Revamping Co-Lending : Can Blockchain Help?

The co-lending model, introduced by the RBI in 2018 to bolster credit flow into priority sectors like rural areas, renewable energy, and MSMEs, has encountered significant hurdles within the Indian banking sector. Despite its aim to address underserved sectors, challenges persist, particularly regarding transparency and efficiency.

How does Co-Lending work ?

In the collaborative lending framework, banks and NBFCs collaborate to extend credit to borrowers, jointly assuming both the risks and benefits associated with lending.

Two co-lending models exist, albeit not explicitly outlined in RBI guidelines. However, the industry has embraced the following framework:

The co-lending landscape in the Indian banking sector faces significant challenges, primarily centered around data collection, performance evaluation, coordination between banks and NBFCs, disparities in risk assessment, and underwriting processes.

One major concern is the lack of comprehensive data to assess the model's effectiveness, hindering stakeholders from understanding its true impact. Coordination issues between banks and NBFCs, including disparities in policies and expectations, further complicate the co-lending process.

Additionally, the Reserve Bank of India's specific requirements for co-lending arrangements add complexity, necessitating a delicate balance in partnerships.

Can Blockchain Help?

Blockchain technology can address these challenges by providing a secure, transparent, and immutable platform for data sharing and management. It can enhance data collection, streamline performance evaluation, ensure trust in transactions, and facilitate seamless coordination between multiple parties. By leveraging blockchain, Indian banks and NBFCs can overcome the current hurdles in the co-lending landscape, improving efficiency, transparency, and overall effectiveness of the model.

Blockchain technology emerges as a promising solution to enhance the co-lending process. By leveraging blockchain's immutable and transparent nature, lenders and NBFCs can securely share and verify data, overcoming the current lack of comprehensive performance evaluation metrics. This transparency fosters trust and accountability, essential for successful collaboration.

Moreover, blockchain streamlines coordination between banks and NBFCs by providing a shared platform for policy adherence and risk assessment. Smart contracts, programmable agreements executed automatically upon predefined conditions, ensure seamless execution of co-lending terms, minimizing disputes and negotiation complexities.

Through blockchain, lenders can also access real-time data on borrowers' creditworthiness, enabling more accurate risk assessment and reducing the reliance on disparate underwriting processes. This standardized approach enhances efficiency while maintaining the integrity of the co-lending model.

Blockchain technology has the potential to offer transformative solutions to the challenges plaguing the co-lending model in the Indian banking sector. By fostering transparency, efficiency, and coordination, blockchain paves the way for a more inclusive and sustainable lending ecosystem.