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.