Banks, especially private sector ones, are becoming increasingly cautious in signing multiple co-lending partnerships with non-banking finance companies (NBFCs) and fintechs on account of concerns related to technology integration and underwriting policies, senior bankers say.

Yes Bank MD, CEO Prashant Kumar, said the lender has only a small number of co-lending partnerships and that he doesn’t see co-lending partnerships moving in “right direction”.

“...On co-lending there has been a concern. There are issues on IT integration, credit underwriting procedure, so I think as an industry we have not seen significant progress on co-lending front...,” he said in a post earnings call last month. Yes Bank’s advances were up 12 per cent year-on-year (y-o-y) at ₹2.35 lakh crore as on September 30. Most lenders do not share the amount of loans extended under co-lending partnership with partner NBFC and fintechs.

However, rating agency Crisil had in April said that NBFCs’ co-lending assets under management (AUM) were nearing ₹1 lakh crore after 5 years of the model coming into being. At that time, about 45-47 per cent of overall loans were estimated to be unsecured personal loan or unsecured MSME loans in nature. Considering the stress in these segments over the past 6-9 months, there has been concerns over such loans, and co-lending volumes are likely to slow down in the current fiscal, said Ajit Velonie, Senior Director at Crisil Ratings.

Under the co-lending arrangement, a bank is permitted to co-lend with all registered NBFCs, including housing financiers, based on a prior agreement. A loan will be partially booked in bank’s balance sheet with the balance share in co-lending partner books. NBFCs shall be required to retain a minimum of 20 per cent share of the individual loans on their books.

Underwriting concerns

A senior official at another private sector bank said the lender is going slow on co-lending partnerships, with only one-two active partnerships.

“We are very careful as you first need to have appetite and we do zero co-lending partnership for unsecured loans. We prefer it only for secured products. Even in secured loans, we are very vigilant. We start small, evaluate the partner, and ensure that only our underwriting policies are being used for loan sanctions,” the official said.

The bank is also conducting random checks on underlying processes and securities being used for extending loans under such partnerships.

“NPA recognition is very important. Evergreening opportunities can be little bit more pronounced as bank is not directly dealing with the borrower. We are not in favour of having co-lending partnerships with many NBFCs as it is very cumbersome to conduct regular reviews,” he said, adding that public sector lenders continue to dominate the co-lending partnership space.

Common lending policy needed

According to sources, seeing the surge in co-lending partnerships at public sector banks (PSBs), the Department of Financial Services (DFS) had set up a committee led by State Bank of India to assess the efficiency of co-lending partnerships.

A source in SBI confirmed the development, saying the bank along with other committee members, have submitted recommendations to the DFS on common policies that lenders must adopt to enter into co-lending partnership.

“Co-lending is a relatively new and good model, but different lenders are following different underwriting practises. There is uniformity required in the model and we have submitted report to the DFS on steps that can be taken to ensure uniformity,” the source said.

Velonie from Crisil shared similar views. He said that co-lending is a win-win model for both banks and NBFCs as NBFCs are able to access banks’ low cost of funds and the bank is able to grow their loan book.

“The challenge in this model is on tech integration and ensuring that banks have full control and high visibility over the end-to-end loan origination to collection to closure process,” he said. “Second thing is about getting approval for underwriting policy. We do think that with tech related integration, it is actually easier for both partners to know and decide the loan sanction parameters. Herein both parties can not only jointly agree on underwriting parameters but also make course corrections quickly. This will boost confidence in the model,” he added.

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