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Technology for risk perception: co-lending model faces ‘several problems’ | Financial news
The model was created six years ago to strengthen the flow of credit to sectors struggling to obtain financing
Illustration by Ajay MohantyAathira Varier Bombay
Non-banking financial companies (NBFCs) had co-lending assets under management (AUM) of nearly Rs 1 trillion more than five years after the model emerged in 2018, according to a CRISIL report in April 2024. The co- loan is progressing, but has “several problems”, say industry executives.
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The issues include lack of technology integration, different risk perceptions among lending partners (banks and NBFCs) and slower acceptance of the model by larger NBFCs, experts said. It is a model where multiple lending partners enter into an agreement to lend to borrowers, with the aim of providing credit to sectors that have been struggling to get enough, such as micro, small and medium enterprises (MSMEs).
The Department of Financial Services (DFSS) under the Ministry of Finance recently set up a committee of banks and NBFCs headed by the State Bank of India (SBI) to address issues related to co-lending, credit to MSMEs and curbing the rapid growth of certain consumer loans.
“Technology concerns remain around co-lending because India does not have many technology players that can integrate with banks and NBFCs,” said Kishore Lodha, chief financial officer at U GRO Capital, a fintech.
“There is also a difference in risk perceptions between lending partners. There are several problems. When we take co-loans, we explain the risks along with guidance on what would be the NPA, cost of credit and ask our partners to price the risk accordingly,” said Lodha, referring to non-performing assets.
There are typically two types of co-lending: CLM 1 and CLM 2. In CLM 1, the total amount is paid by both lenders simultaneously and therefore requires an integrated system between the partners for real-time processing and Know Your completion Customer (KYC). In CLM 2, which is predominantly used, an NBFC joins hands with a larger peer or bank. The loan originates in partnership with the larger partner.
“Technological integration between the two players requires time, energy and effort. Therefore, very limited transactions happened strictly, as we understand it, using the CLM 1 method,” said Karthik Srinivasan, senior president and group head, financial sector, ICRA Ratings.
Lack of interest among larger NBFCs, which have access to alternative sources of funds, is another reason limiting the growth of co-lending. The demand for co-lending is mainly coming from medium and small NBFCs and a few large NBFCs that do not accept deposits. However, according to industry experts, as banks tighten their liquidity, larger NBFCs are also likely to explore the co-lending space.
“Based on the capital adequacy requirements and comfort of each player in the industry, the choice of on-book to off-book continues to vary. A larger NBFC may be inclined towards on-book AUM, while a smaller NBFC may prefer off-book due to the measured capital requirements in the co-lending space. So it’s a mix, I would say. The preference for co-lending for smaller players is definitely increasing,” said Chetna Aggarwal, head of co-lending at Vivriti Capital.
“I don’t see any kind of disappointment when it comes to co-lending. In my personal opinion, co-lending will replace one part of securitization, which is direct assignment (DSA), in the next three to four years. The DSA will be substantially low and banks and financial institutions will opt for co-lending. So all banks are interested in doing co-lending and they have set big targets for themselves,” said Lodha.