Partnership with Bank
When two lending companies bond together to provide borrowers with joint loans, this is referred to as co-lending or co-origination. This arrangement, which is regarded as a key component of the co-financing structure, combines the efforts of the banking and non-banking sectors to contribute credit for priority sector loans jointly.
Through this partnership, businesses are able to find clients, evaluate credit, and pay out a portion of the loan. In accordance with this structure, banks and NBFCs share risk in an 80:20 ratio, meaning that the bank bears 80% of the loan and that non-bank entities such as NBFCs, HFCs, Fintech, etc., bear at least 20%.
The Reserve Bank of India (RBI) established guidelines for co-lending of loans that additional banks and NBFCs joined up to provide funding to the priority sector.
One of the first NBFCs to co-lend with ICICI Bank in 2019 was SBFC (Small Business Finance), an NBFC that provides loans to small enterprises. More banks and NBFCs have started to expand their co-lending partnerships recently.
The co-lending framework, which permits banks and NBFCs to co-originate loans, was first outlined by the RBI in 2018. However, the RBI Co-Lending Guidelines went through the revisions in 2020 and were rebranded as CLM-Co-Lending Models. The goal of CLM is to increase credit flow to economically disadvantaged and underserved parts of the population at a reasonable cost. The approach operates as if NBFCs have a wider market reach than tier-2 centres and banks have lower funding costs.
In accordance with RBI guidelines, the bank's books will hold the remaining 80% of the credit risk resulting from direct exposure, with NBFCs holding the minimum 20% of the risk till maturity. In accordance with their respective shares of credit and interest at maturity, the bank and NBFC split the repayment and recovery of interest. A tripartite agreement is signed by clients, banks, and NBFCs, who act as the customers' single point of contact.
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The two parties to a co-lending arrangement will typically include a number of standard provisions in their agreement, as required by the Reserve Bank of India's mandated regulations.
When a co-lending arrangement is in place, loans are disbursed to the bank and the NBFC, respectively, in an 80:20 capital deployment ratio. Both the bank and the NBFC can gain from it. For example, it permits banks to provide the majority of the capital as they have easy access to a less expensive source. It also permits NBFCs to carry out the role of the party in the arrangement that deals with customers. The relevant NBFC handles both the sourcing and the associated client experience.
When banks and NBFCs enter into co-lending agreements, they can underwrite jointly, resulting in two checks. The fact that both sides are equally involved makes this possible.
As was previously established, the 80:20 split for capital deployment minimizes the risk and return ratio shared by banks and NBFCs.
Banks typically have a lower cost of capital. NBFCs, on the other hand, are rather more expensive. In light of this, the ultimate interest rate that clients receive is typically a combination of average capital cost in addition to their individual commissions. It typically falls in the range of the interest rates that the bank and NBFC charge their respective clients.
An official agreement is given to both parties when they enter into a co-lending arrangement. The roles and obligations of the bank and the NBFC are explicitly stated and defined in the agreement. The NBFC is typically the one that ignores customer management, customer experience, and sourcing. In addition, it is in charge of shorter TATs, expedited documentation, and new product improvements. However, banks must acquire low-cost resources and establish trust in order to draw in and keep consumers.
Compared to other financial
institutions, non-bank financial companies (NBFCs) typically have more access
and reach into distant areas of a nation. Additionally, they have a higher
digital rate and good reachability to underserved sectors. As a result, banks
have access to a wider range of clients and companies for loans. The main goal of Fintechs and NBFCs
is primarily customer-centric. Therefore, in any co-lending arrangement, the
modern partner oversees the client-base management process. It promotes several
prospects for repeat loans as well as conversions. NBFCs are required by law to provide
a minimum of 20% of the total capital amount, which gives banks peace of mind
about the calibre of consumers they will be receiving. Banks are spared from
making undue underwriting efforts as a result. Banks get an additional layer of
assurance in co-lending arrangements because the risk is shared between them and
NBFCs. Additionally, they gain by minimizing losses in the event that things do
not turn out as planned. Banks benefit from having access to
the least expensive funding sources in the market. It also applies to NBFCs.
Because of this, NBFCs have the advantage of offering loans to clients at
interest rates that are cheaper than those of other companies in the industry.
Newly founded businesses and
organisations looking to enter the market to expand their brand among consumers
by forming co-lending agreements with prestigious banks.The majority of co-lending agreements
split the risk equally between the two parties. Since banks employ the majority
of the capital, in the event of any bad debts, NBFCs can minimize the losses on
their loans. At Hindcred, we ensure that clients have a seamless and easy experience throughout the process, which is one of the main goals for new fintech companies. It enables them to cross-sell their finance-related items in the near future and keep consumers for a longer time. We are committed to a smooth loan process; consumers are paying high-interest rates. It is mostly due to the fact that several banks are participating, which drastically lowers the interest rate. We provide outstanding customer service. By informing clients of the terms and circumstances of the co-lending contract, we provide them with a more personalized touch. By facilitating the distribution of joint loans to borrowers between banks and NBFCs, co-lending platforms enable you to access a whole new world of co-lending.
