BL Explainer. How co-lending is just old wine in new bottle

What is co-lending? Which are the entities involved in lending here?

Co-lending is an arrangement where the loan origination is by one entity but the risk is shared by two entities. A non-banking financial company (NBFC) is the originator while a bank is where the major portion of the loan rests.

How does co-lending work?

One can call co-lending a blend of the co-origination and securitisation models. The loan product could range from housing, including affordable housing, gold, commercial vehicles, passenger vehicles or even microfinance loans. Basically, everything retail.

An NBFC can partner with multiple banks and a bank can partner with multiple NBFCs. There is no requirement for exclusivity. Let’s say NBFC A has tied up with Bank A. Unlike in a co-origination arrangement, the bank need not share the responsibility of originating the loan. NBFC A runs the basic filters including ‘know your customer’ or KYC for the prospective borrower before forwarding the application to the bank.

At this stage it may seem very similar to securitisation contracts, but where co-lending differs is that each bank and NBFC, based on their internal practices and risk management framework, formulates its own policy on co-lending. The most binding aspect of this structure is the risk-sharing code — 80 per cent of the loan risk is borne by the bank and the rest by the NBFC. Therefore, it enforces accountability on the NBFC, unlike in a securitisation contract where the NBFC’s role is more like a collection agent. So, if NBFC A has closed in on, say, a ₹30-lakh home loan with Bank A, then the loan will be reflected in the books of both entities for its tenure. As will the risk-reward.

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Also read:Axis Bank, Shriram Housing Finance enter into co-lending pact

What is the advantage in co-lending?

Co-lending is a by-product of the IL&FS crisis. The intent was to free up capital and decide what sort of book NBFCs want to build in the long run. For banks, the model ensures sharing of credit risk and, more importantly, a well-coded policy to evaluate the borrower on par with a bank loan. Also, , co-lending helps banks penetrate markets outside urban and semi-urban centres, which are typically the stronghold of NBFCs.

What is the typical ticket-size and rate of interest in co-lending?

Being retail-focused, these are small-ticket loans. Since co-lending is more popular in the small business loan and affordable housing segments, ticket sizes start at ₹3–5 lakhs and go up to ₹1 crore. These loans are priced at NBFC rates plus a mark-up.

Also read:YES Bank, Aadhar Housing Finance enter into co-lending partnership

Who are the borrowers?

Typically NBFC-centric borrowers with a not-so-long credit track record or a great score. They may also be non-metro customers.

Why is the RBI sharpening its scrutiny on this segment?

There are reasons to believe that borrowers may not be exclusive to banks. There may have been instances where a borrower with Bank A and NBFC A was, under stress, pulled out from Bank A and entered into a new agreement with Bank B, which is tantamount to evergreening. The regulator wants to clamp down on such practices.           

Also read:Hopeful of higher growth in 2023, NBFCs bet on rise in economic activity, co-lending

Will tighter regulations impact borrowers, fintechs?

Fintechs have been finding it difficult to lend since the digital lending norms were rolled out. Those with NBFC licences have taken to co-lending and they could be further impacted under tighter regulations; borrowers with not-so-good credit record may find it more difficult to get loans.

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