The Indian fintech industry has been experiencing a significant surge in the past few years. According to a report by KPMG, the fintech market in India is projected to reach $31 billion by 2025, growing at a CAGR of 22.7% from 2020. The market has been growing due to factors like increasing digital adoption, a favourable regulatory environment, and a growing demand for financial products and services among consumers.
One of the recent developments in the Indian fintech industry has been the emergence of co-lending, which is a partnership between banks and non-banking financial companies (NBFCs) or fintech companies to jointly provide loans to customers. Co-lending is expected to revolutionize the Indian lending industry by leveraging the strengths of both banks and NBFCs or fintech companies. In this article, we will discuss the concept of co-lending, its advantages, and the future of co-lending in the Indian context.
What is Co-lending?
Co-lending is a lending model where banks and NBFCs or fintech companies come together to jointly lend to customers. Under this model, banks provide 80% of the loan amount, while the remaining 20% is provided by the NBFCs or fintech companies. The loans are underwritten and disbursed by the bank, and the NBFCs or fintech companies act as the sourcing partner and provide assistance in customer acquisition, credit appraisal, and monitoring of the loan.
Co-lending is a win-win situation for both banks and NBFCs or fintech companies. Banks can leverage the technology and underwriting expertise of NBFCs or fintech companies to reach out to new customers and offer loans to those who do not meet their traditional credit requirements. On the other hand, NBFCs or fintech companies can leverage the balance sheet strength of banks to access low-cost funds and expand their lending portfolios.
Advantages of co-lending
Co-lending offers several advantages to both banks and NBFCs or fintech companies. Let’s take a look at some of them:
Access to a wider customer base: Co-lending enables banks to reach out to a wider customer base, including those who may not meet their traditional credit requirements. NBFCs or fintech companies, on the other hand, can leverage the brand and trust factor of banks to acquire new customers.
Lower cost of funds: NBFCs or fintech companies can access low-cost funds from banks, which can help them reduce their cost of funds and expand their lending portfolio.
Diversification of risk: Co-lending enables banks to diversify their risk by sharing it with NBFCs or fintech companies. This can help banks reduce their risk exposure and expand their lending portfolio.
Faster loan disbursal: Co-lending can enable faster loan disbursal as NBFCs or fintech companies can assist banks in the customer acquisition, credit appraisal, and monitoring of loans.
Technology and underwriting expertise: NBFCs or fintech companies can bring their technology and underwriting expertise to the table, which can help banks improve their lending processes and reduce the risk of defaults.
When was co-lending introduced in India?
Co-lending is still in its nascent stage in India, but it has the potential to revolutionize the lending industry. The Reserve Bank of India (RBI) has recognized the potential of co-lending and has issued guidelines for banks and NBFCs to engage in co-lending activities. The guidelines provide a framework for the co-lending model and cover aspects like risk sharing, loan pricing, and loan servicing.
The lenders also share the responsibility for collecting payments from the borrower and distributing the funds among themselves. In some cases, the lenders may agree to a predetermined repayment schedule, while in others, each lender may collect payments from the borrower independently.
Co-lending can help small businesses access financing by allowing them to partner with a larger, more established lender. This can provide them with access to more capital, better terms, and a more reliable source of funding. Co-lending also reduces the risk for the primary lender, as they are able to share the risk with the partner lender. This means that the primary lender may be more willing to lend to small businesses that they may have otherwise found too risky.
List of RBI circulars
The Reserve Bank of India (RBI) has issued guidelines for co-lending arrangements in India. These guidelines apply to all financial institutions, including banks, non-banking financial companies (NBFCs), and other alternative lenders. The guidelines require all co-lending arrangements to be approved by the RBI and to be governed by a written agreement between the lenders. The agreement must include provisions for sharing of risks and responsibilities, as well as the terms of repayment. The lenders must also maintain separate accounts for the loan and must not commingle funds. The RBI has also set limits on the maximum exposure each lender can have in a co-lending arrangement.
The guidelines require all co-lending arrangements to be approved by the RBI and to be governed by a written agreement between the lenders. The agreement must include provisions for sharing of risks and responsibilities, as well as the terms of repayment. The lenders must also maintain separate accounts for the loan and must not commingle funds. Additionally, lenders may need to obtain licenses or registration depending on the type of loan, the lenders involved, and the jurisdiction in which the loan is being made. It is also important to ensure that all parties involved in the co-lending arrangement comply with applicable laws and regulations.