The pandemic has proved how technology can reverse every adversity into an opportunity. The massive digitisation of Indian businesses has led to non-conservative finance models like co-lending to gain a foothold.
While co-lending is still nascent, it is gaining popularity among stakeholders, .i.e. banks, NBFCs, and HFCs, for its high risk and reward. Co-lending as a product and service is gaining so much attention that it is projected to garner a jaw-dropping Rs 30,000 crores in volume by FY 2022-2023. As such, is it the right time for financial institutions to foray into this hybrid model and tap this huge unserved market? Let’s find out.
What is Co-Lending?
Under the co-lending model, banks, NBFCs (non-banking financial companies), and HFCs (housing finance companies) come together to leverage each other’s strength and underwrite loans.
While the NBFC does all the paperwork related to loan origination, underwriting, and management, the bank provides funds to the borrower. As partners, they reap the benefits as well as share the risks.
Why is Co-Lending the Best Option for the Indian Credit Market Post-Pandemic?
The Indian economy, which came to a standstill during the pandemic, is now showing signs of revival. As large, medium, and small businesses look for ways to obtain more finance, it is the right time for the stakeholders to adopt co-lending and make the most of this opportunity. Here are some of the reasons which make co-lending a viable option for post covid economy:
1. Huge market potential
The Indian credit market is primarily underpenetrated with an unmet demand for over $200 billion credit. The size of the consumer lending market is pegged at 2 trillion rupees and is expected to reach 70 trillion rupees by 2024. This means only 20% of Indians have access to loans, while 80% of the population is unserved. In this hopeful scenario, banks and NBFCs can reach out to more customers through co-lending and strengthening each other’s balance sheets.
2. Cost-effective for stakeholders
The hybrid co-lending model brings down the cost of client acquisition for the banks. The NBFC does all the legwork of assessing an individual/MSMEs creditworthiness and passes on potential leads to the bank. In comparison, the latter’s role is to disburse the loan to the customer. The entire lending cycle, right from loan origination, disbursal, management to track, is automated and is cost-effective for both parties.
3. Speedy loan disbursal
With their roles of banks and NBFCs concretely pre-defined, both the stakeholders work efficiently to bring down the time taken to disburse a loan.
As the NBFC handles the front-end operation of loan management, the bank just has to sanction the loan amount. This quick response helps the borrower to get fast access to the required credit during a crisis.
4. Explore new segments
According to the CIC (credit information company), only 8% of Indians have access to organised credit. Over 400 million Indians in the age group of 18-33 years in rural and semi-rural areas constitute a big chunk of the unsecured credit market.
NBFCs have a strong presence in rural areas, which are still out of the banks’ reach. Banks can add more customers from this category to their bottom line by opting for co-lending.
5. Shared risk
Co-lending was introduced to tackle the liquidity crunch in the NBFC sector. However, today, NBFCs and HFCs have access to capital from banks and even mutual funds.
This factor allows them to take more risks and venture further into the unsecured credit market. It also lessens the credit risk of banks vis-a-vis the defaulters. No wonder more than four PSU banks had tie-ups with NBFCs in 2021.
6. Government support
MSMEs alone contributed to 31% of our GDP and were forced to shut shop due to mounting losses during the COVID-19 lockdown. They provided jobs to 120 million people, out of which 25-30 million became jobless due to the pandemic.
To revive this segment included in the priority sector, the government doubled its budgetary allocation to Rs 15,700 crores for FY 2021.
7. Defaulters streamlined
During the second wave of COVID, many MSMEs ran out of business due to a liquidity crunch. As such, many weak borrowers were weeded out of the credit market.
According to rating agency India Ratings, NBFCs have fewer bad loans to deal with post-pandemic, and their collection levels also improved to pre-pandemic levels.
8. Growth in digital lending
The lockdown made more MSMEs look beyond the traditional credit instruments. This has led to widespread growth in the digital lending space, estimated to be $820 billion between FY 2021 and 2023.
There are over 1250 fintech startups that have captured 54% of the B2B digital lending market share. Hence, it is the right time for banks and NBFCs to get into co-lending and foray into the digital space.
While post-pandemic India makes for a fertile ground for the co-lending model to thrive, there are still some challenges to tackle. For instance, the lenders need to create better synergies between themselves.
On the other hand, Banks need to adapt themselves to the high-risk appetite of NBFCs to garner more market share. NBFCs, consequently, need to shoulder higher than the designated 20% share of the loan amount in case of bad loans.
Moreover, under the current RBI guidelines, NBFCs are the face of the co-lending model and get to decide the borrowers. In the same way, if banks do not find a borrower credit-worthy, there must be an equal authority vested in banks to reject certain loans.
The Indian economy will see a spurt in the co-lending model if these issues are addressed.
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