Banks, NBFCs join hands to extend retail, MSME loans

Banks hope to show high credit growth by jointly lending with the non-banking finance companies (NBFCs), which have a captive borrower base.

Banks are sitting on excess liquidity with private investment yet to trickle into the banking system. Some like the State Bank of India (SBI) are sitting on Rs 1 lakh crore of excess liquidity in the absence of private demand for credit.

Banks and NBFCs will get together to finance retail loans and home loans, which will help both the entities to build their portfolios. When the overall credit growth for the NBFCs was 25%, banks were growing only at 11 %, the co-lending exercise with the NBFCs will help both to grow their portfolios. The NBFCs have the customers and banks have the liquidity.

Praveen Kumar Gupta managing director, State Bank of India, said, "We are looking at co-origination in a big way. We have a tie-up with ECL Finance and we will have other partners. We have to merge the platforms of the two entities after it will take off. In the beginning, we will start with micro, small and medium enterprises and after that we will extend it to others."

More than 60 million businesses comprise the micro, small, and medium enterprise sector in India that drives a substantial amount of economic growth.

"The co-lending activities and portfolio buys by banks will take off in a big way. Good portfolios will be bought by banks. We are in talks with three NBFCs for co-lending. At the onset we will begin with retail loans and micro, small and medium enterprise loans," Raj Kiran Rai, managing director and chief executive officer, Union Bank of India, said.

ECL Finance, a subsidiary of Edelweiss Financial Services has tied up with State Bank of India and Central Bank of India for co-origination agreement. This will help both the bank and the NBFC to share the risks and rewards between the two entities. The partnership between SBI and Edelweiss comes close on the heels of SBI setting up a special NBFC alliance department to step up lending to the priority sector.

Bank of Baroda (BoB) has also entered into alliances with Srei Equipment Finance and ECL Finance to offer joint loans for infrastructure equipment and MSMEs.

The bank is in talks with more NBFCs and fintech companies to leverage the model of co-originating loans. "We are very much there in the co-origination space. We have been always doing a lot of pool purchases (of assets). What we have found out actually is that in the case of some NBFCs the (co-origination) model is very good said Papia Sengupta, executive director, BoB.

The co-origination plans of the banks are taking place after Reserve Bank of India's (RBI) guidelines on such tie-ups. The alliance aims to leverage the combined reach in Tier II and III markets to ensure timely disbursal of credit to MSMEs.