Priority Sectors Lending is the role exercised by the RBI to banks, imploring them to dedicate funds for specific sectors of the economy like agriculture and allied activities, education and housing and food for the poorer population.
The co-lending model is particularly useful for Public Sector Banks (PSBs) as this model allows them to reach borrowers who may not have access to traditional banking services, thus allowing them to fulfill their priority sector lending obligations as directed by the Reserve Bank of India. The increasing risk of large-ticket corporate loans has led Public Sector Banks (PSBs) to turn to co-lending to increase the percentage of small-ticket retail loans in their overall portfolio. After the Union Government’s recapitalization efforts, PSBs have refocused their lending activities on traditionally excluded sectors and retail borrowers, while the RBI has mandated the PSBs to deploy at least 40 per cent of their Adjusted Net Bank Credit (ANBC) to the priority sector, Therefore many PSBs have adopted the co-lending model, a financing model in which two or more financial institutions collaborate to provide loan financing to their customers.
These obligations include providing loans to economically weaker sections of society, small and marginal farmers, and micro, small, and medium enterprises (MSMEs). To take advantage of co-lending, PSBs have teamed up with NBFCs, fintech companies, and other financial institutions. This partnership enables customised loan products to be offered with reduced origination, underwriting, and servicing costs, thereby making the loan process quicker and more convenient for the customer.
NBFCs have a presence in Tier 2,3,4 cities of India and can use their knowledge of the local geography to help make this possible. By co-lending with NBFCs, PSBs can benefit from NBFCs’ expertise in specific areas, such as MSME financing. This can expand their customer base, as well as assist them in assessing the creditworthiness of borrowers, resulting in higher loan amounts and competitive rates. It can also help the banks to make their operations more efficient, as the NBFCs can shoulder some of the loan origination and processing duties.