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What is Co-lending and How Does It Work?

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What is Co-lending and How Does It Work

The lending industry is constantly evolving and adapting to the changing global landscape, fueled by the integration of finance and technology, giving rise to fintech. This revolution has opened up opportunities to extend financial assistance to previously unbanked sections of society.

While the lending industry faced a temporary setback during the pandemic, it is expected to recover soon and grow at a respectable CAGR of 5.5% to reach $7,929 billion by 2023, driven by factors such as the recovery of emerging markets, fintech, increased internet access, rise in construction activities, and public spending.

The lending market has witnessed various trends, including alternative lending, which has enabled small businesses and individuals to access loans that were previously inaccessible through traditional banking. Fintech has empowered alternative lenders with data-driven insights to make lending decisions that are both profitable and scalable, expanding markets that traditional banks had previously considered too risky and unprofitable.

Fintech offers numerous possibilities such as reducing costs, boosting efficiency and productivity, and reaching obscure and unbanked markets. One of the latest fintech practices gaining momentum is co-lending, which extends financial services to previously unbanked sections of society, spurring growth in the lending market.

Co-lending: A Revolutionary Method of Lending

Co-lending refers to a lending arrangement where two lenders collaborate to meet the requirements of a loan application. Specifically, co-lending occurs when a traditional lender, such as a bank, partners with a Non-Banking Financial Company (NBFC) to provide loans. This partnership creates a symbiotic relationship where both parties benefit in different ways.

By collaborating with NBFCs, traditional banks can leverage fintech tools to extend credit to previously unbanked sections of the economy. The use of alternative credit rating systems reduces lending risks while also improving margins. In contrast, NBFCs can stay invested in these loan applications by contributing less capital while utilizing their expertise to gauge and address larger market shares. This partnership allows NBFCs to benefit from the financial prowess of traditional banks, while traditional banks can access previously untapped markets.

In summary, co-lending is a collaborative effort between traditional lenders and NBFCs to provide loans, with both parties benefiting from the partnership. Through this arrangement, previously unbanked sections of the economy can access credit, and NBFCs can tap into previously untapped markets, leveraging the expertise and financial prowess of traditional banks.

Who is using co-lending as a lending method?

Co-lending has been adopted by various financial institutions across the world. These institutions include banks, credit unions, and online lenders. The main reason why these institutions are using co-lending is to reduce the risk involved in lending. By partnering with other lenders, they can spread the risk of the loan among multiple parties, making it less risky for each individual lender.

Another reason why financial institutions are using co-lending is to increase their lending capacity. By working together, they can provide more funds to borrowers than they would have been able to individually. This enables them to compete better with other lenders and attract more borrowers.

Borrowers are also finding co-lending to be an attractive option. One of the primary reasons for this is the increased likelihood of getting approved for a loan. When multiple lenders are involved in the lending process, the borrower’s creditworthiness is evaluated by more than one lender, increasing the chances of approval. Additionally, co-lending can also result in lower interest rates for the borrower since the lenders can offer more competitive rates due to the shared risk.

Benefits of co-lending

Co-lending offers numerous benefits to both lenders and borrowers. Some of these benefits include:

  • Risk sharing: The primary benefit of co-lending is the sharing of risk among multiple lenders. This reduces the risk for individual lenders, making the loan less risky and more attractive.
  • Increased lending capacity: By partnering with other lenders, financial institutions can increase their lending capacity, enabling them to provide more funds to borrowers.
  • Diversification of portfolio: Co-lending allows lenders to diversify their portfolios, reducing their exposure to any one borrower or sector.
  • Improved credit evaluation: With multiple lenders involved in the lending process, borrowers’ creditworthiness is evaluated by more than one lender, increasing the accuracy of the evaluation.
  • Lower interest rates: Co-lending can result in lower interest rates for borrowers since the lenders can offer more competitive rates due to the shared risk.

The Future of Co-lending

Co-lending is a relatively new method of lending that is gaining popularity in the finance industry. As more financial institutions adopt this method, it is expected to become more widespread in the future. The benefits of co-lending are numerous, and as more borrowers and lenders become aware of these benefits, the demand for co-lending is expected to increase.

One potential future development in co-lending is the use of blockchain technology. Blockchain can provide a secure and transparent platform for co-lending, making the process more efficient and cost-effective. Additionally, the use of blockchain can also help reduce the risk of fraud and increase trust among lenders and borrowers.

Another potential future development in co-lending is the use of artificial intelligence (AI). AI can help lenders evaluate borrowers’ creditworthiness more accurately, reducing the risk of default. Additionally, AI can also help lenders identify potential risks in the lending process and take proactive measures to mitigate those risks.

Conclusion

Co-lending is a mutually beneficial model for all parties involved, including banks, NBFCs, and the end consumer. Fintech is at the heart of this model, making it both foolproof and scalable. However, to provide end consumers with seamless services, it is crucial to ensure that information flows easily and accurately between the two lenders. Although the co-lending method helps reduce operational challenges, certain issues must be addressed to ensure a smooth workflow for both parties. These include reconciling repayment schedules, hypothecation, bureau reporting, and simultaneous credit assessments. Overall, co-lending provides benefits to all parties involved in the lending process, making it a win-win-win situation.

At Sigma Infosolutions, with our proven FinTech expertise across 100+ projects and 500K+ person-hours, we have been a trusted TECH partner for over 17 years in the IT services industry. To learn more about our services and offerings and get the acceleration your FinTech business needs, please do connect with us.