What is co-lending and how does it work?  – Advisor Forbes INDIA
What is co-lending and how does it work?  – Advisor Forbes INDIA

Lending refers to the act of extending money from one party to another for a specific period of time, in exchange for the lender’s future promise to return the money to the lender with interest (usually specified at the time of origination of the arrangement).

“Co” is an abbreviated form of collaboration or, in other words, the coming together of two or more parties for a specific purpose or project. Generally, it is used in its short form “Co” and as a prefix to the actual title of the project to show the partnership between the parties.

Hence, from the two definitions above, we can infer that co-lending refers to the coming together of two or more lenders to lend money together to their target audience.

Co-lending has been around for quite some time in India (2012-2014), but it has recently started to show its potential in the Indian scenario with the rise of fintechs and non-bank financial companies (NBFCs) of the new time. Lending has become the business of the elite and all the big companies want a piece of the pie. However, granting loans requires two essential elements:

  1. Funds – which is not a cheap undertaking for smaller and newer players as they have to raise the funds themselves from a larger entity which in turn comes with its own liability in matter of interests.
  2. Ready consumers – one of the most important steps in granting credit is to find creditworthy customers, as the risk of your loan turning into a bad debt must be minimized.

New players (fintech and NBFC) generally have a larger target audience for loans due to their customer-centric approach and the rise of social media and digital acquisition of potential customers, but they have not not have cheap access to large funds to provide loans to their clients. .

Established players (banks), on the other hand, have a large amount of funds ready to deploy to the right customer group, but their customer acquisition strategy is not updating with digital penetration and they mostly stick to their offline acquisition strategies.

Co-lending helps these two types of entities come together under one lender and leverage their respective synergies to deliver a holistic experience for the benefit of all arrangement stakeholders.

Terms of a co-loan agreement

A co-loan arrangement usually involves the bringing together of two entities – an NBFC and a bank to leverage their respective capabilities. According to the guidelines mandated by the Reserve Bank of India (RBI) for co-lending, here are some of the typical terms of the agreement between the parties:

  1. 80-20 split: Loans are split at an 80:20 capital deployment ratio between the bank and NBFC respectively. This allows the majority of capital to come from banks that have access to a cheaper source (demand deposits) and also allows NBFCs to be the consumer-facing entity that takes care of sourcing and financing. corresponding experience for customers.
  2. Joint subscription: Since both entities have an in-game skin, the subscription is also done jointly, which allows for double checks.
  3. Risk-Return Allocation: The aforementioned 80:20 split for capital deployment also impacts the amount of risk and return that is split between the two entities.
  4. Final interest rate charged: Banks generally have a lower cost of capital and NBFCs generally have a higher cost. Therefore, the final interest rate passed on to customers is usually a combination of the weighted average cost of capital plus their respective fees, which is usually between the interest rate charged by the bank and NBFC individually.
  5. Defined roles: The roles and responsibilities of both entities are clearly defined in a co-loan agreement. Generally, NBFC is responsible for sourcing, customer experience and management, product innovations, fast documentations and quick turnarounds, while banks are responsible for providing cheap funds and establish their credibility.

Advantages of the co-loan

To banks:

  1. Greater range: NBFCs typically have greater reach in more remote parts of the country, underserved target groups, and digital penetration. Thus, banks can benefit from a larger pool of businesses and customers to lend to.
  2. Better customer experience: Both NBFCs and Fintechs have customer centricity as their primary focus and hence the entire process of banking customer management is handled by the modern partner in the arrangement with its smooth and convenient processes, which facilitates conversions and repeat loan opportunities in the future.
  3. Skin in game: Since NBFCs are also required to invest at least 20% of the capital, this reassures a lot of banks about the quality of the customers that are passed on to them and, therefore, the underwriting efforts are considerably reduced for the bank.
  4. Risk management: Due to the distribution of risk between the two partners, banks can benefit from an added sense of security and minimization of losses in case things go wrong.


