Bank-NBFC Co-lending [UPSC Notes]

Co-lending is a situation when two entities share the risk but one entity originates the loan. The loan is originated by a non-banking financial corporation (NBFC), and the majority of it is held by a bank. In this article, you can read more about co-lending and its benefits for borrowers for the IAS exam GS III economy section.

What is the Co-lending Concept?

• One lender receives a request for a loan from a borrower but is unable or unwilling to grant the whole amount sought.
• The lender then forms a syndicate with one or more other lenders, and the group lends the money to the borrower.
• Each syndicated lender provides a fraction of the loan’s total amount and shares in the loan’s risk and rewards.
• The lead lender, who is in charge of organizing the syndicate and liaising with the borrower, is often the one that the borrower interacts with.
• There are multiple loan agreements between the syndicate’s lenders and the borrower, each with its own terms and conditions, interest rates, and repayment plans.

Co-lending Benefits for Borrowers

• Greater capital access: By working with several lenders, borrowers can access loan amounts that are higher than those they could get from a single lender.
• Competitive interest rates: Because lenders are competing for the borrower’s business, co-lending may result in more affordable interest rates.
• Loan management is made easier since, despite the loan including numerous lenders, the borrower just has to deal with the lead lender.
• Customized loan terms: Because each lender in the syndicate may have a distinct set of loan terms and conditions, borrowers can select the ones that are best for them.

Co-lending Benefits for Lenders

• Risk diversification: Lenders can lessen their exposure to any one borrower or loan by spreading the risk over a number of borrowers and loans.
• Lenders’ capacity to make loans is increased thanks to co-lending, which enables them to take part in larger loan transactions than they could otherwise.
• Enhanced return on investment: Lenders’ involvement in the syndicate allows them to receive fees and interest income, which boosts their return on investment.
• Access to new markets: Co-lending can help lenders expand their loan portfolios by giving them access to new markets or industry sectors they might not have otherwise had.

Conclusion: Co-lending may have some parallels to conventional lending arrangements, but it also has special advantages that weren’t previously available. As a result, it is untrue to suggest that co-lending is only “old wine in a new bottle.”

Bank-NBFC Co-lending:- Download PDF Here