Will co-lending in new avatar fly? It may, but not in a way it was imagined

The new co-lending model between banks and non-banking financial companies (NBFCs) may not be the newest game in town, but has the potential to be a game-changer all the same. The Reserve Bank of India (RBI) has allowed banks to team up with NBFCs to provide loans to the priority sector.
 

In an upgrade over September 2018, when the idea was flagged off, banks are also permitted to co-lend with all registered NBFCs, including housing finance companies.
 

However, it’s only now that the building blocks are being foregrounded — the principals involved took time to dance around the finer aspects of the model. The underlying idea is to carve out the risks between banks and NBFCs with an emphasis on long-term structural reforms. And the emerging model may extend beyond the plain-vanilla. Nor will it be restricted to the priority sector.
 

Different strokes
 

Says Rajiv Sabharwal, managing director (MD) and chief executive officer (CEO) of Tata Capital, “We are a triple-A rated NBFC. We have the capital, products and the reach to our audience. We intend growing our book with a watchful eye on credit quality. We are exploring co-lending options with other NBFCs, or smaller banks, where they can source for us based on credit parameters that we will decide.”
 

It’s a nuanced position. Implicit in it is the assertion that Tata Capital can bat on its own; and in any co-lending deal, it will be the sheet-anchor, not the partner bank. That’s one view.

 

Another is that of Y S Chakravarti, MD and CEO of Shriram City Union Finance: “There’s a segment in which we are not present — the top end of the market. My average ticket size is around Rs 12 lakh. Now, if I want to give a crore or more as a loan, I would like to partner with a bank. We are in talks with a few.”
 

Policies would have to be agreed upfront between banks and NBFCs. Take commercial vehicle financing. Banks are more comfortable funding fleet operators, shadow banks with new-to-credit commercial-vehicle owners and market-load operators. Banks service largely out of branches; NBFCs are fine with field decisions.
 

Chakravarti is candid about the co-lending model’s linkage with the Shriram Group’s banking ambitions: “Let’s assume that I am not to become a bank, but continue as an NBFC. Well, even then, I can partner with banks and get into the co-lending model.”
 

Adds Aseem Dhru, founder and CEO of SBFC Finance: “Co-lending can be a game-changer. But it takes a lot of skill and effort to pull it off. When we teamed up with ICICI Bank, nearly six months of effort went into it. You have to get the systems and the technology platform aligned. Otherwise, it will not work.”
 

Pain points
 

Banks may expect NBFCs to adopt their underwriting process, which may be different from the latter’s current policies. If changes are proposed, field teams of shadow banks will find it difficult to switch between sole and co-lending mid-way through the underwriting process. And what can prove irksome is banks expecting NBFCs to adopt their policies, “which will make it no different from a business-correspondent structure,” says the CEO of a large NBFC.
 

What he left unsaid is that banks would have to come off their high horse, and large, well-run NBFCs — some of which have banking ambitions — cannot be pushed around. There are other nettles as well.
 

One problem that is yet to be fully resolved is how to marry the low-cost funds of banks with the lower operational costs of NBFCs, and pass on the benefit to borrowers through a blended rate. Another is that while the bank-NBFC loan-sharing ratio is 80:20, the central bank has said that the “NBFC shall give an undertaking to the bank that its contribution towards the loan amount is not funded out of borrowing from the co-originating bank; or any other group company of the partner bank”.

 

An NBFC official retorts, “To say that NBFCs must not be funded by their partners would mean we have to tie-up funds from another lot of banks (with whom co-origination will be ruled out), unless these limits are vacated.” Then again, from an accounting standpoint, NBFCs are on Ind-AS (Indian Accounting Standard), which requires them to recognise and measure a credit loss allowance or provision based on an “expected credit loss model”. This impairment model applies to loans, debt securities and trade receivables. All of this calls for a fine balancing act.
 

To be sure, the model is not seen as dead on arrival. “As an analogy, think of the towers shared by telephony players. They are now a shared utility. Co-lending is akin to that,” notes H P Singh, chairman and MD of Satin Creditcare Network — a micro-finance institution, or MFI.
 

His point: For banks, it makes sense to tie up with dedicated shadow banks in this space. “The next Bajaj Finserv could be well be from those serving the bottom of the pyramid. We MFIs know the field; and we can both originate and do the collections for banks — even that which is unrelated to the specifics of a co-lending partnership.” And for capital-starved state-run banks, co-lending may well be the route for outreach.
 

The pandemic has taught lenders of all hues that there are huge costs attached to doing things on their own, when it comes to servicing customers at the bottom of the pyramid — from acquisition to collections. Teaming up with MFIs (a category of NBFCs) makes sense for banks and small finance banks.
 

So, will co-lending in its new avatar fly? It may, but not in the way it was imagined.