In 2018, the Reserve Bank of India (RBI) introduced the co-origination framework, allowing banks and NBFCs to co-originate loans. This was seen as a way to increase lending to small and medium enterprises (SMEs), which are the backbone of the Indian economy. The guidelines were later amended in 2020 and rechristened as co-lending models (CML) by including Housing Finance Companies and some changes in the framework.
The co-lending model has been gaining popularity globally as a way to increase lending to small businesses. In India, the SME sector is the key driver of economic growth and employment, so the co-lending model is seen as a way to support this important sector.
So, what exactly is co-lending? And why is it gaining popularity? Let’s take a closer look.
What exactly is co-lending?
Co-lending, also known as syndicated lending, is a type of loan where two or more lenders provide financing for a borrower. This is done in order to diversify the risk of the loan and to increase the amount of capital available to the borrower. Co-lending can be used for a variety of purposes, including business loans, real estate loans, and student loans.
There are a few key benefits to co-lending. Firstly, it allows borrowers to access more capital than they would be able to form a single lender. This is because each lender is only putting up a portion of the total loan amount, so the borrower can get financing from multiple sources. Secondly, co-lending can help to diversify the risk of a loan. This is because each lender is only exposed to a portion of the total loan amount, so if one lender defaults on the loan, the other lenders are still responsible for their portion of the loan. Thirdly, co-lending can help to improve asset quality. This is because all loans made through co-lending must be made on a secured basis, which reduces the risk of default. Fourthly, co-lending can make lenders more accountable. This is because all loans made through co-lending must be made through registered entities, which are subject to greater regulation and oversight.
Overall, co-lending is an efficient way to diversify portfolios, improve asset quality, and make lenders more accountable. It is no wonder that this type of lending is gaining popularity globally.
Why was co-lending required?
Lending in India has traditionally been a slow and cumbersome process, often taking weeks or even months to complete. This was due in part to the lack of transparency and coordination between lenders, as well as the complex web of rules and regulations that governed the industry. The Reserve Bank of India (RBI) recognized the need for reform and introduced the co-origination framework in 2018.
The co-origination framework allowed banks and non-banking financial companies (NBFCs) to work together to originate loans. This was seen as a way to improve efficiency and speed up the lending process. The guidelines were later amended in 2020 and rechristened as co-lending models (CMLs). Housing finance companies were included in the CML framework, and some changes were made to the rules governing how loans could be originated.
The RBI’s goal with the CML framework is to make lending more accessible and affordable for borrowers. By encouraging cooperation between lenders, it is hoped that loans can be approved faster and with less hassle. In addition, by making it easier for small businesses to get loans, it is hoped that this will boost economic growth and create jobs.
What problem it solves for the Indian economy:
The Reserve Bank of India’s (RBI) co-lending framework, which was amended and rechristened as the co-lending model (CML) in 2020, is designed to solve a number of problems for the Indian economy.
Firstly, it is intended to increase lending to small businesses and individuals, who are often underserved by traditional banks. By allowing non-bank financial institutions (NBFIs) to participate in co-lended loans, it is hoped that more credit will be made available to these groups.
Secondly, the CML is intended to provide a boost to the housing sector. By including housing finance companies in the scheme, it is hoped that more financing will be made available for housing projects. This should help to increase construction activity and create jobs.
Thirdly, the CML is intended to improve asset quality. By requiring that all loans be made on a secured basis, it is hoped that defaults will be reduced. This should help to improve the health of the banking sector and reduce the need for future bailouts.
Fourthly, the CML is intended to make lenders more accountable. By requiring that all loans be made through registered entities, it is hoped that lenders will be subject to greater regulation and oversight. This should help to prevent abuse and ensure that loans are made responsibly.
Overall, the CML is intended to solve a number of problems for the Indian economy. By increasing lending, boosting the housing sector, improving asset quality, and making lenders more accountable, it is hoped that the economy will benefit in a number of ways.
What is driving the global popularity of the co-lending method?
There are a number of factors driving the global popularity of the co-lending method.
Firstly, it is a more efficient way of lending than traditional methods. By pooling resources and sharing risk, lenders are able to make more loans with less capital. This increases access to credit and reduces the cost of borrowing.
Secondly, co-lending allows lenders to diversify their portfolios. By lending to a variety of borrowers, lenders can mitigate the risk of defaults and reduce the impact of economic downturns.
Thirdly, co-lending can improve asset quality. By requiring that all loans be made on a secured basis, defaults are less likely to occur. This helps to protect the value of collateral and reduces losses for lenders.
Fourthly, co-lending makes lenders more accountable. By requiring that all loans be made through registered entities, lenders are subject to greater regulation and oversight. This helps to prevent abuse and ensure that loans are made responsibly.
Overall, the global popularity of the co-lending method is driven by a number of factors. Its efficiency, ability to diversify portfolios, improve asset quality, and make lenders more accountable make it an attractive option for many institutions.
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