Co-Lending Model: How Will It Help Small Business Owners?

With the co-lending model, the SMEs will have greater access to low-cost funds as NBFCs will be in a much better position to finance them.


Co-lending takes place when two lender firms come together to disburse loans. Keeping up with the needs of a growing economy, there is a pressing need to fund the small to medium scale enterprises (SMEs). Recognising the same, the Reserve Bank of India (RBI) came out with a Co-lending model under which banks can provide loans along with Non-Banking Financial Companies (NBFCs) to priority sector borrowers based on prior agreements. How will this decision flare out for small business owners?

What is a Co-Lending Model?

Traditional banks typically struggle with outreach to all sections of the economy, especially small businesses. NBFCs come into play to fill the gap between these untouched sections and banks. In a chain of transactions, banks lend to the NBFCs (at low cost) and these NBFCs on-lend to the priority sector.

How will this benefit small business?

To begin with, co-lending will bring down the interest rate, considering the lower cost of funds from banks to NBFCs, which have a greater reach.

NBFCs process loan applications much quicker than banks and have a good reach among SMEs and small business owners than banks in many geographies. There are areas in Tier 1 and Tier 2 where banks do not even have a branch. Therefore, with a co-lending model, small businesses in these places will have a comfortable access to funds. 

The RBI has given special attention to grievance redressal for borrowers in the co-lending model. Suitable arrangement must be put in place by the co-lenders to resolve any complaint registered by a borrower with the NBFC within 30 days. This comes as a huge relief for a borrower.

The process of lending has become much smoother with fintech firms. Now with NBFCs having a bigger pool of funds from banks, they will be in a much better position to lend via these firms who apart from lending along with the banks, provide services like risk assessment, assessing credit quality, This, in turn, will allow banks and NBFCs to lend more to the SME segment as these assessments make them feel more comfortable to lend. State Bank of India is in discussion with dozens of new age  NBFCs, fintech and traditional NBFCs for co-lending. Bank of Baroda and Bank of Maharashtra have entered into similar agreements with JM Financial Home Loans Limited (JMFHL) and Pune-based non-banking financial company LoanTap Credit Products, respectively, for MSME loans. 

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SBI, Bank of Baroda and Bank of Maharashtra are in discussion with dozens of new age NBFCs, fintech and traditional NBFCs for co-lending.

What’s in it for start-ups?

The eligible businesses (MSME, export credit, education, housing, social infrastructure, renewable energy, start-ups) or entrepreneurs can apply for loans either through online NBFC platforms like Capital Float, Lendingkart, SMEcorner, UGRO Capital and others, or directly approach the NBFC nearby (Muthoot Finance Ltd, Tata Capital Financial Services Ltd, Bajaj Finance Limited etc) to avail loans.  

SMEs will have to digitally fill up the loan application on the online platform, post which the company will match the MSME borrower with the right lender.

Naina Sood
Naina Sood
Naina was former staff at Dutch Uncles, she writes on business-life-cycle, funding, small businesses and start-ups.

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