What is Co-Lending?

Introduction

The recent lending domain is evolving at a speedy pace. Your loan needs may grow bigger than what one lender can offer. A borrower may require a larger loan than the NBFC offers. These companies partner with others to improve the lending possibilities while reducing risks. That is where co lending comes into being.

Read this post to have a better understanding of the meaning and further details on co-lending.

What does Co-Lending mean?

What is co lending? It is when two lenders (often a bank and a non-banking financial company) collaborate to offer the loan. It lets you access more funds at fair rates while keeping the process simple. 

The bank usually funds most of the amount. On the other hand, the NBFC handles technology & loan processing. The lenders share the risk & benefits to offer better terms. Knowing the co lending meaning helps you see how this approach combines the strengths of each partner. You can get faster service with higher approval chances without additional complications.

Key Players in Co-Lending

Banks, as well as non-banking financial companies, partner with one another to offer loans. Banks here offer a part of the loan amount while NBFCs contribute the rest. It lets both parties share the risk as well as the profit generated from the loan. It results in a smoother customer experience.

Co lending benefits banks by assisting them to reach untapped markets and customers. NBFCs gain access to affordable funds and improve the customer experience. This is because of the enhanced personal touch alongside a better interface.

Features of Co-Lending

Co lending offers several advantages. Following are some:

1. Shared Risks & Returns - Both lenders take equal responsibility for risks as well as profits in co lending. This benefits each party involved in the lending process.

2. Better Loan Rates - Pooling resources in co lending often results in lower interest rates. This makes borrowing more affordable while letting lenders maintain healthy earnings from their services.

3. Increased Lending Capacity - Co lending expands the total funds available. This enables lenders to reach more borrowers (including those who might otherwise struggle to get financial help).

4. Faster Loan Approvals - Co lending speeds up application handling so borrowers receive needed funds quickly. What it does is combine NBFC technology with bank support.

This makes borrowing simpler & faster for customers while helping lenders work together to serve more people effectively.

Key Terms of Co-Lending Arrangement

This type of lending works under specific terms agreed between banks and NBFCs. Here are the key terms explained:

1. 80:20 Capital Share - Most co lending deals follow an 80:20 split, where banks provide most funds and NBFCs contribute the rest, allowing better reach and more balanced lending.

2. Joint Loan Assessment - Banks and NBFCs check applications together in co lending, ensuring both sides approve loans, which improves accuracy and reduces chances of faulty lending decisions.

3. Risk and Profit Division - Profits & risks in co lending are shared according to the agreed capital split, giving both lenders an equal stake in the loan’s outcome.

4. Final Customer Rate - The rate in co lending is a weighted average of both lenders’ costs, usually lower than separate rates offered by banks or NBFCs alone.

5. Defined Partner Roles - An agreement in co lending sets duties for each lender. It covers sourcing, customer experience, cost control, credibility, etc., to attract and retain more borrowers.

Types of Co-Lending Models

Also Read: What is Money Lending?

How does Co-Lending work?

The RBI first introduced the co-origination framework in 2018. It enables banks & NBFCs to offer loans jointly. The co lending RBI guidelines were updated- renamed CLM or Co-Lending Models. These were expanded to include Housing Finance Companies alongside certain framework changes.

The idea is to boost credit flow to underserved segments at affordable rates. The model works on the basis that banks have cheaper funding sources, while NBFCs have stronger outreach in areas beyond tier-2 cities.

Under RBI rules, NBFCs must hold at least 20% of the loan’s credit risk until maturity, with the remaining 80% on the bank’s books. Both parties share repayment and interest recovery according to their proportion of the loan and interest.

In simple terms, co-lending works like this:

Banks provide funds to NBFCs that pass them to priority sectors because of their wider reach.

NBFCs act as the single contact point for customers with a tripartite agreement linking customers, banks, alongside NBFCs.

Traditional Lending vs Co-Lending

Here’s your Traditional Lending vs Co-Lending mentioned in a table format:

Also Read: Digital Lending in India

Advantages of Co-Lending

Here are the advantages of co-lending for banks, consumers, as well as NBFCs:

Advantages to Banks

1. Wider reach - NBFCs often work more in remote areas as well as underserved markets compared to other financial institutions. They also maintain stronger local networks as they give banks access to more customers alongside businesses.

2. Enhanced customer focus - NBFCs and fintechs are generally more customer-centric. They help banks convert more leads and retain borrowers over time by managing the customer interface.

3. Capital commitment balance - Regulations require NBFCs to contribute at least 20% of the total loan capital. They give banks confidence in the borrower’s quality without overextending underwriting resources.

