Banks and non-banking finance companies (NBFCs) could sign co-lending deals worth Rs 1 trillion in the current financial year, after public sector banks alone declared a co-lending portfolio of Rs 25,414 crore for FY23.

“The total co-lending portfolio declared by PSBs for FY23 was Rs 25,414 crore. The segment saw about 18 partnerships in H2FY23. In fact, Yubi Co.Lend accounts for at least eight of those partnerships, including banks, NBFCs and other FIs like SBI, Axis Bank, Karnataka Bank, Axio, Lendingkart and UGro Capital, among others,” said Irfan Mohammed, chief business officer at Yubi. “We record around 1,00,000 daily average transactions on our platform. Keeping these metrics in mind, the co-lending segment is expected to grow by 3x-4x in FY24 to the tune of Rs 1 trillion.”

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Co-lending refers to partnerships between two lenders, typically a bank and a non-bank, to offer loans to economically weaker sections or borrowers under the priority sector lending programme. Under the model, 20% of the credit risk by way of direct exposure is on the NBFC’s book till maturity, while the balance is on the bank’s books.

Growth drivers

Rajesh Sharma, managing director at Capri Global Capital, said the NBFC has entered into co-lending alliances with State Bank of India (SBI), Union Bank of India and Punjab & Sind Bank for MSME loans. For affordable housing segment, the NBFC has entered into co-lending pacts with SBI, Punjab & Sind Bank and UCO Bank.

“We started FY23 with a target of achieving a co-lending portfolio of Rs 600-700 crore from Rs 120 crore in FY22. We have already achieved Rs 500-crore target as of Q3FY23. We started co-lending for affordable housing loans in Q3FY23. We certainly aim to achieve a higher growth than in FY23.” he said.

Dhrubashish Bhattacharya, head of MSME banking at Bank of Baroda, said the recent hike in lending rates has made funds costlier for NBFCs. “Co-lending, wherein banks can take up to 80% of exposure at a lower cost, has paved the way for NBFCs to increase their exposure as well as serve customers with better risk profile by offering a lower rate of interest. Further, through co-lending, banks can now venture into new product segments and leverage NBFCs’ expertise on digital cash flow algorithm-based assessments,” Bhattacharya said.

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Axis Bank’s group executive and head of Bharat baking Munish Sharda said the bank has consistently been working towards ensuring that all segments of customers across rural and semi-urban markets are provided with easy access to credit facility and banking solutions.

“Our co-lending partnerships will deepen our reach in rural and semi-urban markets, help us enter new customer segments, strengthen our presence in existing segments, and augment the priority sector lending portfolio of the bank. We are excited about the opportunity, as our digital co-lending platform allows the business to scale up fast and offers a superior customer experience,” Sharda said.

Challenges ahead

According to Mohammed, while co-lending has proven to be beneficial in terms of deepening financial inclusion and access to credit, it suffers from one fundamental challenge — a slower execution timeline.

“Co-lending partnerships are one of the most time-consuming efforts undertaken by banks. In a traditional method, banks hunt for NBFCs which focus on specific credit portfolios, which is followed by extensive discussion around the quantum of capital to be provided by banks through the co-lending model and then discussions around the leverage that could be adopted using the capital infusion from banks. Once this is done, monitoring the credit risk of these on-lent portfolios is carried out on a quarterly basis, which again is a time-consuming and manual process,” Mohammed said.

Bhattacharya shared similar views saying for co-lending volumes to increase, a digital journey for quick disbursements and ease of reconciliation is essential. “Bank of Baroda is one of the few banks which has developed its own co-lending digital platform wherein multiple partners can be integrated. We expect to benefit from this first mover advantage,” he said.