What is Co-lending and How Does It Work?

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What is CoLendingThe lending industry is constantly evolving, expanding, and adapting to the massive technological and lifestyle changes that the world has been observing. The financial industry and tech integration birthed fintech that further spurred a revolution where we are seeing increased financial assistance being meted out to the unbanked sections of society.

Although the pandemic caused a setback to the lending industry, the global lending market is set to recover soon and grow at a respectable 5.5% CAGR to achieve a $7,929 billion mark by the year 2023[1]. What will cause this sizeable growth can mostly be attributed to recovering and emerging markets and of course, fintech. Other causes include increased internet access, a rise in construction activities, and an increase in public spending.

The lending market has also been seeing a variety of different trends based on changing consumer spending and preferences. Alternative lending, for example, has allowed small businesses and individuals to access loans (personal, vehicle, working capital, etc.) that were otherwise unavailable to them via traditional banking. Fintech allowed alternative lenders to use data-driven insights to make lending decisions that were not only profitable for the latter but scalable as well. This in turn opened larger markets to alternative lenders, the ones traditional banks had shut out given concerns of high risk and low returns.

Fintech with its millions of possibilities of reducing costs, boosting efficiencies and productivity, helping banks and financial institutions reach obscure and unbanked markets, will be massively responsible for this growth. One of the newest fintech practices that have led to a boost in reaching the unbanked sections of society is co-lending.

In this article, we will be talking in length about:

  • What co-lending is?
  • Who is using this method of lending and why?
  • The benefits of co-lending and the future of this method.

What is co-lending?

As the name implies, co-lending occurs when two lenders join hands to fulfill a loan application. To be a bit more specific, co-lending occurs when a traditional lender (bank) joins hands with a Non-Banking Financial Company (NBFC) to provide loans. The co-lending arrangement is what you call a symbiotic relationship through which both parties enjoy certain wins.

While traditional banks can use the support of NBFCs to reach out to previously unbanked sections of the economy by using fintech tools that allow alternative credit rating to reduce lending risks and improve margins, NBFCs can stay invested in these applications by pitching in lesser capital and using their ability to gauge and address larger market shares given the financial prowess of traditional banks.

Who is using co-lending as a lending method?

When looked at closely, NBFCs aka fintech are playing a major role in bridging a huge market gap. They do so with their tools and ability to provide traditional banks with data-driven decisioning insights and a way to underwrite loan applications of people who were previously unbanked and now have turned into first-time applicants sans any credit history.

Also, since traditional banks do largely depend on the physical proximity of applicants and manual processing of applications, traditional lending limits their area of exposure. Fintech powered NBFCs help traditional banks reach out to these sections using digitized loan origination processes that allow traditional banks to reach out to otherwise remote areas.

Co-lending has been a popular and successful partnership between traditional banks and fintech NBFCs globally, with a major presence in the U.S. and slowly finding a strong foothold in emerging economies like India.

Benefits of co-lending

Apart from the tell-tale benefits of co-lending for both traditional banks and NBFCs, here are some more reasons why co-lending is becoming a popular lending method globally.

Increased reach and reduce turnaround times

Fintech not only allows traditional banks to reach emerging markets and previously non-banked sectors through NBFCs, but it also allows them to churn more applications and disburse more loans thereby improving margins by employing automation and tools like decisioning and alternative credit scoring that reduce underwriting costs and time, substantially.

Increased ease and access to funds

NBFCs act as a bridge between the previously unbanked population and traditional banks by providing easy access to credit for individuals and small businesses who did not have any credit rating earlier. While traditional banks fund 80% of the sanctioned loan amount, NBFC’s fund the remaining 20%. Therefore, if anyone needs a personal loan on today’s date all they need is an app, access to the internet, and 5-10 minutes of their time to fill in a loan application with the necessary documents, all online. Fintech has successfully done away with manual loan origination and traditional banks are giving it effect through their partnership with NBFCs.

Reduced cost of lending

The ability to automate the loan origination process has helped banks and NBFCs pass on the cost-benefit in the form of lowered interest rates. This means they can capture larger markets, gain more market share, process, and disburse more loans thereby pumping in more credit through the economy.

Paperless Processes

A centralized, digitized dashboard to store all information pertaining to each application with proper access controls for stakeholders ensures lesser manual paperwork that’s prone to errors and double entries. Digitized verification and eKYC ensure that every application is verified digitally without the need to physically be present at the bank. This has especially helped substantially during the pandemic when norms of social distancing had been put into place by governments across the world.


Co-lending is truly a win-win-win for banks, NBFCs, and the end consumer. The model itself is foolproof and scalable given that fintech lies at the core of it. However, to ensure that services are seamlessly delivered to the end consumers, ease, and accuracy of information flow, between the two lenders, is crucial. While the co-lending method helps reduce operational challenges, matters such as reconciling repayment schedules, hypothecation, bureau reporting, and simultaneous credit assessments are certain things that need to be addressed to ensure a smooth workflow for both parties.