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Technology perception of risk: Co-lending model faces ‘multiple problems’ | Financial news
The interest charging model between banks and NBFCs (non-banking financial companies), introduced by the Reserve Bank of India (RBI) in 2018, is yet to fully take off due to several issues, industry players said.
The reasons include lack of technology integration, different risk perceptions by lending partners (banks and NBFCs) and slowness of larger NBFCs in accepting the model, experts said.
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Co-financing occurs when multiple lending partners enter into an agreement to provide loans to priority sectors such as micro, small and medium enterprises (MSMEs).
In coending, the minimum credit risk of 20% required by the RBI through direct exposure will be on the books of the NBFC until maturity and the balance will be on the books of the bank.
NBFCs had assets under management (AUMs) of nearly Rs 1 trillion, according to a CRISIL report in April 2024.
The Department of Financial Services (DFS) has set up a committee of banks and NBFCs, led by the State Bank of India (SBI), to address issues related to collective lending, credit to MSMEs and curbing the rapid growth of certain consumer loans.
“Technology concerns remain in colending because India does not have many technology players that can integrate with banks and NBFCs,” said Kishore Lodha, chief financial officer at U GRO Capital, an NBFC focused on small and medium enterprises.
“There is also a difference between risk perceptions between creditor partners. When we undertake loans, we declare the risks along with guidance on what the non-performing assets (NPA) would be and the cost of credit and ask our partners to price the risk accordingly,” said Lodha, referring to NPAs.
There are normally two types of co-credit: CLM 1 and CLM 2. In CLM 1, the amount is paid by both creditors simultaneously and therefore requires an integrated system between the partners for real-time processing and compliance with Know Your standards Customer (KYC). .
In CLM 2, which is predominantly used, an NBFC ties up with a peer or larger bank. The loan originates in partnership with the larger partner.
“Technology integration between players takes time, energy and effort. So, very limited transactions have happened strictly as we understand using CLM 1 method,” said Karthik Srinivasan, senior president and group head, financial sector, ICRA Ratings.
The demand for colending arises from medium and small NBFCs and some large ones that do not accept deposits. However, according to industry experts, as banks tighten their liquidity, larger NBFCs should also explore the colending space.
“Based on capital adequacy requirements and the comfort of each industry participant, the choice between on-book and off-book continues to vary. A larger NBFC may be inclined towards on-book AUM while a smaller NBFC may prefer off-book due to capital requirements measured in the co-lending space. So it’s a mix, I would say. The preference for co-financing for smaller players is definitely increasing,” said Chetna Aggarwal, head of co-financing at Vivriti Capital.
“I don’t see any kind of disappointment as far as colending is concerned. In my opinion, co-lending will replace a part of securitisation, which is direct assignment (DSA), in the next three to four years. DSA will be substantially low and banks and financial institutions will resort to co-lending. So all banks are interested in lending and have set big targets for themselves,” Lodha said.
High risk
Technological integration and different risk perceptions affect widespread adoption of the lending model
The industry lacks technology players that can integrate with banks and NBFCs
RBI mandates that 20% of credit risk in loan agreements must remain on the books of NBFCs until maturity
NBFCs manage nearly Rs 1 trillion in co-financed assets, highlighting the sector’s significant involvement
Larger NBFCs have lower demand for co-financing due to access to multiple sources of funding compared to smaller players