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Technology perception of risk: Co-lending model faces ‘multiple problems’ | Financial news
The interest charging model between banks and NBFCs (non-banking financial companies), introduced by the Reserve Bank of India (RBI) in 2018, is yet to fully take off due to several issues, industry players said.
The reasons include lack of technology integration, different risk perceptions by lending partners (banks and NBFCs) and the slowness of larger NBFCs in accepting the model, experts said.
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Co-financing happens when several credit partners enter into an agreement to provide loans to priority sectors, such as micro, small and medium enterprises (MSME).
In loans, the minimum 20 per cent credit risk required by the RBI through direct exposure will be on the books of the NBFC till maturity and the balance will be on the books of the bank.
NBFCs had assets under management (AUMs) of nearly Rs 1 trillion, according to a CRISIL report in April 2024.
The Department of Financial Services (DFS) has set up a committee of banks and NBFCs, headed by the State Bank of India (SBI), to address issues related to lending, credit to MSMEs and curbing the rapid growth of certain consumer loans.
“Technology concerns remain in 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, an NBFC focused on small and medium enterprises.
“There is also a difference between risk perceptions between creditor partners. When we undertake loans, we declare the risks along with guidance on what the non-performing assets (NPA) would be and the cost of credit and ask our partners to price the risk accordingly,” said Lodha, referring to NPAs.
Typically, there are two types of co-financing: CLM 1 and CLM 2. In CLM 1, the amount is paid by both lenders simultaneously and therefore requires an integrated system between the partners for real-time processing and completion of Know Your Customer (KYC) standards.
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.
“Technology integration between players takes time, energy and effort. So, very limited transactions have happened strictly as we understand using CLM 1 method,” said Karthik Srinivasan, senior president and group head, financial sector, ICRA Ratings.
The demand for colending is coming from mid-sized and small NBFCs and some large ones that do not accept deposits. However, according to industry experts, as banks tighten their liquidity, larger NBFCs are also likely to explore the colending 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 colending for smaller players is definitely increasing,” said Chetna Aggarwal, head of colending, Vivriti Capital.
“I don’t see any kind of disappointment as far as colending is concerned. In my opinion, co-lending will replace a part of securitisation, which is direct assignment (DSA), in the next three to four years. DSA will be substantially low and banks and financial institutions will resort to co-lending. So all banks are interested in lending and have set big targets for themselves,” Lodha said.