Parliamentary Panel Calls for Wider Bank-NBFC Co-Lending to Improve MSME Credit Access

Parliamentary Panel Calls for Wider Bank-NBFC Co-Lending to Improve MSME Credit Access

A parliamentary panel has called for wider use of structured co-lending between banks and non-banking financial companies to improve formal credit access for India's micro, small and medium enterprises, highlighting persistent financing gaps despite rapid growth in lending to the sector.

The Standing Committee on Finance has identified co-lending as one of the mechanisms capable of combining banks' relatively lower funding costs with the reach, specialised underwriting and borrower knowledge of NBFCs.

The recommendation comes as policymakers seek to address longstanding MSME financing constraints including insufficient collateral, limited financial documentation, delayed receivables and higher perceived lending risks.

Panel Sees Co-Lending as Route to Wider MSME Finance

Bank-NBFC co-lending brings two different financial capabilities together.

Banks generally possess large deposit bases and comparatively low funding costs.

NBFCs can often reach borrowers that conventional banking channels find more difficult to serve, particularly smaller businesses requiring specialised underwriting.

A stronger co-lending ecosystem can therefore combine:

• Lower-cost bank capital

• NBFC distribution networks

• Specialised credit assessment

• Local borrower knowledge

• Digital underwriting

• Shared credit risk

The objective is to increase formal credit availability without forcing either institution to build the other's capabilities independently.

MSMEs Still Face Structural Credit Constraints

India's MSME sector has become increasingly formalised, but access to affordable finance remains uneven.

The parliamentary committee highlighted challenges including limited collateral, inadequate financial records, information asymmetry, delayed payments and higher perceived risk among new-to-bank borrowers.

Geographic differences in banking penetration and financial literacy can create additional barriers.

These problems are particularly significant for micro and smaller enterprises that may operate viable businesses but lack the documentation traditionally required for bank credit.

NBFC Lending to MSMEs Has Expanded Rapidly

NBFCs have become increasingly important providers of MSME finance.

The committee's report noted that MSME credit through NBFCs increased from ₹1.41 lakh crore as of March 31, 2021, to ₹4.82 lakh crore as of March 31, 2025.

That represents compound annual growth of approximately 36%.

The expansion demonstrates the important role NBFCs already play in reaching smaller business borrowers.

Banks Bring Lower Cost of Capital

One of the central arguments for co-lending is funding economics.

Banks can typically raise capital more cheaply because they have access to customer deposits.

NBFCs generally depend more heavily on:

• Bank borrowing

• Bonds

• Commercial paper

• Securitisation

• Other wholesale funding

Those funding sources can be more expensive.

When NBFCs lend to higher-risk MSMEs using relatively expensive capital, borrowing costs for the final customer can increase.

Co-lending offers a potential way to reduce this structural disadvantage.

NBFCs Bring Last-Mile Distribution

Lower funding costs alone do not solve the MSME credit problem.

Banks may find small business lending operationally expensive because borrowers can be geographically dispersed and require detailed assessment.

NBFCs have developed expertise in serving such customers.

Their advantages can include:

• Local branch networks

• Sector-specific knowledge

• Alternative underwriting

• Faster processing

• Smaller loan sizes

• Relationship-based assessment

These capabilities can complement bank funding.

Co-Lending Shares the Credit Exposure

Under co-lending arrangements, participating lenders retain exposure to the underlying loans rather than one institution simply acting as a distributor.

This alignment is important because both lenders retain an economic interest in borrower performance.

A well-designed structure can distribute risk while allowing each institution to contribute its strongest capability.

Banks provide scalable capital, while NBFCs can contribute sourcing, underwriting and servicing.

RBI Has Broadened Institutional Channels

The Reserve Bank of India has progressively supported institutional mechanisms designed to expand credit access.

RBI Governor Sanjay Malhotra said in June that priority-sector recognition for NBFC on-lending and co-lending arrangements had broadened the institutional channels through which MSMEs can obtain finance.

The central bank has also encouraged financial institutions to make greater use of digital infrastructure including Account Aggregators, TReDS and other data-based credit systems.

Collateral Remains Major Barrier

Traditional business lending frequently depends on property or other assets that can be pledged as security.

