of their stake.
  1. Automates the Key Facts Statement for Loans– Finezza’s co-lending LMS automatically generates the mandatory Key Facts Statement (KFS). The KFS contains information, such as the terms, conditions, and participants of the loan, that the lenders must share with the borrower.
  1. Undertakes Regulatory Reporting to Credit Bureaus– In the co-lending model, each lending participant is responsible for the proportional reporting of loans, based on their share, to credit bureaus. Our co-lending LMS effortlessly takes care of this operational hassle.
  1. Streamlines Bookkeeping– Our co-lending LMS platform automates bookkeeping for the lending participants in this complex lending model. It can generate ledger and trial balances aligned with each lending partner’s loan share. At any given time, the bank and the NBFC will know how much the latter owes the former.

Parting Notes

Co-lending presents a huge business opportunity for banks and NBFCs. They can overcome their constraints and capitalise on their synergies to provide funds to many credit underserved customers in the Indian market. This business model’s success depends on the technical competence of your co-lending LMS. Finezza’s Co-lending Loan Management System removes operational inefficiencies and helps scale your lending operations. Contact us today to learn more about how our Loan Management System enhances the co-lending process.