Small NBFCs may turn to SME, mortgage, green finance loans in co-lending business as risk aversion sets in

A report by ratings agency CRISIL showed that co-lending assets under management (AUM) of NBFCs is nearing Rs 1 lakh crore after more than 5 years since the model came into being.

Some small non-banking financial companies (NBFC) are likely to increase their share of co-lending loans to micro, small and medium enterprises (MSME), housing and green energy while cutting their co-lending exposure to personal loans, experts said. This is due to personal loans attracting a higher risk-weight after the recent rule changes by the Reserve Bank of India (RBI).

Co-lending or co-origination is a set-up where banks and non-banks enter into an arrangement for the joint contribution of credit for priority sector lending. And large banks like the State Bank of India (SBI) and HDFC Bank have a large number of co-lending partners.

A report by ratings agency CRISIL showed that co-lending assets under management (AUM) of NBFCs is nearing Rs 1 lakh crore after more than five years since the model came into being. It highlighted that out of the current overall co-lending book, personal loans alone account for about a third of the AUM, followed by housing loans at around 20 percent and unsecured MSME loans and gold loans each making up about 13 percent. Secured MSME (including loan against property) and vehicle loans comprise about 20 percent.

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“While co-lending books for all asset classes will grow, the pace of growth for personal loans is expected to be slower than that seen in the recent past. NBFCs may increase their focus on other asset classes such as loans to micro, small and medium enterprises (MSME) and home loans given higher risk weights for personal loans,” CRISIL said in a report on April 8.

Krishna Gopal, Chief Financial Officer (CFO), Aye Finance, said: “Amidst growing concern on the rapid growth of personal and consumption loan portfolios, coupled with corrective regulatory action of increase in risk weights on these portfolios, the focus of co-lending is shifting towards MSMEs."

Green finance focused NBFC Credit Fair is looking at a disbursement of Rs 500 crore in financial year (FY) 2024-25. “We plan to finance 20,000+ homes for rooftop solar installations by March FY25. Till now, we have approved Rs 128 crore worth of loans and Rs 97 crore worth of disbursement is done. And we are looking at a disbursement of Rs 500 crore till the end of FY25,” said Vikas Agarwal, Co-founder and Chief Business Officer, Credit Fair.

Similarly, Avishek Gupta, Managing Director & CEO, Caspian Debt, an MSME and green finance focused NBFC, said that the company is targeting Rs 950 crore to 1,000 crore disbursements across segments by FY25. “We had disbursements of Rs 630 crore in FY24 across green finance, MSME, solar finance, waste to fuel finance and other segments. In FY25, we are looking at disbursing Rs 1,000 crore,” Gupta said.

More partnerships

Some lenders are looking at more partnerships to further boost their co-lending book.

For example, in November 2023, Godrej’s NBFC arm partnered with Amazon, Visa, DBS Bank India to expand value added services offering for MSMEs. And public sector lender Central Bank of India on December 28 entered into a strategic co-lending partnership with Kisetsu Saison Finance, India for MSME Loans.

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Credit Fair’s Agarwal said that currently they have State Bank of India as their lender. “We are in talks with a few PSU banks for co-lending partnerships to further boost our renewable energy lending portfolio,” he said.

Ajit Velonie, Senior Director, CRISIL Ratings, highlighted that for NBFCs, particularly for mid-sized and smaller ones, co-lending enables access to bank funding as well as diversification in funding avenues. “This becomes even more relevant in the light of the recent increase in risk weights for bank lending to NBFCs,” Velonie said