Indian banks are embracing co-lending to scale up business in an unprecedented manner. State Bank of India and Union Bank of India alone have signed about a dozen agreements for co-lending – where loans are issued jointly by two entities – in the past six months alone, senior bankers told Moneycontrol.
SBI has signed over eight such agreements while Union Bank has signed three co-lending agreements, the bankers said.
“Co-lending will be pursued as an important tool to increase the microfinance, MSME (micro, small and medium enterprises) and affordable housing portfolio,” SBI chairman Dinesh Khara said on September 29.
Co-lending refers to partnerships between two lenders, typically a bank and a non-bank, to offer loans to the economically weaker sections or borrowers under the so-called priority sector lending (PSL) programme.
SBI will continue to work with more non-banking finance companies and microfinance institutions to reach out to customers living in far-flung areas and provide them last-mile banking services.
Experts said co-lending has picked up recently as banks want to aggressively tap a revival in demand for credit after a dull pandemic-phase. Co-lending helps bank to meet their PSL targets. Also, banks see an opportunity in the last-mile coverage of NBFCs and their ability to source loans quickly to meet disbursal targets.
Although the co-lending concept has existed in the banking sector for a while, it hasn’t picked up in a big way for various reasons.
The Reserve Bank of India had initially come out with the co-origination framework in 2018, allowing banks and NBFCs to co-originate loans. As per the RBI norms, 20 percent of the credit risk by way of direct exposure will be on an NBFC’s books till maturity and the balance will be on the bank’s books.
Upon maturity, the repayment or recovery of interest is shared by the bank and NBFC in proportion to their share of credit and interest.
The Covid-19 pandemic and subsequent curbs significantly affected the banking sector’s credit growth. Bank loan growth to industry, however, improved to 6.4 percent in January 2022 from 0.7 percent in January 2021, as per RBI data released on February 28, signalling a gradual recovery in the economy.
SBI takes lead
To tap into reviving credit demand, SBI, the country’s largest lender, has been pro-actively involved in co-lending. Since September, the public sector bank has signed co-lending partnerships with NBFCs in different fields of priority sector lending.
On September 29, SBI signed co-lending partnerships with Vedika Credit Capital, Save Microfinance and Paisalo Digital to disburse loans to members of joint liability groups for agriculture and allied activities, including other income-generation activities.
For co-lending to micro, small and medium enterprises, SBI signed co-lending agreements with U Gro Capital and Capri Global Capital.
SBI also formed partnerships with Adani Capital for co-lending to farmers and with five housing finance companies – PNB Housing Finance, IIFL Home Finance, Shriram Housing Finance, Edelweiss Housing Finance, and Capri Global Housing Finance – to sanction home loans.
SBI is not the only PSU lender going aggressive in co-lending. Bank of Baroda projects a decent share of its disbursements coming from co-lending this year.
“FY23 would be our first complete year in co-lending, so we will look at around 5 percent of the overall disbursement,” Dhrubashish Bhattacharya, head of MSME business at Bank of Baroda, told Moneycontrol.
“As a strategy, we would like to partner with NBFCs having core competence in one or two product lines, with each partner focusing on specific product lines in specific geographies. The sectors in focus are green energy, healthcare, infrastructure and micro loans.”
Private sector lender South Indian Bank is also keen on entering the co-lending space, according to managing director Murali Ramakrishnan. The lender is in talks with Chennai-based CredAvenue to offer loans via the co-lending model and this partnership will “hopefully” start this year, Ramakrishnan told Moneycontrol.
“Co-lending is definitely something which we are looking at very seriously. We are in talks with a few NBFCs and we are looking at personal loans, gold loans and home loans,” Ramakrishnan said. “We are expecting some decent amount of book size will be built through co-lending in FY23.”
NBFCs that sign a co-lending pact with banks get access to cheap funds, while banks benefit from the last-mile reach of smaller non-banks.
This is also why Shriram Group aims to book loans of Rs 500 crore to Rs 1,000 crore via co-lending partnerships in FY23, managing director YS Chakravarti told Moneycontrol.
He said Shriram City Union has a significant part of its book under priority sector lending areas and co-lending will be focused on that part, which is mainly home loans and SME loans.
The NBFC’s housing finance subsidiary, Shriram Housing Finance, has partnered with SBI for affordable home loans and the non-bank lender will “test the waters with the new format” and see if they can look at other such partnerships with like-minded companies.
“For the model to work, both entities need to have robust technology to simplify operational challenges. Thus, only once we have confidence in the cost actually coming down for the end-user and it being a profitable means of growth for us, will we explore growing this part of the book,” Chakravarti said.