If you’re in the lending space and haven’t yet explored co-lending, you’re probably missing out on a significant opportunity to expand your reach, reduce risks, and offer more flexible loans.
This innovative model is reshaping the lending ecosystem, offering immense potential to both traditional financial institutions and NBFCs (Non-Banking Financial Companies). While this has been around for a while, it truly took off in 2018 when the Reserve Bank of India (RBI) introduced a framework for the co-origination of loans by banks and NBFCs to serve priority sectors.
But why and how co-lending is an emerging way, and why is it gaining so much traction – let’s get all the answers here.
What is Co-Lending?
Co-lending or co-origination is a collaborative approach where two or more lenders – typically a bank and a non-bank such as Fintech, NBFCs, and more – come together to provide a joint loan to a borrower. This innovative model capitalizes on the strengths of both parties—the agility of NBFCs and the lower cost of capital from banks. This synergy results in more flexible and accessible credit solutions for businesses and individuals.
In India, co-lending has gained immense traction, especially after the Reserve Bank of India (RBI) introduced the Co-origination of Loans model in 2018. This framework was later revamped in 2020 under the name Co-Lending Model (CLM), which emphasized better collaboration, risk-sharing, and operational flexibility between banks and NBFCs.
But what has caused this sudden shift toward co-lending? Let’s break it down.
The first NBFC to support this arrangement was Small Business Finance (SBFC) which co-lend in 2019 with ICICI Bank.
Emerging Trends in Co-Lending
The co-lending space has witnessed tremendous growth due to several factors. First, the need to boost credit to priority sectors, such as agriculture, small and medium-sized enterprises (SMEs), and affordable housing, has driven financial institutions to innovate. Second, the pandemic accelerated the shift toward digital lending, and digital co-lending platforms are now a major force behind this change.
Consider these eye-opening stats:
- As of 2021-22, the co-lending market in India saw a 36% growth, particularly in the rural and semi-urban sectors – Source
- By 2025, the digital lending market is expected to be valued at $350 billion, and co-lending models are a key contributor to this expansion – PwC
These trends reveal that co-lending partnerships are not just a passing phase—they are a revolutionary model set to reshape the future of credit in India.
The Mechanics of Co-Lending: How Does It Work?
- 80:20 Risk Split: The RBI mandates that NBFCs hold at least 20% of the loan risk, with the remaining 80% covered by banks.
- Shared interest rates: The loan is offered at a blended interest rate, calculated based on the respective interest rates of both entities, thus lowering the borrower’s cost.
- Risk and reward sharing: Both institutions split the risks and rewards in proportion to their loan contribution, leading to a fair and transparent process.
As a result, co-lending in India has opened up massive opportunities for reaching underserved customers, particularly in the priority sectors of agriculture, MSMEs, and low-income housing.
Note: The borrowers, however, interact with only one entity, which makes the lending process seamless for them.
What’s even more exciting is the digital co-lending ecosystem. Many NBFCs and banks now use co-lending platforms to streamline this entire process—making loan origination, documentation, and disbursement digital and fast.
This means faster loan processing, improved customer experience, and enhanced credit accessibility for underserved sectors.
Check this: Digital Transformation of Your Lending Business with Lendmantra
The Benefits of Co-Lending
Banks and NBFCs may seem like competitors, but co-lending partnerships show that collaboration can deliver mutual benefits. Here’s how:
1. Shared Risk, Higher Rewards
In traditional lending, a bank or NBFC carries the entire risk of a loan default. With co-lending, this burden is distributed between both institutions, which mitigates individual exposure. Banks benefit from NBFCs’ agility in underwriting and disbursing loans, while NBFCs gain access to low-cost capital from banks.
2. Increased Credit Flow to Underserved Segments
Many small businesses and individuals in India find it difficult to secure credit from traditional banks. Co-lending allows both banks and NBFCs to tap into these high-potential segments. This aligns with the RBI’s priority sector lending initiative, helping banks enter new markets, while NBFCs retain their quick assessment capabilities.
3. Competitive Loan Pricing
One of the standout features of co-lending is the ability to offer borrowers a single blended interest rate. NBFCs and banks contribute at their respective rates, and borrowers enjoy a lower overall cost of credit, fostering financial inclusion. With this model, both banks and NBFCs pass on cost savings to the borrower, making credit more affordable.
4. Improved Loan Origination and Disbursement
Banks traditionally take longer to disburse loans due to extensive checks. On the other hand, NBFCs are quicker but may not have access to the same pool of low-cost funds. Co-lending platforms bring the best of both worlds—quick origination by NBFCs and competitive pricing through banks—ensuring timely loan disbursal and enhanced borrower satisfaction.
5. Leverage Technology for Faster Processes
With digital co-lending, technology enables faster loan disbursement and a more streamlined approach. By using co-lending platforms, both banks and NBFCs can automate much of the loan process—making it more efficient for financial institutions and more convenient for borrowers.
Digital Co-Lending: The Future is Here
For both banks and NBFCs, the future of co-lending is tied to digital transformation. Fintech-powered platforms can use advanced algorithms, data analytics, and AI-driven solutions to assess creditworthiness more accurately, ensure real-time KYC compliance, and speed up loan approvals.
