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

Model was set up six years ago to strengthen credit flow to sectors that struggle to get financing

Non-banking financial companies (NBFCs) had co-lending assets under management (AUM) of nearly Rs 1 trillion more than five years after the model came into being in 2018, according to a report by CRISIL in April 2024. Co-lending is progressing but it has “multiple issues”, say industry executives.

 

The issues include lack of technological integration, different risk perceptions between lending partners (banks and NBFCs) and slower acceptance of the model by bigger NBFCs, said experts. It is a model where multiple lending partners enter into an arrangement to provide loans to borrowers, aiming to provide credit to sectors that have struggled to get enough of it, like micro, small and medium enterprises (MSMEs).

 

 

The Finance Ministry’s Department of Financial Services (DFSS) recently set up a committee of banks and NBFCs helmed by the State Bank of India (SBI) to address issues related to co-lending, credit to MSMEs, and curbing accelerated growth in certain consumer loans.

 

“Technological concerns remain in co-lending because India does not have too many tech players who can integrate with banks and NBFCs,” said Kishore Lodha, chief financial officer of U GRO Capital, a fintech.

 

“There is also a difference between risk perceptions among the lending partners. There are multiple issues. When we undertake co-lending we explain the risks along with guidance on what would be the NPA, credit cost and ask our partners to price risk accordingly,” said Lodha, referring to non-performing assets.

 

There typically are two kinds of co-lending: CLM 1 and CLM 2. In CLM 1, the total 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). 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 both 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.

 

Disinterest among larger NBFCs, which have access to alternative sources of funds, is another reason limiting the growth of co-lending. Demand for co-lending mainly arises from mid- and small-sized NBFCs and a few large non-deposit-taking NBFCs. However, according to industry experts as banks tighten their liquidity, bigger NBFCs too are likely to tap the co-lending 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 towards co-lending for smaller players is definitely increasing," said Chetna Aggarwal, head of co-lending at Vivriti Capital.

 

“I don't see any kind of disappointment as far as co-lending is concerned. In my personal view, co-lending will replace one portion of securitization, 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 co-lending. So all banks are keen to do co-lending and they have set up big targets for themselves,” said Lodha.