Non-bank lenders would have to make a significant investment on the co-lending framework to help mitigate risks arising from the first loss default guarantee arrangement (FLDG), KPMG said in a report on Tuesday.
It released the report in the backdrop of a CII conference. The conference was on the theme, ‘Role of NBFCs and HFCs in driving sustainable GDP growth in India’.
Under a first loss default guarantee arrangement, a third party guarantees to compensate up to a certain percentage of default in a loan portfolio of the regulated entity. The arrangement is usually between a financial technology company and a lender. These arrangements are covered by the Reserve Bank of India (RBI)’s securitisation of standard assets directions 2021.
KPMG expects the co-lending and partnership model to continue to gain traction as non-bank lenders attempt to align their loan underwriting models with banks. Under this model, banks and non-banks co-originate priority sector loans while sharing risks with an 80:20 ratio. Here, the bank would bear 80% of loan defaults costs while the remaining 20% would be bore by the non-bank lender.
The RBI’s norms mandate banks to lend 40% of the total loans to priority sectors such as agriculture, MSMEs, housing and social infrastructure. There are sub targets within the overall 40%. Co-lending partnerships can drive growth in the affordable housing, MSMEs and agricultural sectors, says KPMG.
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But in order to do so, the accounting agency contends that key operational challenges would have to be tackled on loan collection and monitoring, loan pre-sanction, and loan disbursement. All in all, KPMG contends that a digital co-lending platform is necessary to lend at a large scale. The agency expects digital loans to grow at 17% year-on-year (y-o-y) in the next few years.
“While the digital lending ecosystem is evolving and banks are increasingly adopting innovative approaches in digital processes, NBFCs are playing at the forefront of partnered digital lending,” KPMG said.