The landscape of Indian non-banking finance companies (NBFCs) is set to achieve a significant milestone as their co-lending book is anticipated to cross the Rs 1 lakh crore mark by June 2024. This prediction comes off the back of increased involvement from partner banks and the inherent benefits of funding access and diversification as outlined by CRISIL Ratings.
In terms of growth over the medium term, a robust annual uptick of 35-40 percent is foreseen, driven by the escalating interests of both NBFCs and banks. However, there could be a strategic shift with an enhanced focus on different asset classes such as loans to micro, small, and medium enterprises (MSMEs) and home loans. This comes after the realization that personal loans involve higher risk weights.
CRISIL’s examination of the sector, which involved a study of 100 NBFCs that together constitute over 90 percent of the industry’s assets under management (AUM), corroborated these trends. Presently, just around one-third of these institutions have an active presence in co-lending.
Ajit Velonie, Senior Director at CRISIL Ratings, explained the mutual benefits of co-lending, highlighting the risk-sharing mechanism that it facilitates. Mid-sized and smaller NBFCs, in particular, stand to gain from the bank funding access and a diversification of funding avenues that co-lending allows. For NBFCs, the model promises a growth trajectory without excessive capital expenditure. Banks, on the flip side, find value through reaching niche customer segments and fulfilling their priority sector lending quotas, all the while accessing untapped geographies.
Diving into the existing co-lending portfolio, personal loans emerge as the dominant category, comprising about one-third of the total AUM. Housing loans are not too far behind, accounting for 20 percent, followed closely by unsecured MSME loans and gold loans, each representing 13 percent. Secured MSME loans, including those against property, and vehicle loans make up the remaining 20 percent.
Co-lending for all asset classes is expected to see growth, but the surge in personal loans may potentially slow down in comparison to the rates observed in recent times. This is attributed to the upward revision of risk weight for unsecured consumer credit, now at 125 percent as opposed to the previous 100 percent. Consequently, growth in unsecured loans might cool down to 25-35 percent in the fiscal year 2025, dropping from an estimated 35 percent growth in the fiscal year 2024.
Malvika Bhotika, Director at CRISIL Ratings, discussed the likely shift in the makeup of the co-lending book for the fiscal year 2025, predicting a decline in the proportion of personal loans. Conversely, the MSME and home loan segments are predicted to rise, especially when considering the Indian government’s focus on bolstering the MSME sector’s contribution to the nation’s GDP and the ‘Housing for All’ initiatives.
Another point for consideration is the managed asset quality in the co-lending portfolios of banks and NBFCs so far – a factor that will play a pivotal role in the ongoing success of the co-lending business model. Yet, it is also acknowledged that the future of co-lending will be subject to the evolution of the regulatory environment overseeing it.
As the financial ecosystem continues to adapt, the co-lending approach remains a beacon of innovation and efficiency in the Indian credit market. The milestone poised to be reached by June 2024 could mark a new chapter in the story of collaborative lending solutions that have significant implications for the diversification and democratization of financial services in India.
