Co-lending from the Trenches: A Practical View on Launching & Scaling Co-lending Programs
The journey of co-lending is remarkable. What started as a small step to boost liquidity has turned into a well-heeled program, with every leading business wanting a piece of the pie. There is enough information about the program and its uniquity all over the internet, while close to none detailing the practicality of launching the program.
That is why we wanted to speak to an industry expert on launching & scaling co-lending programs. When we reached out to Mr. Vishal Miglani, the Vice President of Strategic Alliances & Collaborations at TruCap Finance Ltd., to help us put together co-lending from the trenches, he graciously agreed to sit down with us.
TruCap adopted Finflux's lending suite in 2021 to significantly scale up its lending book while lowering operational expenses. Finflux's intelligent Business Rule Engine and configurable Loan Origination & Management System (LOMS) workflows helped them process substantially higher volumes, increase productivity, and enhance operational efficiency. TruCap has leveraged Finflux's technology and successfully implemented 17 co-lending programs.
During our candid session, Mr. Vishal delved deeper into the practicality of implementing a co-lending program, the challenges & complexities, how tech can solve them, etc. And further extended his expertise in outlining the industry from an enterprise vantage.
Q: What's your experience in launching a co-lending program at TruCap?
A: I started my journey with TruCap in 2019, right about the time when co-lending was gradually gaining attention from multiple stakeholders in the ecosystem. We started co-lending programs in June 2020. Today, it covers 22% of our entire book. At TruCap, we generally carry out two types of co-lending: Upstream and Downstream. When we partner with another NBFC, it's called a downstream partnership, where we provide our balance sheet, and the partner NBFC serves as a Loan Service Provider (LSP). When we get into a co-lending agreement with a Bank, it's called an upstream partnership, where the Bank provides the balance sheet, and we serve as their LSP. In both types of partnerships, we agree upon a hybrid product (with/without tweaks) that serves the borrowers efficiently.
Over the years, we have built a remarkable co-lending journey with leading public/private sector banks and NBFCs. Between June 2020 and March 2022, we signed up with 17 partners and built a 200-crore book with them.
Q: What setbacks did you encounter in launching a co-lending program?
A: The primary impediment to any co-lending program is how well both lending partners' systems and processes can work. It's obvious! Any co-lender would contemplate what goes into their partner's loan cycle and how their organization can understand and accommodate that loan cycle. Well… I would say finding a middle ground to adapt and accept each other's processes and tech is easier in a downstream partnership. Because as an enterprise, we partner with smaller NBFCs who are driven by the ethos of sustainable growth by catering to underserved borrowers to keep them afloat in the business. Their readiness to amend their tech to align themselves to the processes and technology of the co-lender is always high.
Once the product integration is sorted, the next stumbling block is the integration of processes and technology. Whether you want a bulk upload via SFTP, or manual inputs varies from partner to partner and depends on the tech-readiness of the partner and stage of business at which technology can truly impact sustainable scaling to play a role of an enabler.
Using First Principles in the brainstorming sessions with a strong bias toward action; avoid paralysis by analysis. - Vishal Miglani
Q: Can you elaborate on the practical challenges in scaling a co-lending program and how did you overcome them?
A: The biggest challenge today the industry is facing is handling loan management and collections. Not all customer journeys are happy and smooth. Some customers do not pay on time; some miss an EMI or two; some make a part payment; some pay upfront, and others might not pay at all. We can resolve this issue in one of the following ways: Either the partner NBFC should adapt the system logic of the NBFC that provides the balance sheet or vice versa. So, what happens here is both parties sit down for a mutual discussion to decide. And this is where major disconnect/recon happens in any co-lending relationship.
For example, let's consider the ICP logic. Each NBFC has a different rule book for delayed payments, penal charges, etc. Some NBFCs allow customers to pay their EMI beyond the due date without any penal fees, while others apply penal charges from day one. Depending on the type of arrangement we sign up, the systems must be aligned and integrated to minimize and address the complexities to effectively gauge risk.
Q: How do you handle collections?
A: When it comes to a downstream partnership, we maintain a mirror image of the partner's book in real-time. Say I have a demand for 1,000 customer repayments. The partner NBFC meets the demand and keeps the books. Of these, 5 or 6 customers may miss repayments, and we tag these customers in real-time as the partner NBFC puts a tab on them. Only when we do this in real-time, risk can be managed effectively. Waiting for a partner to report after the customer becomes an NPA could make the situation dire. This is where tech support comes into play.
