{"id":18033,"date":"2020-10-13T16:47:04","date_gmt":"2020-10-13T16:47:04","guid":{"rendered":"https:\/\/habiletechnologies.com\/?p=18033"},"modified":"2022-07-22T07:51:46","modified_gmt":"2022-07-22T07:51:46","slug":"what-is-co-lending-and-how-will-nbfcs-benefit-from-it","status":"publish","type":"post","link":"https:\/\/wiki.cloudbankin.com\/index.php\/2020\/10\/13\/18033\/what-is-co-lending-and-how-will-nbfcs-benefit-from-it\/","title":{"rendered":"What is Co-Lending and How will NBFCs Benefit From It?"},"content":{"rendered":"

Since the turn of the past decade, smaller lenders have taken the credit industry by storm – making giant, liquidity-filled strides all over the world. These are essentially small banks and <\/span>non-banking financial companies<\/span><\/span><\/a> (NBFCs), who have capitalized on the limitless potential of technology to offer credit to sectors like agriculture, education and Small and Medium Enterprises (SMEs), where large banks haven\u2019t managed to penetrate that well. At the same time, umpteen NBFCs haven\u2019t managed to gather a lot of capital to fund their credit offerings to modern customers. To bridge this gap, co-lending has come to the rescue.<\/span><\/p>\n

Co-Lending: What is it?<\/b><\/h1>\n

In essence an arrangement between cash rich banks and non-deposit holding financial institutions (NBFCs) and housing finance companies (HFCs), co-lending has become extremely popular between many players in the market. While the NBFCs would do the grunt work of loan origination and paperwork, banks would offer their liquidity strength to finance a majority of the loan. In co-lending, both parties share the risks and rewards throughout the loan lifecycle.<\/span>
\nNBFCs have always benefited from their ability to pierce smaller, harder-to-reach geographical areas through the use of modern <\/span>loan origination softwares<\/span><\/a><\/span> and banking practices. This led to excellent growth rates, but with limited liquidity, there is only so far that NBFCs can get ahead in the market. Banks on the other hand, have a bigger clientele, bigger wads of cash and bigger fee structures. Co-lending is a give-and-take model by which NBFCs can improve their liquidity, profitability and client base, while banks can advantage from the market outreach, loan origination and servicing acumen of NBFCs.<\/span><\/p>\n

How does a Co-Lending Agreement Work?<\/b><\/h3>\n

NBFCs and banks are obliged to enter a tripartite agreement with customers and play the co-lending game. The process is fairly simple, but has to be executed to the T to ensure a streamlined arrangement. Here are the 3 steps:<\/span>
\n1. First the NBFC performs loan origination activities through co-lending softwares and checks on the prospective client, after which it recommends him\/her to the partner bank with the relevant documentation. <\/span>
\n2. The bank independently does requirement analysis and risk assessment of the client and vets him\/her if found credit worthy. <\/span>
\n3. The lending parties enter into a three-way agreement with the client. The bank and NBFC pool their funds into an escrow account from which the loan shall be disbursed. Although both lenders will maintain the client\u2019s accounts, they must share information and collaborate to generate a unified statement of accounts for the borrower for easier repayments.<\/span><\/p>\n

Features of the Co-Lending Model<\/b><\/h3>\n

Ever since the Reserve Bank of India (RBI) <\/span>announced the Co-Lending<\/span><\/a><\/span> financial model, banks and NBFCs have embraced the \u2018co-origination\u2019 process that entails a bevy of features targeted at mutually profiting both parties:<\/span><\/p>\n