The co-lending model, declared dead on arrival in September 2018, has sprung back to life over the past year, following a change in regulations in November 2020. The last few months have seen a series of agreements being signed between banks and non-banking financial companies (NBFCs) to offer last-mile financing under the co-lending model.
To be sure, a stagnation in credit growth, especially at public-sector banks, and a more onerous regulatory framework for NBFCs may also be playing a role in pushing co-lending arrangements.
Bankers said that the November 2020 revision of the co-lending guidelines has allowed banks to reject loans originated under a particular arrangement.
Rajeev Kumar, executive director, IDBI Bank, said that under the 2018 guidelines, the co-origination model did not give banks the right of rejection. “Therefore there were credit risk related issues. That was a hindrance for the model to take off.
“Now banks have been given the right to reject by adding the co-lending option (Option B) wherein banks can say ‘no’ to the loan originated by the NBFC if it does not fall under the pre-agreed parameters. Therefore it reduces the credit risk for banks,” Kumar said. IDBI Bank has firmed up an agreement with U GRO Capital and is in talks with a few other NBFCs.
The revised framework allows two options for co-lending, one of which involves the bank and the NBFC sanctioning the loan together on the basis of mutually agreed-upon underwriting norms. The second option, involving direct assignment without the need for the NBFC to adhere to a minimum holding period, has made the model a better one in terms of customer experience, industry executives said.
Hari Rajagopal, vice president – capital markets & strategic initiatives at agri financier Samunnati, said that under the second option, the NBFC can sanction the loan and then take a reimbursement from the bank. “That helps to improve the turnaround time for the customer. Under the original guidelines, both bank and NBFC had to simultaneously sanction each loan. The new guidelines have made it very convenient for banks to take exposure to unexplored asset classes,” Rajagopal said.
Co-lending arrangements also help reduce the cost of borrowing for the end customer. Samunnati has entered a co-lending agreement with IndusInd Bank to fund farmer producer organisations (FPOs) across the country. According to Rajagopal, a borrower with a farmer collective would typically get a loan at 18-20% per annum. “We’ve taken a call that despite being an NBFC, we will be lending at 14% interest rate plus 1% processing fee,” he said.
Many of the co-lending tie-ups made in recent months involve public sector banks (PSBs) who are leaning on non-bank partners to extend loans to customer segments historically inaccessible to them. Anil Gupta, vice-president and sector head – financial sector ratings, Icra, said that PSBs have largely been focused on corporate lending in the past and now they want to focus on the granular segments of retail, agri and MSME (RAM). “Although they have a large market share in RAM as well, these tie-ups help them to accelerate the incremental growth they are targeting. However, so far portfolio buyouts have accounted for a much larger portion of the growth in portfolios. Co-lending is yet to make a dent there, but it’s still early days,” Gupta said. Co-lending works well for non-banks which have origination strength but not the balance sheet strength to borrow heavily, he added.
Bankers take the view that co-lending is a smart option for NBFCs that do not want to grow their balance sheets too much at a time when regulatory norms for large NBFCs are being tightened. Co-lending helps them earn fee and interest income without expanding their balance sheets significantly. “In 2017-18, NBFCs were looking to build scale. Now that the RBI is speaking of a tier-based approach to regulation, there are NBFCs that don’t want to scale up either due to enhanced supervision or because they lack capital. The alternative is to go for co-lending partnerships,” said a senior executive with a PSB.
While it’s still early days for the co-lending model, some in the industry see it becoming an important one, given its role in lowering borrowing costs. IDBI Bank’s Kumar said,“Over a period of time, co-lending is the future of PSL (priority sector lending) and will help reduce the cost of financing for the last-mile borrower.”