In late 2021, India’s Minister of State for Electronics and IT said that by 2025, the government’s broad objective is to “make sure that our digital economy is a trillion-dollar economy – the largest in the world.” Numerous untapped opportunities in the manufacturing, engineering, and digitalisation sectors will empower India to achieve this goal.

But to realise this vision, two crucial ingredients must be in place: 1) a skilled and employable workforce and 2) funds to set up, maintain, and optimise a world-class digital infrastructure. To meet Goal #1, the government is making a concerted effort to upskill and reskill millions of Indians via initiatives like the DESH e-portal. With respect to Goal #2, the co-lending model (CLM) could provide the optimal solution.

The CLM can also help close the enormous credit gap in many Indian sectors. For instance, according to one June 2019 report by the Reserve Bank of India (RBI), the credit gap in India’s MSME sector alone is Rs. Rs. 20-25 lakh crore. The credit gap problem – which is not limited to MSME but also affects other sectors – is due to a lack of easy access to capital and the fact that traditional lending channels are highly risk-averse. CLM provides a great way to close this credit gap and help India reach its trillion-dollar economy goal. Let’s see how.

Priority Sectors In India

In October 2021, the RBI published the “Master Directions” directive categorising the priority sectors and specifying the guidelines for Priority Sector Lending (PSL). The directive identifies eight priority sectors:

i. Agriculture

ii. Micro, Small and Medium Enterprises

iii. Export credit

iv. Education

v. Affordable Housing

vi. Social infrastructure

vii. Renewable energy

viii. Others, such as self-help groups (SHG) and joint liability groups (JLG)

Since priority sectors are considered crucial for the country’s economic and social development, the government and the RBI encourage their growth. And for this, banks are mandated to provide adequate, timely, and low-cost credit to these sectors.

Since the early 1970s, the RBI has stipulated certain guidelines for PSL by India’s commercial banks. These guidelines were revised in October 2021 when the RBI fixed the overall PSL target at 40% for both domestic banks and foreign banks with fewer than 20 branches. Even so, most banks struggle to achieve this target because they simply cannot overcome the last-mile constraints of reaching priority sector borrowers across the country. Another challenge is the high prevalence of non-performing assets (NPAs), which makes lending to these sectors an economically unviable prospect for banks. So it’s no wonder that banks tend to favour larger corporations and ignore the acute credit crunch in this sector.

The CLM can play a game-changing role in overcoming these critical challenges. With the help of technology and digitalisation, Banks, NBFCs and FinTechs are helping to usher in a new age of faster lending to a bigger pool of potential borrowers. This is providing an impetus to the starved credit market for PSL, making credit accessible to more worthy organisations than ever before.

The Benefits of Co-Lending for Priority Sector Lending in India

Co-lending can bring numerous benefits to everyone involved in the transaction: banks, NBFs, financial institutions, and end borrowers.

Ushering in greater liquidity and last-mile connectivity

Indian banks are believed to hold enough liquidity to fund several national economies. And yet, this liquidity rarely reaches the country’s hinterlands given the vast distances, lack of infrastructure development, socio-political factors, and other issues. Co-lending is helping the bridge the liquidity gap.

In the CLM, banks bring greater credibility and liquidity to the table, while NBFCs enable last-mile connectivity to even the remotest areas of the country. By combining these two aspects, CLM helps to successfully fill in credit holes in India’s priority sectors and make PSL a more viable prospect for both lenders and borrowers.

Stabilising the PSL ecosystem

Under the CLM, banks, NBFCs and FinTechs commit to a partnership to bring in standardised control, compliance, and customer satisfaction. Besides, the roles and responsibilities of each partner are clearly delineated in every CLM agreement with a borrower, ensuring complete transactional transparency and traceability.

The NBFCs and FinTechs are the single point of interface for borrowers and do all the heavy lifting with respect to customer management, product innovations, documentation, and data integration. This ensures that the CLM lending institutions run in harmony to serve borrowers in the priority sectors.

Sharing both profits and risks

In a co-lending partnership, loans are jointly underwritten, guaranteeing maximum safety for borrowers. Such a distribution ensures that the risk of default is diluted while increasing the probability of higher profits.

All in all, co-lending brings the best of both traditional lending and Fintech-powered new-age lending to the country. It is helping to increase liquidity and credit penetration in priority sectors. Ultimately, it will lead to a larger infusion of much-needed credit not only in priority sectors but in India’s economy as a whole.

The Vital Role of Technology in India’s Credit Infrastructure

NBFCs and banks are changing how credit is supplied in the country with the help of tech-first companies like Yubi. Through technology-powered co-lending, these companies bring the tech DNA required to enable seamless co-lending in India.

Our fully-integrated platform YubiCo.lend is a one-stop solution for the country’s co-lending ecosystem. It enables NBFCs and banks to connect, explore, and form profitable CLM partnerships. Besides, it offers a super-fast onboarding process, access to a full-time marketplace, and end-to-end digital operations to optimise credit access, sales cycles, and portfolio management.

The integration with our technology partners including Finacle, RazorPay, Cash Free and more enables us to provide a strong technology and data-driven environment to extend discovery, operations, and portfolio management services to our Indian and global banking clients’ co-lending (co-originated) assets.

YubiCo.lend in FY 2021-22

INR 5000+Cr Transactions
10x ↑ in Value of transactions from 2020-21
80,000 Transactions/day
70% ↑ in Volume of transactions from 2020-21
Up to 245% ↑in Loans disbursed by Investors

And the new self-serve module of the platform provides an unassisted co-lending set up between the lenders and originators and reduce the overall TAT for loan processing on the platform.

CLM is still at a nascent stage in India. However, it’s all set for exponential growth over the coming years, and it is companies like Yubi will be at the forefront of this growth. With advanced real-time analytics, international lending models, and world-class innovations in the credit space, Yubi is helping to close India’s credit gap and create a trillion-dollar digital economy.