India must exploit the full potential of collaborative lending
Tie-ups between banks, non-bank lenders and digital platforms bring diverse strengths together for operations that can bridge India’s credit gaps. This ecosystem would do even better with a well designed framework for co-lending governance, data sharing and customer servicing.
India’s financial ecosystem is evolving fast, driven by digitization and the need for inclusive credit. Within this landscape, collaborative lending has emerged as a promising way to bridge traditional credit gaps and bring formal finance closer to retail borrowers as well as small and medium businesses, especially the historically underserved.
Among the various collaborative lending models available to banks and non-bank financial companies (NBFCs), two are most popular. One, co-lending arrangements between banks and NBFCs; and two, partnerships involving digital Lending Service Providers (LSPs). Though these models currently represent a small portion of India’s total outstanding advances, their growth is far outpacing that of conventional lending.
Synergy is at the heart of collaborative lending. Traditional banks and large NBFCs bring capital strength, regulatory compliance and reach. On the other hand, smaller NBFCs, fintech firms and digital platforms are agile, well connected to niche borrower segments and often excel in technology-driven origination and underwriting.
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For example, a rural-focused NBFC that understands the borrowing behaviour of dairy farmers or small kirana shop owners in Tier 3 towns may have high-quality leads and underwriting insights, but may lack capital or the regulatory headroom to scale up. Joining forces with a larger bank or NBFC through co-lending would benefit both entities, while the borrower gets faster credit.
LSP-based models are another key component. These digital platforms do not carry credit risk themselves, but play a vital role in onboarding, assessing and servicing customers. Their ability to use alternative data such as digital transaction patterns allows for the credit evaluation of customers outside the formal credit score system.
Collaborative lending models typically involve a risk-sharing structure. In the bank-NBFC model, the bank usually funds 80% of the loan and the NBFC the rest. The NBFC often leads the origination and customer engagement process, while the bank brings capital and risk oversight. This structure aligns incentives aptly, provided that underwriting standards are agreed upon at the outset.
In contrast, in LSP collaborations, the lending entity retains full credit exposure. The LSP’s value lies in lowering acquisition and processing costs, improving the customer experience and enabling faster disbursement using digital workflows.
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In both models, borrowers benefit from quicker credit decisions, less rigid scorecard-based lending and better servicing.
To scale up collaborative lending models responsibly, stakeholders must address a few challenges.
Short-term operational hurdles include aligning the partners. Misalignment is a practical challenge, especially in co-lending arrangements. Differences in underwriting practices, exposure norms or documentation standards can create delays or even disqualify creditworthy borrowers. For example, a co-lender may enforce stricter income verification than the originator, creating friction. Such misalignment can reduce credit flows and lead to provisioning surprises.
Customer service accountability is another operational hurdle. Regulations assign clear responsibility to the lender for grievance redressal, but the on-ground execution becomes complex when multiple entities interact with the borrower. This is especially true in rural or semi-urban areas where borrowers may not be able to distinguish between a bank and its LSP or NBFC partner. Without systems that clearly define servicing roles, response timelines and customer experience can deteriorate.
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A longer-term systematic concern is data security and governance. Collaborative lending involves sharing sensitive borrower data across systems. This becomes especially concerning when lightly regulated entities are involved. Strong data encryption, consent protocols and audit trails must be in place.
To realize the full potential of collaborative lending, several developments are necessary. In the regulatory context, it would help to have more detailed guidance on co-lending governance, data-sharing protocols and customer-servicing standards. A framework that outlines shared responsibilities and escalation norms could improve execution and accountability.
Technological innovation will also be key. Innovations such as real-time co-lending APIs, AI-driven underwriting and distributed ledger technology hold the potential to increase the speed of disbursement, reduce operating costs as well as underwriting errors, and increase confidence among co-lenders. Industry-level standardization—for example, common onboarding protocols or interoperable APIs between regulated entities—would help further reduce onboarding friction and enhance scale.
The potential for collaborative lending in India goes well beyond credit expansion—it is about enabling financial dignity and access for millions of people and small businesses. For banks, it is an opportunity to grow without building new last-mile infrastructure. For fintech firms and smaller NBFCs, it offers access to capital and credibility. For borrowers, it means faster and fairer credit. We must not view these partnerships as mere business arrangements. They are ecosystems that thrive when all participants are aligned with the purpose.
The author is partner, banking and capital markets leader, Deloitte India.
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