Q: You have executed several successful partnerships. What is your secret sauce in selecting your co-lending partners?
A: As highlighted earlier, we work with sustainable and growth-oriented stakeholders in the co-lending ecosystem. We have invested substantially to create an infrastructure that allows for ease of business while making credit accessible and affordable for the underserved MSMEs. Our SoPs guide us in selecting co-lending partner(s) whose vision is aligned to ours. However, it is essential to conduct specific due diligence to ensure a successful partnership. At TruCap, we have a set of criteria, and we carry out extensive due diligence, including financial due diligence, product due diligence, team due diligence, branch network spread, ability to collect, geography, and more.
Further, we only partner with NBFCs that maintain a similar ecosystem of products or in the line of products we offer. For instance, we are an MSME business loan company, so we will do a downstream partnership with an NBFC that is into business loans, not those offering personal loans. The ethos of what we want to do is standard, and we don't divert from it.
Q: In the line of the previous question, what does a typical P&L discussion entail in a partnership?
A: I firmly believe in using First Principles in the brainstorming sessions with a strong bias toward action; avoid paralysis by analysis. We have been quite clear that these partnerships need critical levers of business and metrics to be addressed appropriately at the beginning of the association to avoid post integration pangs and duplication of efforts. We strictly adhere to the Discuss—Implement—Understand method for going live with a program. In line with this approach, we built standardized SoPs to partner with stakeholders. We follow those SoPs for any partner onboarding, from log-in settings to disbursements to collections and thereafter. The SoPs details multiple scenarios and how to handle them effectively and efficiently. But one needs to bear in mind that these SoPs and processes have been established and refined through our learnings over the years. The SoPs are dynamic and subject to periodic updates in line with market developments.
Q: What’s the role of tech in this journey?
A: Technology, of course, is doing its bit as a business enabler playing a pivotal role in making credit accessible. The co-lending relationships and levers driving the business remain unchanged, whether the relationship is upstream or downstream co-lending. Hence, tech accounts for a significant role in enabling business objectives through co-lending relationships. It enables transparency and helps the parties understand customer challenges in real time to address ground challenges more effectively.
But with time, we are also beginning to understand its limitations and the risks associated with it. As there is no one-size fits all solution, there are certain situations that still require manual invention.
Q: Where do you see co-lending’s future?
A: Today, the co-lending industry is close to 25-30K crore book across India, perhaps even more. With more and more FIs joining the bandwagon, the growth potential is high.
That brings us to the end of this wonderful session packed with tons of practical insights. Here is a quick summary of the practical challenges.
1. The main hurdle in any co-lending program is the compatibility of both lending partners’ systems and processes. Both systems should communicate with ease. This calls for middleware to enable transparent and smooth communication.
2. The next biggest challenge is managing the edge case loans. There is a need for effective tools to address the loans that divert from the regular repayment cycles. Co-lenders should find common ground to tackle such situations.
3. Finally, insight into customer behavior at the ground level will facilitate the balance sheet providers to make informed decisions.
About Vishal Miglani
Mr Vishal Miglani is one of the key leaders driving TruCap towards excellence. He got on board with TruCap in 2019, before which he was a highly successful entrepreneur in the fiercely competitive automotive industry. With his illustrious career spanning over 23 years in both the Financial and Automotive industries, he brings a wealth of experience in operations, sales, and marketing. Mr Miglani has remarkable expertise in team building, project management, financial analysis, and developing a new product from the ground up. He is a proud alumnus of the esteemed University of Mumbai.
TruCap Finance Limited, also known as TRU, is an omnichannel, RBI-registered lender listed on BSE & NSE. TRU empowers MSMEs by providing tailored credit solutions through a network of 75+ branches across India. By leveraging technology, TRU has disbursed 1,25,000+ affordable loans, supporting borrowers' growth ambitions. Additionally, the NBFC has established co-lending/co-origination tie-ups with leading public and private sector banks and other financial institutions to expand its offerings. (TruCap Finance Limited was formerly known as Dhanvarsha Finvest Limited.)