The lending industry is continually evolving, and co-lending has emerged as a transformative model. Co-lending allows financial institutions to collaborate, extending greater financial support to individuals and businesses. When a borrower needs a larger loan than a non-banking financial company (NBFC) can offer on its own, these institutions partner with others to enhance their lending capacity and mitigate risk. This collaborative approach enables them to provide more substantial loans while sharing the associated risks.
Read on to learn more about the meaning of co-lending, its pros and cons, how it works, and other important information.
What Is Co-Lending?
Co-lending is a financial arrangement where multiple lenders collaborate to provide loans to borrowers. This model is particularly beneficial when individuals or businesses require larger loan amounts. By working together, lenders can expand their lending capacity and distribute the associated risks. The terms and conditions of these loans are agreed upon by all participating lenders. Co-lending is commonly applied to real estate, Personal Loans, and Business Loans.
The co-lending model combines the resources of multiple lending entities to approve larger loans for both individual and corporate borrowers. When a borrower applies for a Personal Loan through a co-lending platform, the lenders evaluate the borrower’s risk and creditworthiness using data and advanced algorithms. Once approved, each lender provides their portion of the loan, which is then transferred to the borrower’s account.
Co-Lending Guidelines
The co-lending model allows for a collaborative lending approach between banks and NBFCs. The following key terms outline the framework for this lending arrangement:
Development and Regulatory Policies Statement: Previously, only certain NBFCs were allowed to co-lend loans. Under this statement, all registered NBFCs are now allowed to follow this lending model.
80-20 Split: Banks and NBFCs should distribute an 80:20 capital deployment ratio, where the bank typically takes 80% of the loan amount and the NBFC retains at least 20%. However, this ratio can vary based on agreements between the parties involved.
Joint Underwriting: As both entities are interested in the deal, they must jointly underwrite to ensure double checks. Both parties assess credit risk based on their respective criteria.
Risk-Return Split: The 80:20 split for capital deployment also leads to a risk and return split between both entities.
Final Interest Rate: Since banks have a lower cost of capital than NBFCs, the final interest rate passed on to customers is usually more affordable.
Defined Roles: Usually, the NBFC handles sourcing, product innovations, customer experience, quick documentation, and fast turnaround time, while the bank is responsible for providing cheaper funds and building credibility.
The co-lending model benefits different entities in different ways. Here is a detailed look:
To NBFCs
Lower Interest Rates: Since banks can access cheap funds, NBFCs can benefit from lower interest rates by entering a co-lending agreement.
Reduced Overall Cost: NBFCs can extend loans at a lower overall cost due to partnerships with other lenders.
Brand Recognition: The NBFC builds a sustainable reputation in the market by partnering with a renowned financial institution.
To Consumers
Lower Cost of Borrowing: The NBFCs pass on their cost savings to borrowers, making obtaining loans cheaper.
Better Customer Experience: The application process becomes smoother with the co-lending method, allowing customers to obtain loans without hassle.
What is the Future of Co-Lending?
Co-lending is an innovative method that has gained popularity in the finance industry. As more lending institutions understand and adopt this approach, it is expected to gain even broader recognition. Here are a few points explaining the future of co-lending:
Blockchain Technology: One potential development in the method is the adoption of blockchain technology. It provides a transparent platform to make the process more cost-effective and efficient. Additionally, blockchain reduces the risk of fraud, increasing the trust among borrowers and lenders.
Artificial Intelligence: Another potential development in co-lending is the use of Artificial Intelligence (AI). It helps loan providers evaluate an applicant’s creditworthiness, reducing the default risk significantly. Additionally, it helps lenders identify risks in time so they can take proactive measures to mitigate them.
Infrastructure of Co-Lending
Co-lending has a robust infrastructure with escrow accounts. Here is an overview:
NBFCs form partnerships with banks to provide loans jointly.
The collaboration between the parties shares the loan's risks and profits, resulting in a smoother customer experience.
Partnership with two entities provides easy funding to borrowers who could not secure a loan otherwise.
