The Reserve Bank of India (RBI) announced rules on co-lending by banks and non-bank financial companies (NBFCs) to priority sectors. The primary goal of the revised scheme, renamed “Co-Lending Model” (CLM), is to increase credit flow to the unserved and underserved sectors of the economy and make funds available to the ultimate beneficiary at an affordable cost, taking into account the lower cost of funds from banks and the greater reach of NBFCs. How did co-lending grow? In 2020, the capacity of MSMEs plummeted from 75% to 13%, with around 69% of MSMEs unable to survive for more than 3 months. This was the year the RBI authorized banks to partner with NBFCs through co-lending. The funds were distributed 80-20 in this case, with banks providing the vast majority of the funds. This agreement simplifies the loan process for developing businesses and MSMEs. Benefits of co-lending Co-lending in the financial services industry provides several benefits to banks, NBFCs, and consumers. To Banks Co-lending allows banks to extend their credit to key sectors. Banks can benefit from NBFCs’ experience and reach in specific market niches by cooperating with them. Allows banks to benefit from product developments and lower interest rates, thereby extending their lending portfolio. Assists banks in meeting regulatory criteria such as priority sector lending standards. Allows banks to expand their presence in underdeveloped areas by bridging the credit gap and providing financial services to potential consumers. To NBFCs NBFCs might use their expertise in particular sectors to target underserved customers. By collaborating with banks, NBFCs have access to lower-cost capital and a larger customer base. This enables NBFCs to offer attractive interest rates and customized loan solutions, increasing credit flow to priority sectors and boosting financial inclusion initiatives. The technical interventions and digital penetration of their partner banks can assist NBFCs. Co-lending arrangements enable NBFCs to maximize their potential consumer reach while also contributing to the market’s credit deficit. To customers This agreement benefits consumers immensely, especially underserved clients who may have restricted access to finance. You can get a variety of loan products and enjoy low-interest rates. The process is speedier since it shortens the time between loan approvals and payouts. It is also critical to guaranteeing loan availability in underrepresented industries and rural locations. Allows small enterprises and individuals to obtain low-cost financing. Future of Co-lending: A key tool for economic growth According to recent trends and co-lending targets, the peak of co-lending is still to come. The RBI launched co-lending to increase financial flow to priority industries, which are SMEs in India. As the Indian SME market is expected to be worth $300–400 billion by 2025, co-lending is the way to go in order to ensure credit access to these growing enterprises and, as a result, aim to unlock a trillion-dollar opportunity in terms of digital lending. Finally, the co-lending strategy could solve the country’s multi-trillion-dollar liquidity problem. The process was facilitated by the thriving Indian fintech industry. The highly prospective and good results of co-lending have made it an appealing choice for banks, NBFCs, and large-scale investors alike. The market for digital lending platforms is expected to reach USD 26.6 billion by 2028. And, with increasing innovation in the field of fintech and artificial intelligence, the expansion of finance alternatives in unanticipated ways is still to come.
Tag: co-lending
Can Co-Lending Models Be The Future Lending in India?
Co-Lending Models (CLM) is a revolutionary method of lending that has the potential to change the financial sector’s landscape in India. CLM entails cooperation between established financial institutions, including banks, and online lending platforms, utilizing each other’s advantages to offer more open and inclusive credit options. According to research by EY, the fintech industry in India will generate $200 billion in revenue by 2030. Fintech is at its pinnacle now more than ever due to the nation’s increasing need and demand for digital and financial inclusion. CLM: What problems does it solve? The Co-lending model was initiated with the means to ease the lives of people living in that sector of the economy that is not familiar with or used to the idea of banking operations. With the implementation of CLMs, let’s understand the problems it solves: Reaching credit-deprived communities: Out of 68% of India’s population living in rural areas, 28% are without financial literacy and internet-enabled smartphones. These people can, however, through CLMs get access to lending products without having to go through any hassle. Further, there are many people with no credit history. Co-lending models can help overcome this problem by using alternative data sources and sharing risk between lenders, making it easier for unbanked individuals to obtain loans. Dissemination of knowledge: One of the main reasons that are responsible for a huge amount of underserved population is lack of knowledge. In addition to providing loans, NBFCs, and fintech go the extra mile to ensure their customers understand the terms and conditions of the contract before they sign, thus contributing to financial literacy. Cost cutting: In order to make the lending process more efficient, with CLMs, consumers don’t have to pay high-interest rates. Co-lending models can help reduce interest rates by allowing multiple lenders to share the risk and distribute the interest charges across multiple parties. Future of Lending in India: Is it CLM? As per research by Forbes, co-lending allows these two pillars of the economy – NBFCs and banks, to unite and act as one to provide the best to the whole economy. Statistically speaking, by FY23, the co-lending model is expected to generate approximately Rs. 300 billion. Indian co-lending arrangements will likely undergo several innovations, with digital financial literacy, as well as credit penetration, being two of the government’s top priorities. Overall, co-lending models have the potential to address many of the challenges facing the lending industry in India and could become an important part of the future of lending in India. Conclusion Co-Lending Models stand out as a promising solution to satisfy the various credit demands of people and enterprises across the nation as the Indian financial ecosystem develops further. This cooperative strategy promotes economic growth while simultaneously capturing the shifting dynamics of a digitally empowered economy.
The Potential of Co-Lending for the Underserved Segments
Millions of people in India and around the world do not have access to traditional lending services, although credit access is essential for financial inclusion and economic progress. According to a recent TransUnion analysis, there are over 160 million credit-invisible individuals in India who are unable to obtain loans from banks and other formal financial institutions because they need the appropriate credit histories. The emergence of co-lending has the potential to address this gap and provide access to credit for unserved and underserved segments. Co-lending enables NBFIs to underwrite loans alongside banks, sharing the risks and benefits of the lending process. As a result, borrowers who may not have been able to access credit from banks can receive loans from a combined pool of capital, reducing their dependence on informal lenders and avoiding high-interest rates. The Emergence of Co-Lending as a Solution To maximize co-lending potential, traditional lenders and NBFIs must collaborate and form partnerships that leverage their respective strengths. Banks bring expertise in underwriting and credit risk management, while NBFIs can bring their knowledge of underserved segments and their needs. NBFIs can leverage their expertise and experience to identify potential borrowers who may not meet the eligibility criteria of traditional banks or may not have access to formal financial services. By working together, traditional lenders and NBFIs can reach more customers, provide more financing options, and drive financial inclusion and economic growth. Potential Impact of Co-Lending Risks and Challenges Co-lending can bridge the financing gap for micro, small, and medium-sized enterprises (MSMEs). It involves sharing credit risk between different types of lenders and has its own set of risks and challenges, including: Coordination Risk Co-lending requires coordination between different lenders, which can be challenging and time-consuming. Differences in lending policies, procedures, and practices can also make coordination more difficult. Compliance Risk Co-lending requires compliance with various regulations and guidelines, which can be complex and challenging. Different lenders may have different compliance requirements, making it difficult to ensure that all parties are meeting their regulatory obligations. Operational Risk Co-lending can involve operational challenges, including issues with loan documentation, servicing, and monitoring. Failure to manage these operational risks can lead to loan defaults and financial losses. Legal Risk Co-lending can involve legal risks, including issues with loan documentation, loan servicing, and loan monitoring, resulting in legal disputes between the lenders. In spite of the challenges, co-lending has become a potentially effective way to meet the financial needs of neglected and unserved markets. It helps close the funding gap for these segments, lessen their reliance on informal lenders, and promote economic growth by allowing traditional lenders and NBFIs to work together and utilize their capabilities.