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.