Tech to risk perception: Co-lending model battles 'multiple issues'

The bank-NBFC (non-banking financial company) colending model, introduced by the Reserve Bank of India (RBI) in 2018, is yet to take off fully due to multiple issues, said industry players.

The reasons include lack of technological integration, different risk perceptions on the part of lending partners (banks and NBFCs), and bigger NBFCs being slow in accepting the model, said experts.

Colending happens when multiple lending partners enter into an arrangement to provide loans to priority sectors like micro, small, and medium enterprises (MSMEs).

In colending, the RBI-mandated minimum 20 per cent credit risk by way of direct exposure will be on the NBFC’s books till maturity and the balance will be on the bank’s books.

NBFCs had colending assets under management (AUMs) of nearly Rs 1 trillion, according to a report by CRISIL in April 2024.

The Department of Financial Services (DFS) had set up a committee of banks and NBFCs, helmed by the State Bank of India (SBI), to address issues related to colending, credit to MSMEs, and curbing accelerated growth in certain consumer loans.

“Technological concerns remain in colending because India does not have too many tech players that can integrate with banks and NBFCs,” said Kishore Lodha, chief financial officer of U GRO Capital, an NBFC focused on small and medium enterprises.

“There is also a difference between risk perceptions among the lending partners. When we undertake colending we state the risks along with guidance on what would be the non-performing asset (NPA) and credit cost and ask our partners to price risk accordingly,” said Lodha, referring to NPAs.

There are typically two kinds of colending: CLM 1 and CLM 2. In CLM 1, the amount is paid by both lenders simultaneously and therefore requires an integrated system between the partners for real-time processing and completion of Know Your Customer (KYC) norms.

In CLM 2, which is predominantly used, an NBFC joins hands with a larger peer or bank. The loan originates in partnership with the larger partner.

“Tech integration between the players takes time, energy and effort. So, very limited transactions have strictly happened as we understand using CLM 1 method,” said Karthik Srinivasan, senior president and group head, financial sector, ICRA Ratings.

Demand for colending arises from mid- and small-sized NBFCs and a few large ones that do not take deposits. However, according to industry experts, as banks tighten their liquidity, bigger NBFCs too are likely to tap the colending space.

“Based on capital-adequacy requirements and the comfort of each player in the industry, the choice of on-book to off-book continues to vary. A larger NBFC may be inclined towards on-book AUM, whereas a smaller NBFC might prefer off-book owing to measured capital requirements in co-lending space. So it is a mix, I would say. The preference for colending for smaller players is definitely increasing,” said Chetna Aggarwal, head of colending, Vivriti Capital.

“I don’t see any kind of disappointment as far as colending is concerned. In my view, colending will replace one portion of securitisation, which is direct assignment (DSA), in the next three to four years. DSA will be substantially low and banks and financial institutions will go for colending. So all banks are keen to do colending and they have set up big targets for themselves,” said Lodha. 

High stakes 
 

Tech integration, differing risk perceptions affect widespread adoption of colending model 

Industry lacks tech players who can integrate with banks & NBFCs

RBI mandates 20% of credit risk in colending arrangements must remain on NBFCs' books until maturity

NBFCs manage nearly Rs 1 trillion in colending assets, highlighting significant sector involvement

Larger NBFCs show less demand for colending due to access to diverse funding sources, compared to smaller players