Co-lending as a win-win model in transforming the financial landscape

India's journey toward financial inclusion has been one of progress and persistence. Be it interventions such as Jan Dhan Yojana or a surge in digital payment adoption, such initiatives have brought millions closer to formal finance. Yet, many underserved groups, particularly Micro, Small and Medium Enterprises (MSMEs), face barriers when accessing institutional credit.

The numbers tell the story—of the total MSME debt demand of $1,544 billion, 47% remains unaddressed. Formal sources cover only $289 billion of the remaining demand, leaving a massive gap in funding for these critical drivers of the economy. This highlights an urgent need for collaborative financial solutions to ensure equitable access to credit and unlock their true potential.

As a solution, a co-lending model emerged as a powerful mechanism to enhance financial inclusion and expand credit access. This approach involved collaborative arrangements where multiple entities join forces to provide loans to borrowers. Partnerships typically involve traditional banks working alongside NBFCs or fintechs, creating a synergy that combines the bank's capital resources with the co-lender's extensive customer reach, technological innovations, and superior service delivery.

Going back, the original co-lending model 1 (CML1) involved a complicated process where customers had to be onboarded by two separate entities. This was refined with the introduction of CLM2 to serve sectors like MSME lending better. In this model, the NBFC identified borrowers and financed the loan.

After disbursement, it presented the loan to the bank, which reimburses a portion (typically 80%) and adds it to its balance sheet. The NBFC continues managing the customer experience and repayment collection. The biggest benefit is that both parties share the risks and rewards according to their agreement.

A triple win 

In 2023, the co-lending industry lent an estimated INR 470–520 billion, and this figure is set to grow fivefold, reaching around INR 2,000–2,500 billion over the next five years. This impressive growth is driven by the model's many benefits to all stakeholders involved.

For NBFCs, partnering with banks opens doors to cheaper capital and a broader customer base, allowing them to offer competitive interest rates. For banks, co-lending offers an opportunity to expand their reach into underserved regions and untapped markets, such as electric vehicle financing, unsecured MSME loans, and loans for agriculture. 

With this, integrating technologies like robotic process automation (RPA) is instrumental in further enhancing efficiency within the co-lending ecosystem. By automating the coordination of data, documentation, and workflows, RPA reduces manual errors, speeds up turnaround times, and ensures seamless operations.

Finally for customers, the benefits are clear—due to innovations from NBFCs and fintechs, their experience is personalized and seamless. Access to formal credit helps improve their credit scores and opens the door to more favorable loan terms in the future, making it a win-win for everyone involved.

Future opportunities for growth

The co-lending ecosystem in India holds great potential but is still in its early stages. While it presents a unique opportunity to bridge the credit gap and drive financial inclusion, there are challenges to overcome, particularly with technological integration, which requires significant time, effort, and expertise. Another barrier is the slower adoption of the model by larger NBFCs, which already have access to alternative funding sources.

As a result, co-lending has mainly attracted smaller NBFCs, along with a few large non-deposit-taking NBFCs that are more reliant on external funding. However, as banks tighten liquidity, the industry believes that even larger NBFCs will begin to explore co-lending partnerships, creating new growth opportunities.

Another exciting aspect to look for in co-lending is its potential to enhance the efficiency of the digital lending market, which is evolving rapidly and is expected to reach $515 billion by 2030. This can have a game-changing impact on Indian entrepreneurs. With the regulatory framework now in place, capital can flow seamlessly through digital channels, unlocking a wealth of opportunities for business owners nationwide.

Hence, the co-lending model 2 presents a transformative opportunity to reshape India's financial ecosystem, driving growth and inclusion. By leveraging the strengths of both fintech-driven NBFCs and banks, this model creates a powerful synergy that can enhance access to credit, particularly for underserved sectors like MSMEs. As the model evolves, it holds the potential to stimulate economic growth and uplift priority sectors. If implemented effectively, as envisioned by the RBI, co-lending could be the key catalyst for addressing the country's long-standing financial challenges.

By Arun Poojari, CEO & Co-Founder, Cashinvoice