CredAvenue Co-Financing

What is
Co-Financing

Financing is one of the core aspects of businesses without which surviving in the market is a difficult task. Financing means lending money to a business for its growth or to overcome the short-term cash crunch during its operations. Every business needs finance to grow, ranging from small businesses to multi-national and global corporations. The size of financing can range from a few thousand to multi-billion. 

In a regulated environment, banks and NBFCs are the primary sources of securing finance through loans. Each bank works in its capacity, serving specific clientele. Sometimes the funding requirements of a business are much higher than the bank’s lending capacity. To cater to this huge requirement of funds, Co-Financing is used.

In Co-Financing, multiple banks and lending institutions finance a business. Different institutions have their own rules, screening procedures, lending capacity, and various other matrices to pass the loan. The banks evaluate the business or project they are funding and offer their best deals. They lend a fraction of the proposed amount as per their capacity and earn interest on them, thus creating a win-win situation for all the parties involved. 

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Benefits of Co-Financing

Benefits for lenders 

Lower risk

Since multiple financial institutions co-finance a loan, the risks associated, such as defaults, get segregated among the stakeholders. Hence, it lowers the financing risks for an institution. 

Due diligence

As more than one organization is involved in financing, a robust analysis of the financial position of the business and projects are done to find the actual capability of the business.

Speedy disbursal

Financial institutions have to carry out various lengthy processes before approving and disbursing a loan amount. However, when two or more institutes finance a project, they segregate the document verification processes among them. As a result, it helps the lenders save a lot of time and disburse the loan amount faster than the traditional financing model.

Benefits for borrowers

Affordable interest rates

The borrower could get loans at a very affordable rate because of the reduced cost of financing from banks and the more extensive reach of the NBFCs.

How does Co-Financing work?

RBI announced a Co-Financing or co-originating framework in 2018, which was later amended in 2020. The co-lending model (CLM) included banks and Non-Banking Finance Companies (NBFCs) in the framework. The credit market is highly developed in Tier 1 cities and metros. However, the demand for credit is also high in Tier 2 and Tier 3 cities. By combining the attributes of a bank’s low cost of capital and the broader reach of NBFCs, co-financing can take care of the demand for credit in smaller cities. 

As per the new framework of CLM, the banks can co-finance projects with all the registered NBFCs including housing finance companies. The co-lending banks will take their share of individual loans on a back-to-back basis, i.e., the lenders will share the obligations and liabilities. However, NBFCs would have to keep a minimum of 20% of the individual loans on their books. 

Banks and NBFCs policies will have to be approved by their boards to sign the CML agreement. They will post these policies on their websites and draft a master agreement, including all the information about the operations and management of the business. Interestingly, foreign banks with less than 20 branches are not included under the CLM policy. 

The government has taken some time to come up with the regulations. However, if institutions come forward to work on Co-Financing projects, there is a possibility that the concept may take off in tier-2 cities and beyond.

Why is Co-Financing for you?

For lenders

CredAvenue has more than 250+ businesses listed on its platform with frequent funding requirements. Integration with us opens up a world of co-lending opportunities that make it easy to find and process loans between NBFCs and banks. Since we take care of all the rules and splitting requirements, the entire process becomes painless for lenders.

For borrowers

With an ecosystem of more than 500+ investors and institutions, CredAvenue provides a detailed comparison of their offers and services so that you can pick the right group of lenders to speed up the whole process. We also assist with the tedious processes after the loan is paid off.

FAQs

What are the different types of Co-Financing?

Joint Co-Financing and parallel Co-Financing are two basic types of co-financing.

Joint Co-Financing is a co-financial model where two or more lenders work together to pay for the same goods, works, and services needed for a project in agreed-upon amounts.

While in parallel Co-Financing, projects are divided into specific packages, financed individually by different institutions.

What is Co-Financing known as in India?

Co-Financing is known as co-lending by banks and NBFCs in the Indian banking sector.

Who can get involved in Co-Financing?

Banks and NBFCs can partner or tie up to provide Co-Financing services in a risk ratio of 80:20.