How Co-Lending And Co-Origination Can Solve India’s Credit Access Crisis For SMEs And Retail Customers

Digital lending in India has been at the forefront of combating the socioeconomic fallout from the pandemic. As the virus started to spread across India in 2020, leading to a complete lockdown by March, the fintech sector rose to the occasion. The sector came to everyone’s rescue – from enabling retail users to switch to contactless payments to businesses meeting working capital requirements.

Digital Lenders: A Respite During The Pandemic

Over 63 Mn MSME units across India employ more than 120 Mn individuals, contributing 31% to country’s GDP. Out of these, over 25-30 Mn jobs were lost in the seven to eight months following the lockdown.

Liquidity constraints had always been a major challenge for these companies, with a mammoth unmet demand for credit amounting to about $200 Bn.

Disruptions in business models during the coronavirus crisis made it worse. As existing sources of funding dried up, alternative lenders met urgent demands for working capital with timely support plans, like peer-to-peer marketplace lending and alternate credit scoring models.

Salaried individuals facing pay cuts and unemployment could rely on small-ticket loans, requiring minimum documentation and involving quick disbursals, to support their families during the unprecedented challenging times.

The Indian economy is gradually recovering from the economic slowdown triggered by the lockdowns. Following a 24% GDP decline between April-June 2020, the country recorded the highest ever GST collection in December 2020 at INR 1.15 Lakh Cr.

Despite the ramp-up, the fintech sector, specifically the digital lending vertical, is still in its nascent stages. Does the Budget 2021-22 help the sector? In particular, how will the co-lending scheme progress, which has played a crucial role in improving credit flow to the underserved and un-served parts of the economy? Let’s take a look.

Towards Being ‘Atmanirbhar’  MSMEs Through Co-Lending And Co-Origination

‘Atmanirbhar Bharat’, the Prime Minister Narendra Modi’s vision to build a self-reliant India out of the pandemic-induced economic decline, would be incomplete without supporting a crucial and vast part of Indian economy – the priority sector.

Which is why, an improvement over the co-origination loan scheme of September 2018, announced by the RBI in November 2020, was more than welcome. Co-origination was designed to overcome the liquidity crisis in the NBFC sector. Over the last couple of years, NBFCs have grown in terms of diversity and operational scale. They now play a key role in increasing inclusivity by providing last-mile access of financial services to far-flung areas.

Under the co-lending scheme, NBFCs can partner with banks to offer loans to the lesser served priority sectors, based on a prior agreement. The RBI mandates NBFCs to retain a minimum share of 20% of these individual loans in their books. Through risk and reward sharing, NBFCs could focus more on client servicing and sales, while banks could extend their geographical reach. Priority sector norms further make it compulsory for banks to allocate funds for the backbone of our society, like agriculture, MSME, and social infrastructure.

Over the past couple of decades’ different lenders have built different strengths. Banks are better at doing secured, collateralised loans at lower costs; NBFCs on the other hand have specialised in smaller loans that are both collateralised or unsecured.

Co-origination allows both these strengths to come together and serve the country. MSMEs and consumers can access funds at lower costs. The NBFCs bring their existing infrastructure and collection capabilities to the fore while banks bring their balance sheet power to a sector that has largely been underserved by the formal banking sector.

Banks, particularly PSBs, have been trying to improve MSME financing for a while now and have not had the success they had planned for. Co-origination allows PSBs the opportunity to leverage the powerful fintech lenders, based on state-of-the-art algorithms that can evaluate huge amounts of data from disparate sources to better analyse the creditworthiness of customers.

In December 2020, SBI chairman Dinesh Kumar Khara said in a webinar that the bank will give preference to co-origination models and collaborations with fintech firms to better meet the liquidity needs of MSMEs.

To put the economy back on track, an acceleration in domestic consumption is the need of the hour. In this regard, fintech NBFCs with the support of banks through co-origination can boost economic activity through easy transactions, broader reach, extensive analytical capabilities, and consumer-friendly lending terms, especially since periods of economic uncertainty make traditional lenders more cautious.

The Role Of Budget 2021 In Supporting Co-Lending Efforts

Ahead of the budget on February 01, 2021, NBFCs had expected the government to extend continued liquidity support by providing greater encouragement to banks to partner with them, relaxing norms for external commercial borrowings and setting up a permanent refinance window.

Here are some provisions in the budget that will benefit co-lending efforts.

Extensive Liquidity Support Through ECLGS

The Emergency Credit Line Guarantee Scheme (ECLGS) under the Atmanirbhar Bharat Mission launched in May 2020 under the INR 20 Lakh Cr economic package, offered banks and NBFCs complete guarantee in meeting the massive credit requirements of MSMEs. Under this scheme, more than INR 2 Lakh Cr worth of sanctions have taken place to 61 lakh borrowers, as of November 2020.

In the 2021 Union Budget, the government has doubled its budgetary expenditure towards MSMEs to INR 15,700 Cr. It is expected that a vast portion of this allocation will be directed towards the ECLGS scheme. Under the second iteration of this scheme, the validity of which has been extended to March 31, 2021, the government has removed turnover caps in eligibility criteria.

Amendment Of The SARFAESI Act 2002

At the same time, to ensure credit discipline and preserve the interest of borrowers, the Finance Minister Nirmala Sitharaman has proposed to lower the threshold of starting recovery proceedings against loan defaulters. Under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act of 2002, the minimum loan size for debt recovery has been reduced to INR 20 Lakh, from the earlier INR 50 Lakh, for NBFCs with minimum asset size of INR 100 Cr.

This is a positive development. Last year, an amendment to this Act was launched as part of the Union Budget 2020, where the debt recovery limit was lowered to a loan ticket size of INR 50 Lakh, from INR 1 Cr. However, few NBFCs were able to benefit from it. A loan ticket size of INR 50 Lakh and above, put financial stress on small borrowers. Long litigations (where the Act is not applicable) drives up the cost of credit.

The current budget further allocates INR 20,000 Cr towards recapitalization of public sector lenders. This additional liquidity support and steps taken to improve the financial health of lenders will encourage NBFCs and banks to keep lending to the MSME and stressed sectors.

Support To Fintech NBFCs

The arrival of fintech NBFCs has eased access to credit for the MSMEs and individuals. However, the sector needed government support to flourish, which has been enabled through this Budget. Steps have been proposed to incentivize start-ups. This includes the extension of capital gains exemption for investment in start-ups and eligibility to claim tax holiday till March 2022.

Plans to construct a world-class fintech hub in Gujarat sounds promising. Also welcome is the injection of INT 1,500 Cr to incentivize the digital payments ecosystem.

What More Could Have Been Done?

What is lacking is the extension of the CGTMSE Scheme which will improve its efficacy and enable more small companies to benefit from it. Increasing the reach of the CGTMSE scheme would allow NBFCs & Banks to lend more to MSMEs. In particular, making this scheme available specifically to the co-origination program allows more MSMEs access to much-needed financing.

Although there is much stress, the economy is gradually moving toward normalcy. The economic impact of the pandemic will be reflected in the banking system. But the RBI has introduced measures like co-lending to ensure that banks can lend more through NBFCs, helping the economy revive. This will pave the way towards the revival of the MSME sector and by extension an Atmanirbhar Bharat.