Co-lending, a collaborative effort between banks and non-banking financial companies (NBFCs), has emerged as an important mechanism to address the liquidity challenges faced by the unbanked and underserved segments of the economy. The history of co-lending dates back to the introduction of co-origination of loans by banks and NBFCs in 2018. Early partnerships, such as the agreement between ICICI Bank and Small Business FinCredit India in January 2019, have marked the start of the co-loan. loans in the Indian financial landscape. Since then, the co-lending model has continued to recognize the untapped potential of banks, which have significant liquidity reserves. As this ecosystem strengthens, it is expected to bridge the gap between affordability and the MSME ecosystem in India. Subsequent tie-ups between major financial institutions, including the Edelweiss Group, the Central Bank of India and the Bank of Baroda, have illustrated the growing dynamics of co-lending, reflecting its growing importance in stimulating credit flows to the MSME sector.

The unforeseen pandemic and subsequent lockdowns severely impacted the MSME sector, with 67% of MSMEs temporarily closing their doors for three months or more in FY21, and more than half of all MSMEs experienced a drop of more than 25% in their income. In response, the RBI amended the 2018 co-origination framework in 2020 to create a more flexible model, which has since shown promising results. Co-lending has emerged as a solution to alleviate the liquidity crisis and is expected to play an important role in promoting financial inclusion and reducing regional disparities. For banks, partnering with NBFCs allows them to lend more funds to various sectors and regions.

Understanding the regulatory framework and operational aspects of co-lending is essential to understanding how it works. The key features of the co-lending model (CLM), as outlined by the RBI, include scope, customer issues, risk-reward mechanisms and 80-20 split. These features are intended to improve the flow of credit to unserved and underserved sectors of the economy. The impact of joint lending on the MSME sector has been substantial, with significant disbursements under joint lending arrangements. In FY22, disbursements reached nearly ₹5,000 crore through co-lending partnerships. The exponential growth of these partnerships and substantial disbursements reflect the growing importance of the model in driving credit flows to the MSME sector.

According to a recent study by Ernst and Young, India has nearly 64 million MSMEs, surpassing China (44 million) and the United States (32 million), demonstrating the great potential to contribute to India’s GDP . However, credit penetration stands at only 14%, which is the lowest compared to 37% in China and 50% in the United States. This is particularly alarming, especially as the sector faces external headwinds. Economic uncertainty, coupled with a competitive market scenario, could stifle the growth of MSMEs. Establishing a robust co-lending ecosystem could effectively address many of these challenges. Financial inclusion of the unbanked and underbanked population is key to achieving inclusive economic growth in India, and accessibility to credit on demand is one of the crucial elements of this goal.

Although the co-lending ecosystem is extremely promising, it is still in its infancy in India. Issues such as technology integration, different risk perceptions among lending partners and slower acceptance of the model by larger NBFCs need to be addressed diligently. Despite these challenges, the outlook for co-lending is encouraging. It has the potential to improve the efficiency of direct sales agents (DSAs), and the digital lending platform market is expected to reach $26.6 billion by 2028. Regulatory innovation of the co-lending model 2 (CLM2) and its role in combining the strengths of fintech NBFCs with lower cost of funds in the banking system is expected to further boost the growth of joint lending.

To further strengthen the co-lending ecosystem in India, there is an urgent need for better infrastructure. Rapid implementation of digital infrastructure and credit information analytics has boosted lenders’ confidence in expanding credit to MSMEs. Robust technology infrastructure and effective risk mitigation strategies are essential to ensure the sustainable growth and success of co-lending within the Indian financial ecosystem. For this initiative to be successful, products and platforms must be well equipped to handle the hybrid borrowing model. With India’s technological expertise, it is possible to create one of the strongest co-lending ecosystems in the world, increasing credit penetration three times for the Indian MSME sector and setting an example in matters of financial inclusion. As we progress and expand horizontally and vertically, the backbone of our economy will be defined by the success of small businesses alongside large-scale conglomerates. The ripple effect of this ecosystem is immeasurable and cannot be overlooked while creating the vision of “Viksit Bharat 2047”.

In conclusion, co-lending has been a game changer in financial inclusion, addressing the liquidity challenges faced by the unbanked and underserved segments. Continued collaboration between banks and NBFCs is crucial to further expand the reach of joint lending and drive inclusive growth within the financial ecosystem. The transformative potential of co-lending to drive financial inclusion is clear, and its role in addressing the liquidity challenges faced by these segments is paramount.

Opinions are personal. The author is CEO and founder of Lendingkart