“lendmantra’s dynamic rules engine enables lenders to define customizable loan policies, ensuring that both the bank’s and NBFC’s risk appetites are met while offering personalized credit solutions to borrowers.”
So don’t wait,
This means
- If you’re an NBFC – Then you can enhance credit availability, minimize risk, and unlock access to a broader borrower base – all with co-lending.
- If you’re a bank – co-lending provides an opportunity to enter markets where they traditionally lack reach and agility, particularly in rural areas.
- For borrowers – co-lending offers quicker access to loans, lower interest rates, and more flexible terms, thanks to the synergy between banks and NBFCs.
Co-Lending: The Way Forward
With the rise of digital platforms, AI, and regulatory support, co-lending is well on its way to becoming a mainstay of the Indian financial ecosystem. For NBFCs, this model represents a golden opportunity to expand their reach, offer competitive loans, and manage risk more effectively. As more NBFCs and banks embrace co-lending partnerships, the landscape of credit in India is set for a revolutionary shift.
If you are an NBFC looking to explore co-lending opportunities, now is the time to act. Make the most of this model and bring more value to your customers with seamless, transparent, and cost-effective lending solutions.
Are you ready to explore the co-lending advantage with lendmantra? Reach out to us today to learn more about how we can transform your lending process!
Read more: News & Blog – lendmantra
Frequently Asked Questions :
How does co-lending benefit borrowers?
- Co-lending allows borrowers to access more affordable financing by combining the strengths of both banks and NBFCs (Non-Banking Financial Companies).
- Banks offer lower interest rates, while NBFCs provide greater flexibility and reach underserved markets.
- As a result, borrowers benefit from competitive rates, faster loan processing, and broader availability of credit, particularly in remote areas where traditional banks may not have a strong presence.
What is the role of NBFCs in co-lending?
NBFCs play a crucial role in co-lending by expanding financial inclusion. They typically have a deeper understanding of local markets and a greater presence in underserved regions. In the co-lending model, NBFCs handle customer acquisition, loan origination, and risk assessment, while partnering with banks to access lower-cost funds. This collaboration helps NBFCs offer competitive products to their customers and contributes to the financial inclusion of underbanked communities.
How does co-lending impact the financial sector?
Why should financial institutions and NBFCs consider co-lending? Here are some compelling benefits:
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- Risk Mitigation: By sharing the loan amount, lenders can mitigate risks and reduce their exposure.
- Enhanced Reach: Co-lending allows banks to reach underserved markets through NBFCs’ extensive networks.
- Cost Efficiency: Combining resources leads to cost savings, benefiting both lenders and borrowers.
- Innovation: Co-lending fosters innovation by encouraging financial institutions to adopt new technologies and approaches.
Is co-lending regulated in India?
Yes, co-lending is regulated in India. The Reserve Bank of India (RBI) introduced guidelines under the Co-Lending Model (CLM) to regulate partnerships between banks and NBFCs. These regulations ensure fair lending practices, risk-sharing, and transparency. Under the guidelines, banks must fund at least 80% of the loan, while NBFCs contribute the remaining 20%, with both institutions sharing the risk. The goal is to ensure better credit access while safeguarding borrower interests.
What are the challenges in implementing a co-lending model?
Implementing a co-lending model faces several challenges, including:
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- Operational complexity: Integrating the systems of banks and NBFCs for seamless coordination can be difficult.
- Risk management: Defining clear guidelines for risk-sharing between banks and NBFCs is essential to avoid disputes.
- Compliance: Ensuring that both parties comply with regulatory requirements and maintain transparency can be challenging.
- Technology integration: Harmonizing technological platforms for efficient data sharing, reporting, and loan disbursal is critical for smooth implementation.
- Customer experience: Both institutions must collaborate effectively to provide a seamless experience for borrowers.
What is the difference between co-lending model 1 and 2?
- In India, co-lending is regulated under two different models: Model 1 and Model 2. Here’s a breakdown of the differences:
- Co-Lending Model 1 (CLM 1):
- Simultaneous Lending: In this model, both the bank and the NBFC jointly contribute their respective shares (usually 80% from the bank and 20% from the NBFC) at the time of loan disbursal.
- Loan Origination and Maintenance: The loan is originated and maintained by both parties, with each keeping their respective share on their books.
- Risk Sharing: Both the parties share the risk as per their agreed terms.
- Co-Lending Model 2 (CLM 2):
- Direct Lending by NBFCs: In this model, the NBFC disburses the entire loan to the borrower and is solely responsible for loan origination, disbursal, and servicing.
- Bank Reimbursement: After disbursement, the bank reimburses up to 80% of the loan to the NBFC, and the bank then keeps its portion on a back-to-back basis.
- Priority Sector Lending: The bank’s share of the loan helps it meet priority sector lending (PSL) targets, without directly handling origination or servicing, while the NBFC expands its outreach to sectors typically dominated by larger banks.
- Key Differences:
- Loan Disbursal Timing: In CLM 1, both parties disburse at the same time, while in CLM 2, the NBFC disburses first, and the bank reimburses later.
- Role in Priority Sector Lending: CLM 2 allows banks to meet their priority sector lending targets without being directly involved in loan origination or servicing.
- Co-Lending Model 1 (CLM 1):
