Banks, NBFCs need to build co-lending focused products for model to succeed, says Union Bank MD

Banks and non-banking finance companies (NBFCs) need to evolve co-lending specific loan products for the share of such assets to meaningfully increase in size, Union Bank of India managing director and chief e Union Bank of India xecutive officer (MD & CEO) Rajkiran Rai G said on Thursday.

Speaking at the virtual FICCI-IBA banking conference, Rai said the co-lending model enables lenders to reach the unserved, NBFCs to tap banks’ high capital base at lower costs and at the same time serves customers’ interest. However, different practices adopted by banks and NBFCs for underwriting loans, collection, valuation, and margins are a challenge in the present co-lending model.

“We (banks) are focused on policies and we have a very rigid filter. You have to fit into that, only then you will get the loan, whereas NBFCs are more amenable to changes. They have more cash flow-based lending models and we have more balance sheet-based lending models. We are more data driven, whereas NBFCs are more practical. They look at the shop, look at the cash flow, if the number of customers is good, they decide, ‘yes this fellow can repay’ and they can take the risk,” he said.

Rai said Union Bank of India has entered into three tie-ups for co-lending so far and is looking at two to three more such partnerships. There are practical issues ranging from getting the product right and changing the bank’s policies and mindset on risk management practices, he said.

“If you have to make it successful (co-lending), we need to make products specific for the co-lending model, which are a hybrid between a pure bank product and a pure NBFC product. And NBFCs also have to evolve because they always look at very high profits and high valuation because they have private equity investors,” he said. In the financial sector, margins are quite low and the regulator urges lenders to cover costs, but operate with lower margins.

“NBFCs in every product look at higher margins. Somehow, they also have to moderate, because they are working with the public sector … So, if you are able to, evolve and be more prudent because [there can be] customer complaints on your collection practices,” he said.

YES Bank MD & CEO Prashant Kumar said while there is no debate on the usefulness of the co-ending model, the basic issue is around different underwriting practices adopted by banks and non-bank lenders.

“We formed a separate team that did not have any prior experience of MSME (micro, small and medium enterprises) finance. So, they were completely new in terms of credit underwriting, seeing the product from a different angle. I think in a very short time, say just six months, we have been able to fully implement the partnership with three large NBFCs. Every month, we are adding almost Rs 300 crore,” he said.