Co-Lending For MSME Credit Flow

    MSMEs have emerged crucial for the consumer market during the economy over the past two years in terms of last-mile delivery, community support, and even promoting the use of digital technologies. This occurred in spite of the difficulties they’ve had and still have accessing working capital as a result of the market slump while managing supply and labour chain interruptions, thanks to co-lending options available.

    It is hardly surprising that MSMEs have become a pillar of the global economy, particularly in developing nations like India.

    They struggle to get finance, which limits their ability to deal with turbulent market dynamics, despite the potential they hold and their importance within our economic system. According to a SIDBI poll, 67 per cent of MSMEs in India temporarily closed for three months or more in FY21, and more than half of all MSMEs had a fall in income of over 25 per cent.

    In such a situation, NBFCs, particularly digital lenders, continue to be the primary source of fresh loan disbursals for the underserved retail and MSME markets in the nation.

    The NBFC loan book has increased by about 18 per cent, according to a PWC analysis, driven by a thorough grasp of target client categories, utilisation of technological advancements, lean cost structures, and innovative business models to reach the segments that are in fact, credit-starved.

    Even though NBFCs are so crucial to finding solutions to these problems, many of them are having trouble finding money.

    The Reserve Bank of India (RBI) updated its 2018 framework for co-origination of loans into a more flexible framework of the co-lending model (CLM) in 2020 in order to mitigate the impact of the pandemic on vulnerable sectors of society.

    By utilising the cheaper cost of capital from banks and the wider reach of NBFCs, this was done with the purpose of enhancing the flow of credit to underserved sections of the economy (particularly MSMEs in smaller towns).

    Co-Lending: A Beneficial Partnership

    Co-lending enables banks and NBFCs to work together and leverage their own capabilities to provide a comprehensive service that benefits all value chain participants. From the perspective of the consumer, these agreements enhance access to money and speed up loan disbursement.

    Banks gain from co-last-mile lending’s reach, access to new product lines, speed of execution, and strength in collections while NBFCs may compete on the pricing front.

    There are enormous prospects in this symbiosis, and it is anticipated that nearly Rs 300 billion would be distributed by FY23 alone. This arrangement has increased the number of first-time borrowers in India due to the prevalence of NBFCs in the nation, which has led to much better liquidity as well as credit penetration.

    The RBI has required all banks to lend a portion of their net bank credit (NBC) to a few designated priority economic sectors, even from a regulatory standpoint. Co-lending agreements make it simple for banks to meet the loan sourcing requirements, which helps the economy as a whole.


    Future Consequences

    Although in principle this should prove to be a much-needed boost for the neglected MSME loan market, a sizable number of NBFCs, or digital lenders, have been kept in the dark. In a recent study, the McKinsey Global Institute predicted that by 2025, digital finance will increase the GDP of emerging nations by $3.7 trillion.

    However, due to their younger vintage, the majority of fintech lenders fall within the BBB rating category and do not have public sector banks co-lending along with them.

    Intriguingly, since the NBFC’s balance sheet does not act as an intermediary for these loans, ratings should not be given much weight in such straight on-book arrangements. Due to the PSBs’ ability to exert fine-grained policy control over these co-lending arrangements, there would be an advantage in them adopting graded criteria and a first principles approach.

    Furthermore, the ecosystem-based strategy, which is gaining popularity in the MSME lending market, assists to reduce risk and is thus expected to increase credit flow to the MSME sector. For all areas and economic sectors to benefit from the flow of credit, it is essential to leverage and promote digital financial literacy and lending. 

    For all areas and economic sectors to benefit from the flow of credit, it is essential to leverage and promote digital financial literacy and lending. There is a corresponding need for strong regulatory rules for co-lending partnerships that include digital lenders as this model develops in this economic context.

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