Is a Co-Lending Model the Answer for MSME Credit Gaps?

India's MSMEs are crying out for credit: only 19% of total MSME credit demand was being met officially by FY21, leaving a daunting ₹80 lakh crore unmet.

Despite contributing nearly 30% of GDP and employing over 110 million people, many small businesses still rely on informal sources that charge far more. What they need isn't just more capital. They need it when and where it matters.

That's where co-lending comes in. Co-lending blends the deep pockets of banks with the agility of NBFCs and fintechs. Could this hybrid model finally rewrite the MSME lending story? Let's find out in this blog.

What Makes Co-Lending Models Popular?

Co-lending has grown rapidly because it creates value for every stakeholder involved. For banks, it means meeting their priority sector lending targets without having to reach small borrowers directly.

NBFCs benefit by accessing larger pools of capital from banks, which reduces their cost of funds. For borrowers, especially MSMEs, the model delivers credit at better rates and with greater flexibility.

Other reasons driving its popularity:

• Lower Cost of Credit: Banks' low borrowing costs combine with NBFCs' outreach efficiency.
• Last-Mile Connectivity: NBFCs are known for their expansive reach, especially in rural and semi-urban areas.
• Quicker Approvals: Co-lending platforms are technologically sound. This sharpens decision-making and makes it faster.
• Risk Sharing: Both institutions split the loan. This reduces individual exposure.

How Does a Co-Lending Arrangement Support MSMEs?

For many small businesses, borrowing money can be a frustrating experience. Banks want heavy collateral and endless paperwork. NBFCs, while friendlier, don't always have the big funding muscle.

That's exactly where co-lending hits the sweet spot.

It's like putting both strengths together to create a loan that actually works for MSMEs.

• Greater Access to Credit: When banks and NBFCs pool their funds, there's simply more money on the table. This means even first-time borrowers or smaller enterprises get a fair shot at credit.
• Better Loan Terms: Banks bring in cheaper capital. NBFCs bring flexibility and a personal touch. Combine the two, and MSMEs get interest rates that don't burn a hole in the pocket.
• Reduced Barriers: Many NBFCs look beyond just collateral. They'll assess businesses using local knowledge, alternative data, and on-ground insights. This expands coverage to micro-entrepreneurs, women-led ventures, and semi-urban businesses that banks often miss.
• Wider Reach: NBFCs enjoy a strong network. The co-lending model ensures funds reach the kirana in a small town or the workshop in a tier-2 city. Such places are often not as lucrative or accessible to banks.
• Digital Integration: NBFCs are often born in a digital-first environment. As a result, co-lending platforms enjoy another layer of ease. From automated KYC to online repayment tracking. Less red tape, more transparency.
• Faster Turnaround: The digital infrastructure and the paperless ecosystem make it easier to source and check loan applications. As a result, approvals happen quickly and money flows sooner.

And here's a small tip: if cash flow is urgent and you can't wait for a co-lending loan to come through, a personal loan can act as a smart stopgap for payroll or supplier bills. Hero FinCorp's instant personal loan, for instance, is a quick, digital option worth exploring.

Looking Ahead: The Future of Co-Lending

The co-lending model is fast emerging as a pillar of MSME finance, marrying banks' low-cost capital with NBFCs' agility and reach.

Recent policy changes have added to this momentum. For instance, the Union Budget doubled credit guarantee cover for MSMEs to ₹10 crore. On the other hand, the RBI's repo rate cut makes borrowing more affordable. Together, these shifts create fertile ground for MSMEs to scale without financial roadblocks.

And for entrepreneurs who need a quicker lifeline, Hero FinCorp's personal loan offers a simple, digital way to keep business moving.

Frequently Asked Questions

1. What is a co-lending model?

It's when a bank and an NBFC join hands to give you a loan. You deal with one lender, but behind the scenes, both share the funding and risk.

2. Does co-lending mean I borrow from two lenders?

Not directly. You'll interact with just one lender (usually the NBFC). The co-lending arrangement happens in the background.

3. Is co-lending available everywhere in India?

Yes, but it's gaining fastest in MSME-heavy regions, rural belts, and semi-urban centres where NBFCs already have strong networks.

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