How co-lending can boost credit flow to SMEs

Can co-lending boost the credit flow to one of the most important contributors to India’s economic and social growth, that is, the country’s MSME sector? The industry’s growing significance may be traced back to the GDP and exports it provides for the country. The International Labor Organization did a survey, and the results show that MSMEs are responsible for more than 70% of the world’s jobs and 50% of the world’s GDP.

But, did you know that in FY21, over half of all MSMEs in India saw a decline in revenues of over 25%, and 67% of MSMEs in India were temporarily shut down for three months or more?

It’s only due to the lack of easy access to credit that makes it difficult for small businesses to navigate the fluctuating market dynamics. In this article, we look at how co-lending can help SMEs with an uninterrupted flow of working capital.

Key takeways 

1. Who helps MSMEs?

2. Are NBFCs able to meet the growing demand for loans?

3. What role does co-lending play?

4. How does co-lending help SMEs to become “Atmanirbhar”

5. What are the other benefits to co-lending?

So without any further delay, let’s dive into co-lending and how it can help MSMEs in India.

1. Who helps MSMEs?

In this case, NBFCs, especially digital lenders, continue to be the main source of new credit for the retail and MSME markets in the country that aren’t well served. PWC found that NBFCs were able to increase their loan books by more than 18% because they knew a lot about their ideal clients, used technology in new ways, managed their resources well, and came up with unique ways to lend money to people who needed it the most.

2. Are NBFCs able to meet the growing demand for loans?

In spite of the fact that NBFCs play a crucial role in alleviating the plight of small and medium-sized enterprises (SMEs) in the credit crisis, many NBFCs find themselves in a precarious position with respect to capital availability. The Reserve Bank of India (RBI) updated its framework for co-lending of loans in 2018 into a more flexible framework of co-lending model (CLM) in 2020 to mitigate the impact of the pandemic on vulnerable segments of society. This was done with the objective of boosting the flow of credit to underserved areas of the economy (particularly MSMEs).

3. What role does co-lending play?

Co-lending allows financial institutions (FIs) and non-bank financial companies (NBFCs) to pool resources and capitalize on synergies to benefit all parties involved in the lending process. From the perspective of the client, these arrangements expedite the loan disbursement process and increase the availability of funds. Banks gain last-mile reach, access to new product lines, speed of execution, and strength in collections, while NBFCs are able to compete on pricing.

4. How does co-lending help SMEs to become “Atmanirbhar”?

Without assisting a vital and significant portion of the Indian economy, the MSMEs, India’s dream of becoming “Atmanirbhar,” cannot be realized. That’s why co-lending allows non-bank financial institutions (NBFCs) to work with traditional financial institutions (banks) to provide credit to underserved priority sectors. The Reserve Bank of India requires NBFCs to keep at least 20% of these loans on their books as collateral. By FY23, it is expected that approximately Rs 300 billion will have been disbursed as a result of this symbiosis. India has a lot of non-bank financial companies (NBFCs), which may be why this system has made it easier for people to get loans and increase liquidity. Banks would be able to increase their geographic reach, while non-bank financial companies (NBFCs) would be able to focus more on customer service and sales. Priority sector standards also require banks to give money to important areas of society like agriculture, small and medium-sized businesses (MSME), and social infrastructure.

5. What are the other benefits to co-lending?

Co-lending is the key to keeping customers around. It’s not just domestic financial institutions that are interested in the co-lending approach. For instance, Standard Chartered Bank and Edelweiss Housing Finance entered into a strategic co-lending of loans against property at the beginning of the year. Edelweiss Housing will make, process, and take care of the loans. It will keep 20% of the loans on its books, while Standard Chartered Bank will keep 80%. Union Bank of India, an Indian financial institution, and Ambit Finvest, a non-deposit-taking NBFC of the Ambit Group that provides loans to micro, small, and medium-sized enterprise (MSME) clients in 11 states, entered into a co-lending agreement on February 28.

The bottom line

Applying digital methods to lending procedures facilitates the distribution of funds to those who need them the most. Personal loans may now be obtained with a few taps on a smartphone screen, through apps that are designed with the borrower in mind. Anybody with a smartphone and five spare minutes can do it. When a digital lender and a bank work together in a co-lending arrangement, customers get the best of both worlds: convenient access to both online and brick-and-mortar locations. If your business needs working capital, you can now apply for a business loan on UpScale by CredAble. We provide both secured and unsecured loans up to Rs. 50 lakhs and require you to only provide your basic business details (including your GST number), your (and your partners’) CIBIL Scores, and your past 12 months’ current account bank statements.