Co-lending: A win-win option for the economy during COVID times


The Covid-19 pandemic and the resultant lockdown have affected various sectors of the Indian economy adversely. Both businesses and individuals need additional credit due to falling revenues and cash reserves. Credit institutions like banks, NBFCs, and HFCs themselves have been hit by the pandemic.

Before offering the credit, lenders need comprehensive risk identification, continuous monitoring, and risk mitigation approaches to identify customers with higher exposure to the impact of Covid 19 and forecast their declining creditworthiness. In this situation collaboration among various stakeholders would help the lending institutions to deliver enhanced customer experience.

What is Co-lending?

Co-lending offers the lenders an opportunity to work together and create a winning strategy for all the stakeholders. Here, the banks, NBFCs, and HFCs get into an agreement where the risks and rewards are shared by all parties to the co-lending agreement throughout the loan period, as per a pre-determined ratio.

Why Co-lending?

The co-lending permits multiple stakeholders of the lending ecosystem. While NBFCs and HFCs can increase their presence in local markets, commercial banks have the availability of funds for credit disbursement. Another benefit is that NBFCs and HFCs have mastered in estimating the credit capacity of certain niche customer segments, which the banks have been ignoring.

The NBFCs use different methods for estimating credit risk such as the use of advanced sources of data, remarking an individual’s modus operandi and cash-flow at work, building customized scorecards, etc. for both small-ticket retail and MSME segment. This is an area where the banks can look forward to.

Reserve Bank of India (RBI) has also come up with guidelines for lending to priority sectors through co-origination of credit.

Robust Technological Requirements

The Co-lending model requires extensive use of powerful technology to reduce operational constraints. While NBFCs and  HFCs will be the front end for customer servicing, all decisions, transactions, and funds require multi-directional information flow at various points between the banks and NBFCs, highlighting the need for mature technological solutions. Financial institutions need to assess whether their existing technology systems are efficient in handling the constraints caused by the single requirements of this model.

Due to the pandemic, certain banks face difficulty in deciding the sufficiency of loan-related collaterals available with them and make required provisioning. when the loan is co-originated by two parties this becomes even more complicated and hence effective use of technology will help to drive the model.

Meeting KYC & Anti Money Laundering (AML) requirements is an essential part of the credit disbursal process. Since co-lending involves numerous lenders, the compliance check requires a seamless sharing of customer data between them.

The assessment of creditworthiness is another critical aspect. Co-lending requires the assessment of one’s creditworthiness to also consider the further decision parameters from the partner’s credit risk team.

Co-lending enables both parties to price their part of the credit as they want. Since each lender follows its own rules and regulations as per the applicable statute guidelines the lenders have to meet additional requirements. Both parties must agree upon certain standards while aligning their businesses.