  1. Minus interest rates: Banks are in the enviable position of having access to the cheapest source of funding in the economy. Therefore, NBFCs can take advantage of a co-loan arrangement to provide loans at lower interest rates than their competitors.
  2. Credibility: New-era businesses looking to enter the lending industry can build brand credibility in the eyes of customers through co-lending partnerships with major banks.
  3. Risk management: Due to the distribution of risk between the two partners and the fact that the banks employ the majority of the capital, NBFCs can reduce losses on their loans in the event of bad debts.

To Consumers:

  1. A better consumer experience: New era partners like fintechs ensure that the customer has the smoothest experience throughout the process, in order to retain them for a long time and cross-sell financial products in the future.
  2. Lower interest rates: Consumers do not need to pay extremely high interest rates just to go through a convenient loan process, because they benefit from significantly lower interest rates thanks to the participation of banks.
  3. Underserved Clients: Traditionally credit-deprived communities in rural areas and people with less credit histories find a good fit in co-lenders as they finally have access to loan products, albeit indirectly, from banks.
  4. Dissemination of knowledge: NBFCs and fintechs offer a personal touch and go the extra mile not only to source, but also to educate the end customer on the terms and conditions of the loan agreement, thus also contributing to the financial literacy of underserved customers.

How to choose the right co-financing partner?

As with any other business partnership, co-loan agreements should also be entered into with the utmost caution, as apart from the obvious financial risk involved, your entire brand image could be affected by the actions of the other party.

Some things potential partners should keep in mind are:

  1. Sector of interest

Some lenders are sector independent, but many of them also focus on a particular sector of the economy or on a particular target group like working professionals etc. Therefore, the similarity of areas of interest becomes important when striking a deal.

  1. Risk appetite

The risk-taking ability and willingness of the potential partner becomes extremely important to match yours, as future disputes over restructuring and bad debts could get ugly if things don’t go as planned.

  1. Ticket size

The average loan amount, along with the broad spectrum, is something that must be agreed upon when entering into a co-loan agreement so that there are no disparities in the future.

  1. Process grades

Some lenders have a particular way of approaching their processes, in terms of documentation, customer engagement, customer service, etc. Therefore, complete clarity about the same before starting the co-loan agreement is extremely important for both parties.

Co-loan demand and opportunities

  1. Loans to underserved and priority sectors

Co-lending has increased liquidity and credit penetration in underserved sectors of the economy like rural areas, MSMEs, among others, due to the wide reach of NBFCs. This is contributing to an increase in the number of new borrowers in the country, thus playing a huge role in bridging the credit gap of around a few trillion rupees that exists.

Even from a regulatory perspective, the RBI has required all banks to lend a portion of their Net Bank Credit (NBC) to certain identified priority sectors of the economy. Co-lending arrangements allow banks to easily meet supply requirements for these loans, which in turn benefits the broader economy.

  1. Reconciliation of banks and NBFCs

When we look at the Indian economy as a whole, banks and NBFCs play an important role in oiling the wheels of the system through a steady flow of funds to the right companies and the right customers, which in turn increases the demand and production of goods and services. Co-lending allows two important pillars of the economy to come together and increase their respective capabilities, which makes the whole process smoother and also expands the target market itself.

This unique arrangement may have huge opportunities in the coming times with an expectation of around INR 300 billion to be disbursed by FY23 itself.

  1. Technological interventions

Co-lending offers the unique opportunity to transform the age-old lending industry into a comfortable and fun experience for the end customer through Fintech-led technology interventions. Banks struggled to modernize their underwriting, documentation and customer support processes, resulting in a loss of 21st customers of the century who are accustomed to financial products at the end of their hand.

With digital financial literacy and credit penetration also being two important areas of government focus, we can expect to see a host of innovations around co-lending arrangements in India.


The co-loan had come a long way from being just a buzzword to being recognized by the RBI and issuing proper guidelines for its implementation in the country. A lot of start-ups and banks have started collaborating with each other to lend in niche segments of the economy and we would only see tech product innovation and lending books increase in time. coming.

However, regardless of the type of lending, co-lending also carries many risks and with NPAs constantly in the spotlight in the economy, co-lending arrangements would also be tested on their robustness and fundamentals at the future.


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