The Reserve Bank of India (RBI) has established a 'co-lending model' that allows banks and non-banking financial companies (NBFCs) to jointly provide credit for the priority sector, sharing risks in an 80:20 ratio. The model aims to enhance credit flow to underserved segments by leveraging banks' lower costs and NBFCs' distribution reach, although challenges in system integration and execution have hindered its initial rollout. Moving forward, the model is expected to facilitate credit delivery for small businesses and rural areas, with recent co-lending agreements indicating increased interest from major lenders.

2. The ‘Co-Lending ModeL’
RBI issued updated guidelines on ‘Co-Lending Model’
vide his circular FIDD.CO.Plan.BC.No.8/04.09.01/2020-21
in November 05, 2020
In September 2018, the RBI had announced “co-
origination of loans” by banks and Non-Banking Financial
Companies (NBFCs) for lending to the priority sector.
“The arrangement entailed joint contribution of credit at
the facility level by both the lenders as also sharing of
risks and rewards”, the RBI said.

3. The ‘Co-Lending ModeL’
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. To put it
simply, under this arrangement, both banks and NBFCs
share the risk in a ratio of 80:20 (80 percent of the loan with
the bank and a minimum of 20 percent with the non-
banks).
The banks can claim priority sector status in respect of
their share of credit while engaging in the CLM adhering to
the specified conditions.

4. How does a co-lending model work?
The Reserve Bank of India (RBI) had come out with the co-
origination framework in 2018 allowing banks and NBFCs to
co-originate loans. These guidelines were later amended in
2020 and rechristened as co-lending models (CML) by
including Housing Finance Companies and some changes in
the framework.
The primary aim of CLM is to improve the flow of credit to
the unserved and underserved segment of the economy at
an affordable cost. This happens as banks have lower cost
of funds and NBFCs have greater reach beyond tier-2
centres.

5. How does a co-lending model work?
As per RBI norms, a minimum 20 percent of the credit risk by
way of direct exposure shall be on 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.
This joint origination allows banks to claim priority sector
status in respect of their share of credit. NBFCs act as the
single point of interface for the customers and a tripartite
agreement is done between the customers, banks and NBFCs.

6. What took so long for
co-lending to take off?
On several occasions, the Ministry of Finance has pushed for PSU banks to
adopt co-lending models. Some of the PSU banks in the initial days had tied
up with large non-banks. For instance, SBI had tied up with ECL Finance, a
subsidiary of Edelweiss Financial Services in September 2019.
But some of these tie-ups didn’t take off as expected. According to bankers,
banks and NBFCs both are open for these kinds of tie-ups but the challenge
was in execution at ground level.
Some of the main hurdles were IT integration of systems as both banks and
NBFCs would operate on different systems, different underwriting processes
and parameters. All of these took a lot of time to solve for the marriage to
happen.

7. What took so long for
co-lending to take off?
Amit Sharma, MD & CEO, Satin Housing Finance Limited, said, “Beyond
technology challenges, longevity of the relationship is yet to be seen.”
The co-lending model is still in the nascent stages and one may enter
into an agreement but over a period of time the relationship should
sustain, Sharma added.
A senior banker with a private sector bank explained that most of
these arrangements are with NBFCs that have sizable distribution but
are low on capital. Most of the mid-sized well-rated NBFCs still opt for
term loans over entering into co-lending models, given the
complexities around integration and processes.

8. What are the opportunities?
The co-lending model if it takes off and is
executed rightly will ensure delivery of credit to
the unserved and underserved, said a senior
executive at a mid-sized NBFC.
The real gap of credit exists with the segments
such as small and medium businesses, credit to
lower and middle-income groups, rural areas,
etc., he added.

9. What are the opportunities?
The opportunity can be taken up by digital lending
start-ups and mid-size NBFCs, and they can actually
marry their strength of distribution with bank’s
funds, Sharma said.
As banks are flushed with funds, they can cater to
vast customers as NBFCs have reach in tier-3 and
tier-4 cities. On the execution side, it really needs to
be tested at ground level, Sharma adds.

10. What is the way forward?
According to experts, to address the huge credit gap the co-lending
model is one of the right ways to go forward, but challenges around
tech integrations and ground-level executions should be addressed.
The country’s largest lender, SBI, recently said it is actively looking at
co-lending opportunities with multiple NBFCs / NBFC-MFIs for
financing farm mechanisation, warehouse receipt finance, farmer
producer organisations (FPOs), etc., for enhancing credit flow to
double the farmers’/individuals’ income.
The bank entered into a co-lending agreement with Vedika Credit
Capital Ltd (VCCL), Save Microfinance Pvt Ltd (SMPL) and Paisalo
Digital Ltd (PDL).

11. What is the way forward?
Finance Minister Nirmala Sitharaman in her recent visit to
Mumbai in August met MDs of PSU banks. She said that the focus
should be towards credit growth to support MSMEs and
underserved segments.
In her interaction with state-run banks, Sitharaman emphasised
the necessity of making the co-lending model work to enhance
affordable credit to MSME and retail sectors.
According to experts, as the economy recovers coupled with pent-
up demand, these kinds of models will evolve and grow to fulfil
the credit requirements of the priority sector segments.