What is Co-origination and how does the Co-origination model work?

What is the Co-origination of loans?

Co-origination, also known as co-lending, is a setup where banks and non-banks enter into an arrangement for the joint contribution of credit for priority sector lending. The term Co-origination of loan means that both Banks (lender) and NBFCs (originator) share the risk in a ratio of 80:20, that is, 80 % of the loan with the lender and 20 % minimum with the originator.

Co-origination loans were designed originally to overcome the liquidity crisis in the NBFC sector. Under the Co-origination loan agreement, NBFCs can join hands with banks to provide loans to the underserved priority sectors based on a prior agreement. Consequently, through risk and reward sharing, both NBFCs and banks can benefit; NBFCs can benefit from consistent funding lines and banks’ advice on credit underwriting, similarly, banks can benefit from the granular book and real-time updates on the underlying portfolio. Thereby, NBFCs could concentrate more on client servicing and sales, while banks could expand their geographical reach. 

Benefits of Co-origination 

Co originated loan has been around for quite a long time now. However, in 2018, after the RBI laid out the framework for the Co-origination of loans, more banks and NBFCs came together to make funds available to the priority sector. It is thus considered a significant step towards an efficient framework for micro-finance and MSME lending in India. 

Benefits of co-origination loans are:

• NBFCs focusing on the MSME sector and those qualifying for priority sector classification will be the key beneficiaries.
• Since NBFCs are focused on micro-finance and MSME lending and have strong business growth potential, thus they require continuous funding support. These NBFCs are primarily dependent on debt markets, bank loans, etc., to meet their funding requirement, which is a major constraint in their growth opportunities. Also, the increasing interest rates lead to an increase in the funding cost of the NBFCs. 
• Co-origination provides an excellent avenue for NBFCs to (1) sort out funding requirements without encountering funding-related challenges and (2) increase their assets under management (capital eased) without capital constraints, as it does not take a lot of portfolio on its books.
• PSBs- Public sector banks will also benefit from the origination of good quality but relatively higher yield retail loans helping them meet their priority sector lending requirements and enhancing the diversity in their loan portfolio. 
• The Co-origination setup also helps the banking sector meet their priority sector lending.
• Co-origination also authorizes the PSBs (Public Sector Banks) and large NBFCs the opportunity to leverage the powerful fintech originators that can assess huge amounts of data from disparate sources to examine the creditworthiness of customers satisfactorily.
  

How does the Co origination model work?

Reserve Bank of India had earlier laid out the Co-origination meaning framework in 2018, allowing banks and NBFCs to co originate loans. But, in 2020, RBI co-lending guidelines were amended and renamed CLM- Co Lending Model. According to the RBI norms, a minimum of 20 % of the credit risk through direct exposure shall be on NBFCs books till maturity, and the balance 80% will be on the bank’s books. The bank and NBFC share the repayment and recovery of interest in proportion to their shares in credit and interest rate, respectively, upon maturity. 

The Co origination model works in the following way:

• Under co-lending, the NBFCs have a greater reach, so they reach out and tap clients. 
• After that, both parties underwrite the mutual agreement and agree to sanction and disburse the money. 
• The flow of funds here is less risky as the Banks lend to NBFCs, passing the fund on to the priority sectors. 
• NBFCs function as the single point of contact for the customers. 
• Finally, a tri-party agreement is signed between the customers, banks, and NBFCs.

Why is a Co-origination platform for you? 

Co-origination platforms help connect banking and non-banking institutions to disburse joint loans to the borrowers, thus opening up a world of co-lending for you. CredCo-Lend (by CredAvenue) is a fully integrated platform – a 1-stop solution that provides prospects for effortless discovery and seamless loan processing between Banks & NBFCs. This platform helps NBFCs discover Banks to meet loan origination needs. It is a one-time integration exercise for all the variety of lenders & originators you want to get into partnership with.

The platform collaborates with 500+ lenders, and thus you can associate with the bank at a price that suits you. Also, it takes care of all the compliances and diverging essentials to power the complete co-lending ecosystem. Further, using this platform, the Banks can specify the NBFCs meeting your criteria with a transparent credit rating module and 240+ probable co-lending partners across numerous sectors. Also, CredAvenue’s all-in-one debt platform enables you to quickly get a term loan or working capital loan by just switching between the platforms.

Conclusion

• The concept of Co-origination of loans by the banking and non-banking institutions in the priority sector is aimed at leveraging the reach of NBFCs to help banks meet their priority sector lending targets.
• Co-origination also provides an excellent avenue for NBFCs to increase their assets under management without encountering funding-related challenges or capital constraints.
• Co-origination can boost confidence in the operations of NBFC fostering economic activity through easy transactions. It will further facilitate real-time updates on loans, better joint under writings, a cleaner flow of funds, and higher ground-level funding reach. This model will work wonders, especially since periods of economic uncertainty make traditional lenders more cautious.

FAQs-

Q: What does Co-origination of loans mean? 

A: Co-origination of loans meaning under this setup, banks & non-banks (lenders and originators) enter into an arrangement for the joint contribution of credit.

Q: How does the Co-origination of loans help the ultimate/end-borrower?

A: By the Co-origination of loans, the ultimate/end-borrower gets loans at a very affordable and competitive rate.

Q: What is the loan sanction procedure under the Co-origination agreement?

A: The NBFC shall recommend the Bank proposals as relevant for joint lending. The lenders shall be entitled to assess the risks and requirements of the applicant borrowers independently, and the loan agreement would be tripartite between both the lenders (Bank & NBFC) and the customer.

Q: What is the grievance redressal system under the Co-origination loan model?

A: NBFC will be primarily responsible for providing the necessary customer service & grievance redressal to the borrower. Any complaint reported by a borrower with the NBFC or Bank shall also be shared with both the lenders. If the complaint is not resolved within 30 days, the borrower can escalate with the concerned Banking Ombudsman or Ombudsman for NBFCs.