In the post-covid economy, co-lending has emerged as one of the most attractive financing models. It not only makes credit available to the unserved but also minimizes the risks that lending institutions face. As a result, numerous public and private sector banks in India have entered into co-lending agreements with NBFCs. We’ll go through the top 10 reasons why co-lending is a win-win situation for both banks and borrowers.
What is Co-lending?
Banks and NBFCs collaborate to provide loans to borrowers under the co-lending model (CLM). Banks supply the requisite capital, while NBFCs handle the entire loan cycle. They split the benefits and risks that come with such partnerships. In India, NBFCs are responsible for 20% of loan risk, while banks are responsible for 80%. The front desk, on the other hand, is run by the former.
Impetus to Co-lending
Due to a scarcity of finance during the covid wave in 2020, many medium and small businesses (MSMEs) were forced to shut down. MSMEs contribute to 31% of our GDP, and their closure resulted in the loss of jobs to a large number of people employed in that sector. As a result, the government declared them a priority sector and directed banks and non-bank financial companies (NBFCs) to join hands under the co-lending model (CLM) to inject capital into the industry. Since then, CLM has become a popular choice among financial institutions.
10 Reasons that make Co-lending one of the Best Options for Banks and their Customers
The co-lending strategy lets stakeholders share risks and profits, and it genuinely puts the consumer first. It allows even the most underserved members of society to obtain credit. Following are the reasons why CLM is the greatest alternative for both banks and customers:
1) Digital Reach-
India is one of the world’s fastest-growing Fintech markets. By 2025, the industry valuation of Indian Fintech is estimated to reach $150 billion. Among the 2100+ Fintechs currently booming, 67% of the businesses started not more than 5 years ago. Moreover, in the past five years, the retail lending market has grown at a consistent rate of 16 percent. Thus, through the CLM, banks can reach those clients who were previously unreachable.
2) Low-cost Customer Acquisition-
Working with an NBFC lowers the cost of client acquisition for banks. In tier II and tier III cities where banks are not present, NBFCs have a large customer base. The NBFCs bring in the clients, whereas the banks essentially provide the funds in a CLM.
3) Be Innovative-
When it comes to loan approval, banks use a standard approach. They look at the balance sheet of the borrowers, whereas an NBFC looks at the cash flow. A CLM allows banks to experiment with their lending procedure. They can develop novel products with the expertise of an NBFC and design products that were previously overlooked by the regular banking system.
People no longer have to go to a bank multiple times for loan approval. One can apply for a loan from the comfort of their home or office. Their verification can be done through eKYC. Because the overall process is paperless, it helps to save time, and you get the loan in an eco-friendly manner.
5) Quick Loan Disbursement-
In a CLM, NBFCs and banks have their work cut out for them. The former welcomes clients and handles all of their loan appraisals, verifications, and paperwork, while the bank disburses the loan. This minimizes the time it takes for each stakeholder to complete loan approval and disbursement.
Today, your smartphone serves as your lender. You may receive a secured loan via your phone using a variety of applications. Technology has made loans readily available to those in need.
7) Broad Reach-
With 749 million internet users, India is the world’s second-largest internet market. 744 million of them use their smartphones to access the internet. India will have 1.5 billion mobile internet users by 2040. A CLM approach will assist banks in adding these users to their customer base since the majority of these users are likely to be Fintech lenders’ customers.
8) Financial Inclusion-
More than 80% of Indians lack access to formal finance. There’s also a demand for $200 billion that hasn’t been addressed. Banks will be able to service this underserved part of the population through a CLM, leading to their financial inclusion.
9) PSL Compliance-
The CLM assists banks in meeting the RBI’s priority sector lending (PSL) requirement. According to this criterion, all scheduled banks must set aside 40% of their Adjusted Net Bank Credit for PSL. Under the CLM, banks can lend loans to persons in the priority sector by partnering with NBFCs.
10) Lower Interest Rates-
NBFCs counter their greater risk appetite by charging higher loan rates. They charge a percentage ranging from 10% to 36%. Customers can get these loans at reduced interest rates under a co-lending model. Banks get access to a larger customer base, while clients benefit from faster loans at lower rates. It’s a win-win situation for everyone.
The co-lending concept is India’s strategy for regaining control of its economy. It allows all stakeholders to be more adaptable, take bigger risks, and generate more revenue. It also helps the customer as they can obtain a loan from the formal credit market at a low-interest rate.
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