Co-Lending – Here is what co-lending means to the borrowers and to lenders

lending Co Lending   Here is what co lending means to the borrowers and to lenders

In a rather high-profile announcement, HDFC and Indiabulls Housing Finance tied up to for a co-lending arrangement for home loans. How would it work and what are likely to be the synergies?

Capital plus reach

If you look at the two companies in terms of book size, HDFC is nearly 8 times larger than Indiabulls Housing. So, clearly, it is not a marriage of equals. It is an attempt to blend the balance sheet strength of HDFC with the aggression and fleet-footed approach of IBHFL. It allows Indiabulls to take a bigger loan book without impacting its return ratios negatively and also without adding too much risk to its balance sheet. HDFC gets the benefit of the reach and the deep customer interface that Indiabulls has built over the last 20 years.

How will the co-lending work?

Under the co-lending agreement, HDFC will house 80% of the co-lent asset in its books while the balance 20% will rest in the books of IBHFL. Indiabulls will do the entire loan processing and disbursal as well as the collection and other processes involved. The co-lending was first permitted by the RBI in 2018 but due to the NBFC crisis at that point of time, it is only just about taking off. For the customer, the interface would still be IBHFL as HDFC will only take a major part of the capital risk. The 80:20 model is broadly how co-lending will work.

What customers must know

The RBI rules stipulate that any co-lending arrangement must be governed by a master agreement between the two parties. While the NBFC will be the single point of contract with the client, they have to be kept informed about the co-lending arrangement as well as the respective claims and liabilities of both the parties to the co-lending deal. In addition, the RBI has also made it mandatory for the co-lending agreement to be backed by a business continuity plan so that customers are clear as to what happens if one of the parties to the co-lending partnership, either opts to walk out or goes bankrupt. Also, the fee will only be charged at one point.

How should borrowers react?

The idea of co-lending is a great idea as it leverages on the balance sheet of a larger lender with the reach and fleet footedness of a smaller lender. For the smaller lender, it enables them to hive off part of the balance sheet risk to the larger player who is better capitalized. There are three things borrowers must be careful about. Firstly, ensure that the larger party to the co-lending deal is a well-established player in the financial system with deep roots and a stake in the system. Secondly, they must go through the fine print of the master agreement before signing on. Lastly, be clear about your exit route, in case you are unhappy. It is then good to go!

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