Banks, NBFCs Kick Off Joint Lending To Reach The Unbanked

Joint lending by banks and non-banking financial companies under the central bank’s new model has gathered pace as lenders look to target the unbanked at lower costs.

The Reserve Bank of India, in September last year, released guidelines for commercial banks and non-deposit taking systemically important NBFCs to co-originate loans for creating priority sector assets. Under the model, banks and NBFCs can jointly provide credit to borrowers by sharing credit contribution and risk-reward in an 80:20 ratio.

Several NBFCs and banks have announced partnerships in the last five months:

• Srei Equipment Finance Ltd. with ICICI Bank Ltd., Oriental Bank of Commerce, Syndicate Bank, United Bank of India and Bank of Baroda.
• Paisalo Digital Ltd. with State Bank of India.
• Indostar Capital Finance Ltd. with ICICI Bank.
• Edelweiss Financal Services Ltd. with Bank of Baroda.

Queries emailed to Indostar Capital and ICICI Bank, HDFC Bank Ltd., Axis Bank Ltd. and IIFL Finance Ltd. on their joint lending plans didn’t elicit a response.

Customer Access At Low Cost

The loan facilities and target customers of each of the tie-ups are distinct.

Indostar and ICICI Bank, for instance, will provide small and medium fleet owners loans to purchase used and new commercial vehicles under a joint-lending model, according to a July 3 statement.

Paisalo Digital and SBI said they would provide loans up to Rs 2 lakh to borrowers in Tier-2 and Tier-3 geographies, through a joint-liability-group model where loans will be mainly provided to women in groups of up to six people.

The high cost of operations at a branch doesn’t allow banks to focus on small loans and, therefore, they do not approach the unbanked segment, Paisalo’s Chief Innovation Officer Santanu Agarwal told BloombergQuint.

Operational aspects, such as customer acquisition, underwriting, collections and recovery will be done by them, he said. “By combining the low cost of operations that Paisalo’s platform offers, banks can attract new borrowers and deploy more credit.”

Agreed SBI Managing Director PK Gupta. NBFCs, he said, are nimble and their cost of operation is lower compared with banks. They can reach more places, which we may not find cost effective, he said.

Access To Expertise

The joint lending model, according to Devendra Kumar Vyas, managing director of Srei Equipment Finance, will provide the company’s five banking partners access to domain expertise and knowledge on its customer base in the equipment finance space.

The combined reach and resources of Srei Equipment Finance and the banks can provide customers with customer-driven credit solutions, while providing borrowers with access to new-age banking products, Vyas told BloombergQuint.

A spokesperson for Srei Equipment Finance said in an emailed response they have reviewed over 500 loan proposals and more than Rs 200 crore has been sanctioned to date under the co-origination programme.

Lenders believe that this can help them offer better solutions.

The co-origination model will help deliver better solutions to borrowers, KP Singh, head of MSME lending at Bank of Baroda, told BloombergQuint, adding that they are in talks with a few other NBFCs for partnership. “At the same time, we will attract new customers in lending segments where we haven’t been aggressive in the past.”

Bank of Baroda, through its tie-up with Edelweiss Finance, is targeting MSMEs where smaller-sized loans will be split in 80:20 ratio between the bank and Edelweiss.

The share of disbursements for larger ticket-size loans to mid-corporates would be decided on a case-to-case basis, said Mehernosh Tata, head of SME lending at Edelweiss.

“For NBFCs, this translates into a lower cost of funding loans,” Tata said. “Priority sector MSMEs will benefit greatly as the blended interest rate will be lower, assisting them through a significant reduction in interest rates for their borrowings.”

Traditional banks have been wary of lending to MSMEs, but since NBFCs have a proven track record of customer acquisition and assessment, this model can help banks tap new customers in the segment that they can’t reach on their own under regular business operations, he said.

Integrating Technology, Operations

According to the RBI’s guidelines, both the lending partners will have to open a common account, similar to an escrow account, for pooling their contributions towards a specific loan.

Agarwal said circle-specific escrow accounts will need to be created for disbursing loans and collecting repayments from borrowers. Under the co-origination model with SBI, he said loan disbursements have already begun in Delhi, Lucknow and Maharashtra circles, but only on a manual basis.

Srei Equipment Finance plans to solve this by employing iQuippo, a digital marketplace for commercial equipment. The platform will be used by lenders for loan origination, collections, auction of equipment and valuing them.

Operational issues in the form of technology integration would pose a temporary challenge, the heads of the financial institutions cited earlier said. They expected the integration to be completed within the next two months, if not earlier.

There are other challenges too.

Singh of Bank of Baroda said operational aspects related to synchronising of accounting principles exist as banks and NBFCs follow different accounting frameworks and procedures.

Still, Jinay Gala, senior analyst at India Ratings and Research, said it’s a win-win situation for banks and NBFCs. Banks, he said, can benefit from the reach and specialised knowledge of NBFCs, whereas NBFCs will benefit from cheaper funding.

During initial stages of the joint lending programme, there would be moderate profitability for NBFCs, Gala said, as they need to invest in sourcing, underwriting and collections processes. “Margin improvement for the NBFCs, largely fintechs, depends on scaling of the co-lending channel, which would help in rationalising operating expenses.”