By Arjun Sood
Credit and Finance for MSMEs: The increasing risk of large-ticket corporate loans has led Public Sector Banks (PSBs) to turn to co-lending to increase the percentage of small-ticket retail loans in their overall portfolio. After the Union Government’s recapitalization efforts, PSBs have refocused their lending activities on traditionally excluded sectors and retail borrowers, while the RBI has mandated the PSBs to deploy at least 40 per cent of their Adjusted Net Bank Credit (ANBC) to the priority sector.
Therefore, many PSBs have adopted the co-lending model, a financing model in which two or more financial institutions collaborate to provide loan financing to their customers. This is particularly useful for PSBs as this model allows them to reach borrowers who may not have access to traditional banking services, thus allowing them to fulfill their priority sector lending obligations as directed by the Reserve Bank of India
By co-lending with NBFCs, PSBs can benefit from NBFCs’ expertise in specific areas, such as MSME financing. This can expand their customer base, as well as assist them in assessing the creditworthiness of borrowers, resulting in higher loan amounts and competitive rates. It can also help the banks to make their operations more efficient, as the NBFCs can shoulder some of the loan origination and processing duties.
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Accelerating credit for all: government regulation and policy
The Indian government’s vision of financial inclusion is bolstered by the EASE 4.0 Reform for Co-Lending, which seeks to expand the availability of financial services to underserved and unbanked sections of the population, particularly those living in rural regions. EASE 4.0 seeks to promote co-lending as a means of increasing lending capacity and reaching a larger pool of borrowers. Under the programme, public sector banks (PSBs) are encouraged to partner with non-banking financial companies (NBFCs) and fintechs to provide loan financing to borrowers, including those who may not have access to traditional banking services.
Accelerating co-Lending with technology platforms
Technology platforms have contributed to the growth of co-lending in India. This is due to their capability of providing a more efficient and organised way of initiating, processing, and managing loans. A digitally-enabled co-lending collaboration between two authorised organisations forms a strong data-sharing structure that allows both parties to share information safely and easily. This ongoing and real-time exchange of data assists the partners to accurately and quickly detect, analyse, and satisfy borrower needs, with the assistance of a powerful API integration layer in the background. The data is stored locally, in adherence to the data localization norms of The Reserve Bank of India.
The advent of technology and B2B Platforms have revolutionised the way Banks and NBFCs partner, allowing for a fully digital experience. From finding partners, setting up credit policies and processes, allocating loans, transferring documents and data, managing escrow accounts, transferring funds, portfolio management and collections – everything is now digital. Furthermore, the traditional one-to-one integration architecture has been replaced with a single API integration layer, resulting in faster time to market, interoperability and the ability to enter into multiple partnerships with just a few clicks. With the data flow and loan journey now being digital, reconciliation, invoicing, and accounting is made much simpler, bringing more transparency and accountability to co-lending arrangements. Additionally, digitisation also simplifies auditing processes, ultimately improving trust.
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Unlocking possibilities in co-lending
The potential for growth in co-lending in India is looking promising, supported by the heightened demand for credit, the need for banks and NBFCs to boost their lending capacity, streamline operational efficiency and comply with RBI
The co-lending model is an immense resource to India’s credit system by affording the unbanked population access to credit and thereby advancing financial inclusion. As the model continues to grow and mature, we can expect to see more PSBs and NBFCs collaborating to deliver loan financing to customers.
Arjun Sood is the Vice President at Yubi Co.Lend. Views expressed are the author’s own.
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