The first-ever transaction to securitise co-lent loans, which has been rated by CRISIL Ratings¹, opens another funding avenue for non-banking finance companies (NBFCs).

Says Krishnan Sitaraman, Senior Director and Deputy Chief Rating Officer, CRISIL Ratings Ltd, “Securitisation, wherein loans originated by a lender are pooled and transferred to third-party investors for upfront consideration, has been a favoured funding route for NBFCs, given the potential for credit enhancement and the resultant cost benefits. However, it has been limited so far to loan pools originated by a single lender. Securitisation involving co-lent loans, which made its debut in India only recently, is now generating considerable market interest, given the potential to monetise the growing co-lending books of lenders.”

Co-lending, which has gained traction of late, involves joint disbursement of loans to borrowers by two lenders under a common underwriting policy — a large funding partner with capital heft that holds a higher share of the loans on its book, and a smaller sourcing partner holding the rest and providing origination and collection services for the loans to generate fee-based income. Cash flows from the borrowers are split between the partners as per the terms of the co-lending arrangement.

The transaction rated by CRISIL Ratings, for instance, was backed by receivables from a pool of loans disbursed under co-lending arrangements between an NBFC lending to small and medium enterprises and five of its co-lending partners that were non-banks. The NBFC that undertook the securitisation transaction acted as the funding partner, holding 90-100% of the loans on its books, while its co-lending partners were involved in sourcing and servicing these loans, and held the remaining share of loans (please refer to annexure 1).

Such securitisations involve unique legal and operational aspects. One, as the co-lending partners hold a portion of the receivables from the underlying loans, a partner can securitise only its share in the underlying borrower payments that contractually belong to it under the co-lending agreements. Two, the securitised receivables need to be bankruptcy remote from the co-lending partners to achieve delinkage from their credit risk profiles.

Three, co-lending arrangements typically provide for the larger funding partner to step in and replace the smaller sourcing partner as the servicer of loans if the collection performance of the sourcing partner is not satisfactory, thereby providing an upfront back-up servicer option for the securitisation transaction.

Four, co-lending arrangements may involve first loss default guarantees (FLDGs) from sourcing partners to compensate the funding partner for losses due to delinquencies in the co-lending portfolio. Assignment of such FLDGs to the securitisation trust, if operationalised, could enable better transaction economics by providing loss absorption against loan delinquencies.

Says Rohit Inamdar, Senior Director, CRISIL Ratings, “The advent of securitisation of co-lent loans underscores the role of innovation in bringing more loan portfolios under the purview of the securitisation market. Securitisation can enhance transparency regarding the quality of co-lent loans, thereby boosting market confidence on the sourcing, underwriting and servicing norms governing co-lending arrangements. This can, in turn, lead to more securitisation avenues backed by co-lent loans, enhancing the potential for NBFCs to manage their liquidity by deploying funds in high-yielding co-lent loans that can be released over the short-term through securitisation.”

¹https://www.crisil.com/mnt/winshare/Ratings/RatingList/RatingDocs/LeoAugust2022_September%2009,%202022_RR_300612.html