Page 43 - Banking Finance June 2025

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To NBFCs dependent on banks for funding, which can limit their
NBFCs can leverage their expertise in niche sectors and operational flexibility.
reach underserved customers. 2. Profit Sharing: The revenue from loans is shared with
Partnering with banks grants NBFCs access to lower- the bank, which can reduce the profitability for NBFCs
cost funds and a wider customer base. compared to lending independently.
This enables NBFCs to offer competitive interest rates 3. Operational Burden: NBFCs need to align their
and customized loan products, enhancing credit flow processes and systems with those of the bank, which
to priority sectors and supporting financial inclusion can be resource-intensive.
initiatives. For Customers
NBFCs can benefit from the technological interventions 1. Confusion and Complexity: Customers might face
and digital penetration of their partner banks. confusion due to dealing with two entities for a single
Co lending arrangements allow NBFCs to maximize loan, leading to potential miscommunication and
their potential customer reach and contribute to filling delays.
the credit gap in the market. 2. Higher Costs: The blended interest rates and fees from
both entities might result in higher overall costs for the
To Consumers
borrower.
Consumers benefit greatly from this arrangement,
particularly underserved customers who may have 3. Service Issues: Inconsistent service levels between the
limited access to credit. bank and NBFC can lead to a poor customer experience.
Access to a wide range of loan products and enjoy For the Indian Economy
competitive interest rates. 1. Systemic Risk: Increased interconnectedness between
The process is faster as it reduces the turnaround time banks and NBFCs can lead to systemic risks if one entity
for loan approvals and disbursements. faces financial difficulties.
It also plays a crucial role in ensuring the availability of 2. Regulatory Challenges: Ensuring that both banks and
credit in underserved sectors and rural areas. NBFCs adhere to regulatory standards can be
challenging, potentially leading to gaps in oversight.
Creates opportunities for small businesses and
3. Market Distortion: Co-lending might lead to market
individuals to access affordable finance.
distortions if not managed properly, with certain
Co-lending, while beneficial in many ways, also has its sectors receiving disproportionate credit while others
disadvantages for banks, NBFCs, customers and the Indian are neglected.
economy. Here are some key drawbacks:
While co-lending offers many advantages, these potential
For Banks drawbacks need to be carefully managed to ensure the
1. Operational Complexity: Managing co-lending benefits outweigh the risks.
arrangements can be complex, requiring coordination
between different systems, processes and teams.
Mitigate risks in Co-lending :
2. Risk of Non-Performance: If the NBFC partner Banks and NBFCs can mitigate risks in co-lending through
underperforms or faces financial difficulties, it can several strategies:
impact the overall loan portfolio and increase the risk 1. Robust Credit Assessment
for the bank.
Joint Credit Policies: Develop and adhere to joint
3. Regulatory Compliance: Ensuring compliance with credit policies that outline borrower eligibility, loan
regulatory requirements for both entities can be terms and risk assessment criteria.
challenging and resource-intensive.
Due Diligence: Conduct thorough due diligence on
For NBFCs borrowers, leveraging both entities' expertise and
1. Dependency on Banks: NBFCs may become overly resources.

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