We help you with loan processing between banks and NBFCs, as well as easy research. It also handles all of the splits and compliance requirements needed to run the entire Co-Lending ecosystem.
We assist clients in finding NBFCs in order to fulfil loan origination criteria. Because of its partnerships with more than 500 lenders, you can join the bank at a rate that works for you.
Co-lending systems enable traditional banks to use the fintech working model to distribute larger sums of money with a wider digital reach. NBFCs have the reach, but banks have the resources. Thus, a co-lending arrangement turns out to be mutually beneficial. This approach works well because it makes use of strong technology to remove the operational difficulties that come with traditional lending arrangements simpler. The following are some advantages of a co-lending model:
Improved time and quality: As financial institutions have gone digital, the quality of their services has improved. Strong technology has shortened the time it takes to complete every step of the process, from application to payment and real-time service delivery.
Reduced Interest Rates: The co-lending approach enables priority customers to receive a range of products at reduced interest rates. The cost of gaining new clients has significantly decreased because of digital lenders, and this, along with banks' cheap cost of capital, lowers overall costs. It is possible to transfer the cost benefit to the borrowers.
Computerized and Paperless Procedures: From application to disbursement, the entire procedure is computerized, allowing the borrowers to access funds from the comfort of their homes. Additionally, modern lenders have started using e-KYC, and Video KYC has made the procedure even simpler.
Fast Loan Disbursement: These days, loans can be obtained with only one click through user-friendly smartphone apps. Customers gain from it since co-lending offers the best of both worlds: physical branches and internet channels.
Expand clientele process: FinTech companies leverage digital platforms to expand their customer base and meet the needs of borrowers who are located in different parts of the world. Additionally, a co-lending approach provides the necessary funding to support economically disadvantaged groups.
Technology Integration: Leveraging advanced technology, we provide seamless digital experiences, enhancing convenience and efficiency for businesses.
Transparency: Our transparent policies and clear communication ensure businesses fully understand the terms and conditions, fostering trust and confidence.
Risk Mitigation: Hindcred employs robust risk management strategies, safeguarding businesses from potential financial uncertainties in the Indian market.
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Lending Hub business strategy service has been instrumental in our success. Their tailored strategies have not only improved our profitability but have also given us a clear roadmap for the future. Their NBFC expertise has become an invaluable asset to our organization.
In a co-lending agreement, two entities share the risk while one entity originates the loan. The loan was originated by a non-banking financial firm (NBFC), with the majority of the loan remaining with a bank. Co-lending is available to any bank that the RBI has approved for use in conducting business in India. The Agreement/MOU will be signed with the co-lending Banks/NBFCs for the period(s) that the Bank/NBFC and the Company have mutually agreed upon, i.e., either for a set amount of time or indefinitely. According to a previous agreement, the banks are allowed to co-lend under the CLM with any registered NBFC, including HFCs. However, a "loan agreement" between the co-lenders and the borrower defines their relationship. Co-lending is a horizontal network in which the two co-lenders work together to facilitate the borrower. Given the lower costs of money from banks and the wider reach of NBFCs, the main goal of the co-lending model is to increase the flow of credit to the underserved and unserved sectors of the economy and make funds available to the eventual recipient at a reasonable cost. According to the RBI, a bank can only have an NBFC as a subsidiary if it engages in specific activities such as main dealership, factoring, or credit cards. Following the announcement by public sector banks alone of a co-lending portfolio of Rs 25,414 crore for FY23, banks and non-banking finance firms (NBFCs) have the potential to ink co-lending agreements valued at Rs 1 trillion in the current fiscal year. "PSBs reported a total co-lending portfolio of Rs 25,414 crore for FY23. The majority of peer-to-peer lending platforms operate as fintech NBFC (Non-Banking Financial Companies) businesses. The P2P model is a contemporary credit model to address the demands of contemporary business credit, in contrast to traditional banking and financial organizations. In an emergency, this enables business owners to obtain finance. Most borrowers are concerned about the interest rates applied to their loans. increased EMIs and a greater financial strain are the outcome of increased interest rates. NBFCs have lower interest rates on business loans than traditional banks. According to RBI regulations, banks must set aside a certain proportion of their assets to cover anticipated credit losses. For outstanding debts on personal home loans and loans to small and micro businesses, NBFCs must maintain a reserve of 0.25%. The established network of NBFCs, low funding costs, and loan process automation all contribute to lenders' ability to operate more profitably. Lower interest rates are how they give the borrowers access to this benefit. The co-lending strategy makes loans available to low-income borrowers at competitive interest rates. Because NBFCs obtain their funding from the market at a greater cost than banks, they typically demand higher interest rates on house loans. It may result in higher borrowing costs overall. In contrast to banks, the rate differential is not so great.
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