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.
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.
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