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Five years after the launch, the co-lending book of non-banking finance companies (NBFCs) is expected to reach Rs one lakh crore by June 2024 in the wake of interest from partner banks and the benefit of access to funding and diversification, according to CRISIL Ratings.
Over the medium term, growth momentum is seen healthy at 35-40 per cent annually, amidst rising interests of partners – NBFCs as well as banks, it said. The partners, however, may increase their focus on other asset classes such as loans to micro, small and medium enterprises (MSME) and home loans given higher risk weights for personal loans.
Crisil said a study of 100 NBFCs, accounting for over 90 per cent of the sector’s AUM, indicates these trends. Interestingly, only about a third of these have active co-lending books at present.
Ajit Velonie, Senior Director, CRISIL Ratings, said, “Co-lending is seen as a win-win for NBFCs and banks alike, as it allows sharing of risk and rewards. For NBFCs, particularly for mid-sized and smaller ones, it enables access to bank funding as well as diversification in funding avenues.”
“This becomes even more relevant in light of the recent increase in risk weights for bank lending to NBFCs. The model also allows NBFCs to grow in a capital-efficient manner. For banks, on the other hand, it provides optimal access to niche customers and geographies and also aids them in meeting their priority sector lending targets,” Velonie said.
Of the current overall co-lending book, personal loans alone account for about a third of the AUM, followed by housing loans at 20 per cent and unsecured MSME loans and gold loans each making up 13 per cent of the pie.
Secured MSME (including loan against property) and vehicle loans comprise the rest 20 per cent. While co-lending books for all asset classes will grow, the pace of growth for personal loans is expected to be slower than that seen in the recent past, it said.
This is because of the revision in the risk weight of unsecured consumer credit to 125 per cent now from 100 per cent earlier, which would lead to some moderation in growth for unsecured loans to 25-35 per cent in fiscal 2025, from an estimated growth of 35 per cent in fiscal 2024.
“With recalibration in growth of personal loans following increase in risk weights, the share of personal loan in the co-lending book could decline in fiscal 2025, and that of MSME and home loans should go up. This will be supported by government’s focus on increasing share of MSME sector contribution in India’s gross domestic product and ‘Housing for All’ initiatives,” said Malvika Bhotika, Director, CRISIL Ratings.
Growth will also be supported by controlled asset quality seen so far in the co-lending portfolio of banks and NBFCs. While sustenance of asset quality will be the key to long term success of the co-lending business model, the manner in which regulations governing co-lending evolve will also bear watching, it said.
