Page 52 - Banking Finance March 2025

ARTICLE

NBFCs can benefit from the technological interventions For NBFCs
and digital penetration of their partner banks. 1. Dependency on Banks: NBFCs may become overly de-
Co lending arrangements allow NBFCs to maximize pendent on banks for funding, which can limit their op-
their potential customer reach and contribute to fill- erational flexibility.
ing the credit gap in the market.
2. Profit Sharing: The revenue from loans is shared with
the bank, which can reduce the profitability for NBFCs
To Consumers
compared to lending independently.
Consumers benefit greatly from this arrangement, par-
ticularly underserved customers who may have limited 3. Operational Burden: NBFCs need to align their pro-
access to credit. cesses and systems with those of the bank, which can
be resource-intensive.
Access to a wide range of loan products and enjoy com-
petitive interest rates.
For Customers
The process is faster as it reduces the turnaround time 1. Confusion and Complexity: Customers might face con-
for loan approvals and disbursements.
fusion due to dealing with two entities for a single loan,
It also plays a crucial role in ensuring the availability of leading to potential miscommunication and delays.
credit in underserved sectors and rural areas.
2. Higher Costs: The blended interest rates and fees from
Creates opportunities for small businesses and individu- both entities might result in higher overall costs for the
als to access affordable finance. borrower.

Co-lending, while beneficial in many ways, also has its dis- 3. Service Issues: Inconsistent service levels between the
advantages for banks, NBFCs, customers and the Indian bank and NBFC can lead to a poor customer experience.
economy. Here are some key drawbacks:
For Banks For the Indian Economy
1. Operational Complexity: Managing co-lending ar- 1. Systemic Risk: Increased interconnectedness between
rangements can be complex, requiring coordination be- banks and NBFCs can lead to systemic risks if one en-
tween different systems, processes and teams. tity faces financial difficulties.
2. Risk of Non-Performance: If the NBFC partner 2. Regulatory Challenges: Ensuring that both banks and
underperforms or faces financial difficulties, it can im- NBFCs adhere to regulatory standards can be challeng-
pact the overall loan portfolio and increase the risk for ing, potentially leading to gaps in oversight.
the bank. 3. Market Distortion: Co-lending might lead to market
3. Regulatory Compliance: Ensuring compliance with distortions if not managed properly, with certain sec-
regulatory requirements for both entities can be chal- tors receiving disproportionate credit while others are
lenging and resource-intensive. neglected.

While co-lending offers many advantages, these potential
drawbacks need to be carefully managed to ensure the
benefits outweigh the risks.

Mitigate risks in Co-lending :
Banks and NBFCs can mitigate risks in co-lending through
several strategies:

1. Robust Credit Assessment
Joint Credit Policies: Develop and adhere to joint
credit policies that outline borrower eligibility, loan
terms and risk assessment criteria.

BANKING FINANCE | MARCH | 2025 | 47