4. Risk distribution - Banks gain an additional safety with risks shared between the bank and the NBFC. Losses are minimised when loans underperform, and they reduce the overall exposure.

Advantages to NBFCs

1. Lower Cost of Funds - Partnering with banks gives NBFCs access to affordable funds. This lets them lend at more competitive interest rates compared to sourcing funds independently.

2. Boosted Credibility - Collaborations with reputed banks allow NBFCs to improve their brand image while attracting quality borrowers. This also builds trust with investors as well as customers alike.

3. Shared Risk - Both parties split the risk equally in most co-lending setups. NBFCs reduce potential losses from defaults since banks usually provide the bulk of the funds.

Advantages to Consumers

1. Improved Service Experience - Borrowers enjoy smoother processes with fintechs & NBFCs often leading customer interactions. This ensures faster approvals alongside personalised service throughout the loan journey.

2. Reduced Interest Burden - Multiple lenders involved in the arrangement can collectively offer lower rates. This makes borrowing more affordable for a wider range of customers.

3. Inclusion for Underserved Groups - Co-lending channels credit to rural & underserved markets. Those with limited credit score history gain access to financing that might otherwise be out of reach.

4. Financial Awareness - NBFCs & fintechs frequently take time to educate borrowers about terms, repayment schedules, or loan benefits. This improves financial literacy among new borrowers.

Benefits of Co-Lending

Traditional banks can offer larger funds with a co lending model. It uses the fintech approach for a wider digital reach. Banks bring financial strength. On the other hand, NBFCs contribute their extensive market access. Such a partnership benefits both sides with advanced technology to overcome operational hurdles common in traditional lending.

The key advantages include the following:

1. Better Service Quality and Faster Processing - Digital innovations have boosted service quality. Automation (from application to disbursal) allows for faster services. It offers customers easy loan approvals & minimal delays.

2. Reduced Interest Costs - Co-lending lets competitive rates by combining the low capital costs of banks with the reduced acquisition expenses of NBFCs. It ultimately lowers the borrower’s overall loan repayment burden.

3. Completely Digital & Paperless - Automated systems let borrowers complete the process from home with many lenders offering e-KYC & video verification for added speed.

4. Swift Loan Approvals - Customers benefit from multiple access points, such as mobile apps, as well as online platforms. This makes loan disbursal accessible.

5. Expanded Borrower Reach - Fintech outreach lets lenders connect with customers across regions, including underbanked communities. It lets the economically weaker groups access essential funds.

Applications of Co-Lending

Co-lending’s versatility serves diverse financial needs across sectors. Here are some key areas where it plays a role:

1. Home Loans - Expands access to property financing for a wider range of borrowers.

2. Personal Loans - Supports urgent personal needs or significant purchases.

3. Small Business Financing - Supplies capital to small enterprises that might struggle to obtain traditional bank loans.

4. Microfinance - Empowers small-scale businesses alongside entrepreneurs with easier funding.

5. Agricultural Loans - Helps farmers secure funds for equipment alongside seeds as well as operational improvements.

6. Educational Loans - Offers students financial assistance for academic pursuits.

7. Green Financing - Enables funding for eco-friendly initiatives & sustainable projects.

RBI Regulations for Co-Lending

Co-lending is rising as a growing financial practice. It is closely regulated by the Reserve Bank of India & the Ministry of Finance to protect both lenders as well as borrowers. The RBI in November 2020 issued co lending RBI guidelines mandating that banks must retain at least 20% of each individual loan co-originated with NBFCs.

This requirement helps mitigate risks from extensive NBFC participation. Banks are responsible for ensuring their NBFC partners comply with all applicable regulations.

The RBI’s regulations strengthen the stability of co-lending arrangements by establishing clear responsibilities. It also ensures that borrowers benefit from the strengths of both financial institutions.

Terms & Conditions of Co-Lending Arrangement

Co lending arrangements function under defined terms mutually agreed upon by banks & NBFCs. These include sharing credit risk as well as interest income. Besides, they also include compliance with the regulatory guidelines issued by the RBI as well as the Ministry of Finance. 

The agreement specifies each party’s responsibilities. This ensures transparency. A tripartite agreement involving the bank (also NBFCs) as well as the borrower ensures smooth operations. 

Role of Financial Institutions in Co-Lending

Financial institutions have defined responsibilities that ensure smooth loan processing & risk management in a co lending model.

Primary Lender

1. Originating the Loan - Initiates the loan process by marketing products, collecting applications, as well as conducting initial credit checks.

