~ Shrishti Sharma
In 2018, the RBI introduced the co-lending model, which was later redefined in November 2020. Banks and non-banking financial companies (NBFCs) then joined forces to pursue financial inclusion by enhancing priority sector lending in India.
At ETBFSI’s NBFC Connect ‘24, industry experts including Vipul Sekhsaria, Co-founder & COO of Kaleidofin; Ashish Mehrotra, MD & CEO of Northern Arc Capital; Mehernosh Tata, CEO of Edelweiss Retail Finance; and Rakesh Kaul, CEO of Clix Capital, convened to explore the potential of co-lending.
Is co-lending cultivating the right opportunities for financial inclusion?
“We see how information asymmetry leads to a lot of gaps between two entities. Scalability and underwriting become challenging. Two entities coming together look if the partnership can get them better risk-adjusted returns, more customers, can the customer benefit from this partnership with better interest rates, more access, a frictionless process,” said Vipul Sekhsaria, Co-founder & COO, Kaleidofin.
They intend to curate robust risk infrastructure to the partner and platform, focused on small businesses.
Ashish Mehrotra, MD & CEO, Northern Arc Capital, stated, “We look at risk on a first principle basis, adding value through the chain. For example, Nu Score as a tool helps to optimise and answer the most important questions: whom, how, what price to lend. Underwriting, validation, disbursal of the obligor across various asset classes”
“We are in the early days but it has helped channel the needed money to MSMEs because the purpose was to serve the underserved. NBFC is the conduit by its way of underwriting and disbursal. Much needed to serve the growth capital and aspirations of entrepreneurs in India,” added Mehernosh Tata, CEO, Edelweiss Retail Finance.
Reflecting on the statistics on credit gap, Rakesh Kaul, CEO, Clix Capital elaborated, “Despite all the efforts in the last several decades, the credit gap is huge. The gap is growing at the CAGR of 12-13%. Through regulations like co-lending, it could be mainstreamed. It has crossed 1 lac crores, CAGR of 35-36%, showing that it has gained critical mass.”
Capital sources in Co-lending dynamics
“We are very well capitalised from shareholders’ fund, we have the opportunity to raise debt from lenders like banks, NBFCs, etc,” mentioned Rakesh Kaul of Clix Capital.
Mehernosh Tata of Edelweiss Retail Finance emphasised, “The co-lending model is a great solution to it, when a bank assesses an NBFC and approves a 300-500 thousand crore loan, it will transfer the money to the NBFC. Here you have an underlying loan which on a loan by loan basis, the bank is also evaluating and giving 80 percent.”
The edge that the partner entity brings in
“Everybody needs to work together. Partner brings the reach into place, because the partner has a limitation of what it can take on its balance sheet, we step in. The biggest challenge is reach or last-mile connectivity to the customer,” commented Ashish Mehrotra of Northern Arc Capital.
Mehernosh Tata of Edelweiss Retail Finance added, “It’s not like “one size fits all”, we keep looking at the strengths that the partner brings in, for example, if the distribution strength is good. We look for strategic and long term, we are into MSME Lending, someone coming and talking about vehicles and gold, we might not be into it even though the opportunity is big. There are digital partners who at points of sale can capture the customers.”
Challenges ahead
“We’ve made considerable progress with CLM 2, while CLM 1 awaits resolution of key components. Our successes are notable in certain asset classes, particularly secured housing. However, there’s ample room for expansion, especially in unsecured small business loans and microfinance. Rather than viewing it as a challenge, we see it as a promising opportunity,” said Vipul Sekhsaria of Kaleidofin.
“For Public Sector Banks (PSBs), some experienced exponential growth, but the test lies in effectively managing the influx of data. As we anticipate serving a larger population, standardisation will be crucial. The demand for compliance is immense, making operations exceptionally challenging,” added Rakesh Kaushal of Clix Capital.
