Though still early days, co-lending appears to offer win-win benefits to all stakeholders and the model is expected to gain momentum going forward.

Amid various measures from the Union Finance Ministry and RBI to boost liquidity and funding lines to non-banking financial companies (NBFCs), fund-based growth remains a challenge. So, NBFCs are increasingly adopting new strategies, including co-lending with banks, to grow their business.

In co-lending, NBFCs, and housing finance companies (HFCs) facilitate the origination and collection of housing loans while the banks offer their balance sheet strength to house the majority of the loan (80 per cent in the bank’s balance sheet and 20 per cent in that of NBFCs).

“Certainly the concept of co-lending is an excellent one. It has the potential to change the lending landscape in our country,” says Siddhartha Mohanty, MD & CEO of LIC Housing Finance.

Explaining further he said two factors are at interplay ― ample liquidity with banks and NBFCs’ inherent strength of providing the last mile connectivity. Both parties need to look at this arrangement as sharing of risks and rewards proposition.

Top banks like State Bank of India created a new department ‘NBFC Alliances’ a couple of years ago to partner with NBFCs and microfinance institutions across the country in co-origination of loans for the creation of assets under priority sector.

But many things have to be worked out to make the model win-win for both, adds Mohanty.

Aspects like setting common credit appraisal standards, changes in lending policies at both ends, integration of IT platforms, seamless digital journey from onboarding to disbursement, and robust monitoring mechanisms post disbursals, among others, need to be established.

“Though it is evolving, the co-lending model is worth revisiting for the HFC space, once the market stabilises and growth picks up,” feels D Lakshminarayanan, Managing Director, Sundaram Home Finance.

Vydianathan Ramaswamy, Director-Ratings, Brickwork Ratings, says the major challenge in the co-lending model is integrating credit and risk management systems and the processes of partner banks and NBFCs.

However, he is of the view that by adopting the co-lending model banks can leverage NBFCs’ geographical reach and benefit from their origination and servicing capabilities without incurring significant additional operating costs.

Furthermore, NBFCs/HFCs will get access to better-profile clients, require lower capital for deployment and improve liquidity and profitability, given the fee-based nature of the business, he adds.

Industry experts hope that with the announcement of many stimulus packages by the Central government, co-lending space is expected to gain traction in MSME and affordable housing segments.

Published on June 8, 2020