2. Assessing Credit - Evaluates borrower eligibility based on credit history, income, as well as repayment capacity.

3. Documentation - Manages the collection and verification of identity, income, and property documents.

4. Loan Servicing - Oversees repayment tracking, account management, and customer support after disbursal.

Co-Lender

1. Funding - Contributes an agreed share of the loan amount to enable larger disbursals and broader borrower coverage.

2. Risk Sharing - Distributes credit risk proportionately with the primary lender.

3. Expertise Contribution - Offer sector knowledge or technological tools for efficient loan processing.

4. Compliance & Oversight - Ensures their share of the loan meets regulatory and internal policy requirements.

Fintech Companies & NBFCs

1. Integrating Technology - Offer advanced digital solutions for faster & seamless processing.

2. Market Reach - They extend loan accessibility to underserved areas and niche markets.

3. Customer Acquisition - These companies use digital platforms to attract and onboard borrowers efficiently.

Co-lending delivers a customer-centric lending solution by combining low-cost capital from banks as well as the agility of NBFCs.

Co-Lending Infrastructure

Co lending in India combines technology as well as regulatory compliance. Escrow accounts are central to these setups. They ensure safe fund transfers as well as transparent settlements between lending partners.

Selecting the right partner involves assessing their credibility as well as expertise in the intended borrower segment. Their technology infrastructure (including secure digital platforms) should support smooth loan processing.

Partnerships work best when both sides maintain open communication & share responsibilities.

How to Choose the Right Co-Lending Partner?

Selecting a partner for co lending requires careful planning:

1. Risk Capacity - Choose a partner whose risk-taking ability aligns with yours to maintain stability in shared loan portfolios.

2. Target Segment - Work with a lender focused on borrower groups you aim to serve. This ensures a better understanding.

3. Funding Scope - Pick a partner comfortable with the loan size range you plan to offer. This supports constant disbursal and a smooth borrower experience.

Example of Co-Lending

A practical example of co lending is when a bank teams up with an NBFC to issue a loan. The bank contributes the larger share of funds, while the NBFC adds the rest and manages borrower interactions.

Suppose a borrower requests an instant personal loan of ₹5,00,000. The bank could fund ₹3,50,000 (which is 70%) at a lower rate. The NBFC covers ₹1,50,000 (which is 30%) at a slightly higher rate. This arrangement reduces the borrower’s overall interest cost while speeding up disbursal.

Future of Co-Lending

The Reserve Bank of India has updated rules for banks as well as NBFCs to support priority sectors. Co lending is expected to grow further. Increased credit flow will reach underserved markets with personal loans & micro-finance likely to adopt it more widely. 

Housing finance companies already use co lending, and similar adoption in personal finance will follow. Streamlined processes from application to disbursal ensure faster access to funds. 

Conclusion 

It can be said that co lending is reshaping access to credit in India. What it does is combine bank stability as well as NBFC loan lending efficiency. Overall, it benefits borrowers & lenders alike while driving inclusive financial growth across multiple lending segments.

Frequently Asked Questions (FAQs)

Q.1. What is the typical interest rate in co-lending?

Interest rates vary based on loan type & borrower profile (also partner agreement). Rates are often lower than NBFC-only loans since banks offer more affordable funds while NBFCs handle processing & customer service.

Q.2. How does co-lending help borrowers?

Co lending offers faster approval & access to larger loan amounts. Borrowers benefit from the bank’s lower funding cost combined with the NBFC’s efficient loan processing. This makes the borrowing experience smoother and more affordable.

Q.3. How do NBFCs raise funds to give loans?

NBFCs raise funds through bank borrowings, issuing debentures, as well as equity investments. They partner with banks to reduce their funding burden while sharing credit risk. 

Q.4. What is the usual loan size and interest rate in co-lending?

Loan sizes usually range between ₹10,000 & ₹2,50,000 for personal loans. Personal loan interest rates generally range between 12% & 36% annually. It depends on the borrower profile as well as agreed terms between the bank & NBFC.

Q.5. What is the minimum holding period for co-lending loans?

The minimum holding period for co lending loans depends on RBI regulations as well as partner agreements. Banks must retain a portion of each loan until maturity or as specified in the agreement.

By: Jaivinder Bhandari

Jaivinder Bhandari is a Senior SEO Manager at lendingplate with a passion for writing on a wide range of financial topics, including personal loans, credit and debit cards, investments, money management, and practical financial tips to help people improve their financial well-being. Linkedin Profile