According to the world bank, India’s economic growth is estimated at 8.7 percent for the financial year 2022, which is the highest amongst all large economies. To put this in perspective, the same estimates set China at just 5.5 percent, and advanced economies of Europe, America and Japan at 4.2, 3.7 and 2.9 respectively.
Growing apace with the GDP however, is India's credit gap.The central nerve of the Indian economy, MSMEs (Micro, Small and Medium enterprises) contribute 30% to India’s GDP, 50% to exports, and employ nearly 11 crore workers; all while struggling with a credit gap of Rs. 30 lakh crores. According to the World Bank Programme appraisal document for the Raising and Accelerating MSME Performance (RAMP) programme, over 40 percent of MSMEs lack access to formal sources of finance.
And that is just one slice of the credit pie. Agriculture and allied services, businesses in tier 2, 3, 4 cities, social infrastructure projects, artisans, cottage industries, self help groups, etc all remain underserved. Those looking to avail micro-credit, housing or educational loans find their options limited, and loans hard to come by. Often, the only option left to these borrowers is to go to non-institutional lenders, making them vulnerable to unethical exploitation.
Banks vs NBFCs: Who will rise to the challenge?
Why does this happen? It's simple. Banks, like any other business concern, are in the business of making money. They would rather invest in areas that are generally profitable and generally less risky. Also, most banks often lack the expertise to deal with, and relevant offerings for, customers from tier 2, 3, 4 cities and from lower economic stratas. Owing to low financial literacy, these customers often require much more hand-holding, and operating costs tend to be high. When considered alongside the smaller ticket size, it's easy to see why returns don't justify entry into these markets. For India to step confidently into the future, however, these are the very areas that need the extra push that access to credit can provide.
In recognition of this, the Govt of India sets targets for banks under Priority Sector Lending (PSL) initiatives. When banks don't meet their quota, certain penalties apply. While this works great on paper, in reality, the underserved are still underserved, despite PSL initiatives having been implemented since the 1960s. .
However, this is an area where NBFCs have seen much greater penetration. MSMEs, for instance, may find it much easier to navigate business loans with NBFCs than they do with banks due to their competitive interest rates, easier loan process and more flexible eligibility terms. NBFCs however, rarely have the deep pockets that banks do.
The Solution: Co-Lending.
Co-lending, or co-origination to retail borrowers, emerged around 2018. The learnings from both extremes of capital markets regulation (India and the West) were clear and present; the Indian banking sector has seen significant reform and liberalization over the previous decades; and there had been an explosion of fin-tech models in Indian credit markets starting in 2012. While debates raged globally on competition between banks and fintech, or how alternative lenders should be regulated, India’s financial sector neatly sidestepped these by opting for a partnership model between banks and non-bank lenders, allowing banks and non banking players to work together, rather than compete for the same markets.
It hasn't all been smooth sailing, and the RBI has refined the Co-lending guidelines several times in response to feedback from stakeholders. It's the latest revision in November 2020, that has spawned a flurry of deals and breathed new life into the model. The revisions allow Housing Finance companies an entry into co-lending, while also allowing banks to account for co-origination loans as part of their PSL targets, giving housing finance a much needed boost. In addition, there are changes to the process of co-lending itself which bring down the number of handshakes needed while simultaneously creating greater autonomy in decision making.
Has It Worked?
In a manner of speaking, yes. Already, we're seeing tie-ups like the one announced in Dec 2021, between the Union Bank of India and Home First Finance Company's strategic co-lending partnership to offer home loans to customers at competitive interest rates. A few weeks prior to that, Union Bank of India entered into a co-lending agreement with Capri Global Capital Ltd (CGCL), to enhance last-mile finance and drive financial inclusion to MSMEs by offering secured loans between Rs 10 lakhs to Rs 100 lakhs.
However, it is important to note that while both of those announcements occurred within a week of one another, it still took them a year from the time the announcement was made. Co-lending involves a long, drawn out process of agreements, provisioning, and integration due to Information and Data Security (CISO) compliances and the complexities inherent in the process. What's more, this process repeats with each new lead - that is, each new loan has the same journey. This creates unnecessary lead time in what should be a much shorter process… making the entire process unviable.
This is where CredAvenue steps in with CredCo-Lend. CredAvenue's stated aspiration is to unlock India's GDP multiplier by powering debt markets with an end-to-end solution to the debt lifecycle. CredAvenue's model is a novel one that solves several problems plaguing debt markets in India. When it came to Co-Lending, CredAvenue leveraged its historical understanding of the industry to create a self-serve API. CredCo-Lend's self-serve API reduces the onboarding time for originators from 6 months, to just one week. What's more, this is a one-time integration - no more waiting for 6 months with each new partnership! .
Once onboarded on CredCo-Lend, lenders (last mile/originators) have access to a huge pool of other lenders (large lenders/investors) , and there is no need for integration for each time one approaches another lender to partner with. Additionally, the 6 layer foolproof security system is CISO compliant, and brings additional data security. The platform also provides for easy reconciliation, and quick loan discovery, and disbursal. Once disbursal is accomplished, lenders can use portfolio monitoring and collection management features, allowing their teams to get more done, in less time.
By leveraging technology to reduce barriers to entry, finance players in India can come together in ways that are beneficial not only to their own bottom lines, but to that of the nation at large. Particularly for Priority Sector Lending, the unserved and underserved in tier 2,3,4 cities, small businesses and farmers, this has the potential to unlock $1 Trillion worth of capital that will go into improving their businesses, their ability to earn and their ability to create value for their communities and the country at large.
It is by unlocking credit and creating these GDP multipliers, that the dream of India Inc is expected to be realized in our lifetimes.Moneycontrol journalists were not involved in the creation of the article.