Some aspects to consider in potential co-lending partners include the following:
Risk Appetite: The potential partner’s risk-taking capacity is important to match.
Focus Area: Some loan providers are sector-specific or provide loans to particular target groups only. When entering into an agreement, both partners should have similar focus areas.
Loan Amount: Both parties must agree upon an average loan amount to avoid future disparities.
Advantages of Co-Lending for Large Personal Loan Amounts
The co-lending model is highly beneficial when sanctioning large Personal Loans. Read on to learn how:
Risk Sharing: The risk of lending gets distributed among multiple loan providers, making the loan deal more attractive with less risk.
Increased Financial Capacity: By partnering with other lending institutions, lenders can increase their capacity and approve larger loans. Borrowers can also obtain more funds with the co-lending model.
Lower Interest Rates: Since lenders can offer better interest rates due to the lower risk involved, borrowers can benefit from a reduced loan cost.
Step 1- Visit the Hero FinCorp website or download the loan app
Step 2- Go to the Personal Loan page and click ‘Apply Now’
Step 3- Enter your mobile number and verify with the OTP received
Step 4- Choose the loan amount you need
Step 5- Verify your KYC details to check income eligibility
Step 6- Click ‘Submit’ to complete your application
Once you accept the loan offer, you will get the loan amount in your account.
Conclusion
Co-lending is a mutually beneficial lending model for both financial institutions and borrowers. Those looking for a bigger loan amount may apply for a loan using this model to obtain the loan at lower interest rates.
Frequently Asked Questions
1. What is the minimum holding period for co-lending?
The minimum holding period depends on the type of loan. For non-priority loans, it can be three months to two years.
2. What are co-lending challenges?
Different risk perceptions, slower model acceptance, and lack of technological integration are some common co-lending challenges.
3. What types of loans can be co-lent?
Lending institutions can form partnerships to lend various types of loans, including Home Loans, Personal Loans, and Business Loans.
4. How does co-lending affect loan terms and interest rates?
Since co-lending reduces the lender’s risk, they can approve bigger loans at lower interest rates for longer terms.
5. How are loan repayments handled in co-lending?
In the co-lending model, loan repayments are handled through various methods, such as an escrow account, individual accounts, shared statements, and repayment sharing.
6. How does the co-lending model help the lender?
The co-lending model helps lenders reduce risks, diversify their portfolios, expand their customer base, and enhance their market reach and stability.
7. How does the co-lending model work?
In the co-lending model, at least two finance companies collaborate to provide larger loans to individual or business customers. They share the risks and rewards equally to ensure mutual financial exposure and benefits.
8. How does the co-lending model help the borrower?
Co-lending helps a borrower borrow a larger loan amount at lower interest rates.
9. Can banks lend to NBFCs?
Banks can lend to NBFCs through co-lending, fund schemes, or priority sector lending.
10. How can NBFCs raise funds for lending?
NBFCs can raise funds for lending through co-lending, issuing securities, accepting deposits, or borrowing from other finance companies.
11. What are some examples of NBFCs?
Hero FinCorp is an example of an NBFC that offers different loan products at competitive interest rates.
12. What are the different types of co-lending models?
Co-lending models can apply to various types of loans, including Home Loans, Personal Loans, Business Loans, and Vehicle Loans. Each model leverages multiple lenders to provide larger loan amounts and share risks.
Disclaimer: The information provided in this blog post is intended for informational purposes only. The content is based on research and opinions available at the time of writing. While we strive to ensure accuracy, we do not claim to be exhaustive or definitive. Readers are advised to independently verify any details mentioned here, such as specifications, features, and availability, before making any decisions. Hero FinCorp does not take responsibility for any discrepancies, inaccuracies, or changes that may occur after the publication of this blog. The choice to rely on the information presented herein is at the reader's discretion, and we recommend consulting official sources and experts for the most up-to-date and accurate information about the featured products.
Katyaini is a finance expert with a focus on the non-banking financial sector, bringing over 8 years of experience in NBFC. She specializes in simplifying complex financial concepts for readers, helping them navigate the NBFC landscape. Outside of work, she is passionate about travelling.
