How Co-lending is changing India’s credit landscape

In bridging this credit gap, India’s fintech sector has emerged as a game-changer. Supportive government policies and technological innovations allowed lenders to now create customized financial products at lower costs, making them more accessible to a broader population.

The digital lending sector in India has witnessed extraordinary growth, with its value increased from $9 billion in 2012 to $110 billion in 2019. Dominated by fintech startups and non-banking financial companies (NBFCs), this sector is projected to reach a staggering $350 billion by 2023.

In 2018, the Reserve Bank of India (RBI) introduced a framework for co-origination by banks and registered NBFCs, later renamed the “co-lending” model (CLM) in 2020. This model offered operational flexibility to lenders while ensuring adherence to regulatory norms, such as KYC and outsourcing. Importantly, it recognized the substantial liquidity reserves held by India’s public-sector banks (PSBs).

By the end of 2021, bank credit in India reached an impressive $1.56 trillion. To expand credit, it is crucial to tap into this vast liquidity pool. New-age lenders can benefit from lower leverage, allowing them to experiment, develop new products, and manage cash flows more effectively, making them resilient to economic shocks.

The co-lending model has evolved into an effective strategy to manage liability efficiently. By partnering with established banks, new-age lenders can scale products while maintaining healthy revenue models. This collaborative approach ensures compliance and customer protection.

For co-lending to succeed, new-age lenders must uphold the same standards of compliance and regulatory oversight as traditional banks. This commitment helps prevent regulatory issues and ensures the stability of products and structures.

Co-lending partnerships benefit everyone involved. Larger lenders can offer more affordable credit, while leveraging technology for seamless operations, including alternative data usage, real-time processes, and automated KYC. This synergy enables financial inclusion by extending loans to underserved individuals who may lack a credit history.

With India’s rapid growth in cellular broadband and digital access, the country is poised to generate immense economic value from the digital economy. The co-lending model plays a pivotal role in this transformation, unlocking trillions of dollars in dormant capital and ensuring that the benefits of financial inclusion reach every corner of the nation.

In the years ahead, India is set to overcome its liquidity challenges with the co-lending model. Strong incentives will encourage financial institutions to collaborate and meet the growing demand for credit, ultimately empowering individuals and contributing to India’s economic growth. The journey toward financial inclusion and economic prosperity continues.