The Union government’s move to introduce credit guarantees for loans advanced jointly by banks and NBFCs, known as co-lending, will likely give a fresh impetus to unsecured loans being extended to small businesses, industry officials said.
Under the new scheme, lenders extending credit to micro and small enterprises can avail of guarantees on secured loans of up to Rs 2 crore and unsecured loans of up to Rs 1 crore. Unsecured loans are those that are not backed by collateral.
The Credit Guarantee Scheme for Co-Lending (CGSCL) came into force on February 25. It will cover loans sanctioned under a co-lending arrangement by a pair of lending institutions to eligible borrowers, the Credit Guarantee Fund Trust for Micro and Small Enterprises said in a statement.
Under a co-lending agreement, a non-banking financial company partners a bank to advance various types of loans. As per Reserve Bank of India guidelines, while the NBFC can source, originate and service these loans, it can keep only 20 percent of the loan outstanding in its books and the partner bank must hold the rest on its balance sheet.
Presently, there are two modes of forming a co-lending partnership, one of which is where an NBFC and its partner bank jointly lend to the borrower through an escrow account and due diligence and appraisal is done by both. The second is through direct assignment, where the bank can exercise its discretion on taking on to its books loans originated by the NBFC as per agreement.
Experts said loans amounting to Rs 1,000 crore have already originated under the co-lending model.
Big thrust
According to Shachindra Nath, executive chairman of U GRO Capital, a small-business lending platform, recognising co-lending as a separate scheme will give it a big thrust because most banks were focused only on secured lending.
“I think for MSME financing, unsecured is a big piece, and that would start happening with public sector banks now,” Nath said.
U GRO Capital was initially considering co-lending deals with selective banks but considering the growth opportunity, it has decided to expand the list of banks with which it is signing co-lending partnerships.
Presently, U GRO Capital has co-lending deals with Central Bank of India, Bank of Baroda and IDBI Bank. A partnership with State Bank of India will take effect this month, he said.
The NBFC has received approvals from three other banks, details of which will be announced shortly. Nath said MSME financing under the co-lending model would be about Rs 50,000 crore in FY23 and U GRO would extend up to Rs 3,000 crore of loans.
Customer retention
Co-lending will drive customer retention and help NBFCs expand their customer reach, said Jinay Gala, associate director at India Ratings & Research.
“While adaptability of the model has been a challenge, the new daily stamping of non-performing asset norms by the RBI for NBFCs will help align banks and NBFCs’ underwriting and stress recognition process more. Many lenders are exploring this model and there is growth potential in the same,” Gala said.
The co-lending model is also attracting foreign banks. Edelweiss Housing Finance and Standard Chartered Bank signed a strategic co-lending of loans against property deal on March 2. Edelweiss Housing will originate, process and service the loans and retain 20 percent of the loans on its books, while the remaining 80 percent will be on the books of Standard Chartered Bank.
“The new normal post COVID-19 will need significant re-thinking in the way NBFCs and HFCs do business. The focus is seen to be shifting on liquidity management and asset-light models and the co-lending arrangement will fulfil precisely this need,” the lenders said in a joint statement.
Union Bank of India of India signed a co-lending agreement on February 28 with Ambit Finvest, a non-deposit taking NBFC of the Ambit Group that lends to MSME customers in 11 states.
“The partnership with Ambit Finvest is part of the bank’s strategy to serve the most deserving and under-serviced businesses. This initiative is also part of Union Bank’s commitment to support MSMEs by providing tailor-made financial solutions and accelerating the growth of MSMEs to contribute to the country’s economic development,” said Lal Singh, chief general manager, MSME, Union Bank.
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