What is co-lending and how can it benefit borrowers?

May 29, 2023

What is co-lending and how can it benefit borrowers?

A Successful partnership leverages the combined strength of the Partners to deliver results and fill in the inherent gap of each. Co-lending is one such partnership that enables Lenders to leverage core competitive advantages and serve the markets better.  

NBFCs have always been agile and have adopted technology to create innovative loan products that reason with the Borrowers' needs and demands, some have created vertical niches in sectors by closely working with the Customers. The core strength of NBFCs has been the effective distribution of credit and efficient collections, the gap has been the availability of Funds. Where for large banks, the Balance sheet strengthens and access to multiple avenues to raise funds, but the deployment of these funds has been a challenge. Co-lending has opened up possibilities for both NBFCs who need Capital at a lower cost and Banks who need to deploy these Funds effectively.  

MSME has been a very interesting segment for the NBFCs and many have created a business around MSMEs addressing their credit needs by deploying teams and technology. They have been able to reach the tier 2 and 3 towns, Micro businesses, and unconventional Entrepreneurs with the extensive credit delivery model. NBFCs have a clear edge regarding the identification, Origination and Assessment of Borrowers. Banks have been waiting to address this market, but essentially due to the small token size, the large turnaround time to convert the leads and their policies skewed to suit larger credit outlays have not been successful in this domain.  

MSMEs contribute 30 % to the Economy, 70 % of the firms are categorized as MSMEs, but have a large unmet Credit demand. Lending to MSMEs has also been prioritized and categorized as a Prior Sector to facilitate greater interest among the large lenders. Also, as social responsibility, it is important to cater to these entrepreneurs' needs create employment opportunities and drive the economy's growth engine.  

Co-lending with tech-enabled NBFCs that can provide the Banks with all the relevant and required data is proving to create trust in this model, enabling banks to tap the MSME Market. In the Co-lending arrangement the Operating Partners do all the heavy lifting at the front end – evaluating and onboarding Borrowers, Documentation, assessing and compilation of the data and also participating in the loan, the Banks now have thoroughly vetted and quality loan applications that they can quickly disburse to. Operating partners with the same Funds can now create a Large Customer base and their AUM increases without having to borrow on the Balance Sheet. In the Long run, they make the ability to handle large volumes and exposure organically. Their core capabilities also include better Debt Collections as they are always close to the Borrower and thus can control defaults and control NPAs.  

As a Joint responsibility both the partner work together to deliver better credit to the underserved MSME markets and add to the growth of the Economy. This model removes the trust deficit in earlier forms of Collaboration where extensive data transfer was required to monitor portfolios and teams were deployed for analysis and reporting. With Co-lending Technology both the lenders can create seamless integrations and access to each other systems and scale their operations with trust and assurance, Risk sharing also creates responsibility and ownership.  

Going forward Co-lending should be an important part of any lender's growth strategy – Collaboration is the way forward.  

Thank you for reading! We hope this article was helpful.

The AllCloud Team.

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