Many small businesses do not possess sufficient collateral.

This creates a fundamental problem.

A business may generate adequate cash flow to repay a loan while still being unable to satisfy conventional collateral requirements.

Greater use of cash-flow-based lending could therefore materially expand the pool of financeable MSMEs.

Collateral-Free Lending Limit Has Increased

The RBI has also taken steps to reduce collateral barriers for smaller enterprises.

The mandatory collateral-free loan limit for micro and small enterprises was recently doubled from ₹10 lakh to ₹20 lakh.

The central bank has indicated that this could potentially extend to ₹25 lakh for businesses demonstrating a consistent financial track record.

Such measures can complement co-lending by allowing lenders to evaluate businesses increasingly on operating performance rather than physical security alone.

Credit Guarantees Can Reduce Lender Risk

Government-backed credit guarantees represent another important part of the MSME financing architecture.

The Credit Guarantee Fund Trust for Micro and Small Enterprises can reduce lender risk on eligible loans.

Guarantees are particularly important for borrowers that:

• Lack property collateral

• Have limited credit histories

• Are relatively young businesses

• Need smaller loan amounts

Reducing potential losses can encourage banks to lend to otherwise creditworthy enterprises that fall outside conventional underwriting models.

Digital Data Can Transform MSME Underwriting

One of the biggest changes in small-business lending is the growing availability of digital financial information.

Lenders can increasingly evaluate borrowers using:

• GST records

• Bank transactions

• Income-tax data

• Digital payments

• Account Aggregator information

• Invoice histories

These data trails can provide a more detailed picture of business cash flow.

That can reduce information asymmetry between MSMEs and lenders.

Account Aggregator Framework Gains Scale

India's Account Aggregator framework is becoming increasingly relevant to credit underwriting.

The RBI said lending facilitated through the framework reached approximately ₹3.5 lakh crore during FY26.

Account Aggregators allow customers to consent to secure sharing of financial information between institutions.

For MSME lending, this can help lenders analyse financial behaviour without depending entirely on physical documents.

Unified Lending Interface Could Improve Credit Delivery

The Unified Lending Interface represents another element of India's emerging digital credit architecture.

The objective is to make relevant borrower information more easily available to lenders through standardised digital connections.

For smaller enterprises, reducing information and documentation friction could make loan applications:

• Faster

• Cheaper

• More transparent

• Easier to assess

Combining these systems with co-lending could substantially change MSME credit distribution.

TReDS Addresses Working-Capital Problem

Not all MSME financing problems require conventional term loans.

Delayed customer payments are a major source of working-capital stress.

The Trade Receivables Discounting System allows eligible businesses to obtain financing against approved invoices instead of waiting for customers to make final payment.

This can convert receivables into immediate liquidity.

Delayed Receivables Can Hurt Healthy Businesses

A company can be profitable on paper while still facing a cash shortage.

Suppose an MSME supplies goods to a large company but receives payment several weeks or months later.

During that period, it still needs cash for:

• Salaries

• Raw materials

• Electricity

• Rent

• Taxes

• New orders

Receivables financing can help close this timing gap.

Parliamentary Panel Supports Stronger TReDS Ecosystem

The broader parliamentary policy discussion has also emphasised strengthening TReDS to improve liquidity for small businesses.

Wider participation by large buyers can increase the number of invoices available for financing.

Competition among financiers on these platforms can potentially help businesses obtain better pricing.

This makes TReDS complementary to bank-NBFC co-lending rather than a competing financing mechanism.

Cash-Flow Lending Could Expand Borrower Pool

Traditional lending models often rely heavily on balance sheets and collateral.

Cash-flow lending instead evaluates whether the operating business generates sufficient money to service debt.

Digital financial trails make this increasingly possible.

For example, lenders can analyse:

• Monthly sales

• Customer payments

• Bank inflows

• GST filings

• Existing debt obligations

• Cash-flow volatility

This can potentially bring more informal or recently formalised businesses into the credit system.

Banks Could Reach New Customers Through NBFC Partnerships

Co-lending allows banks to expand into markets without establishing extensive new physical distribution networks.

A bank can partner with an NBFC already serving a particular borrower segment or geography.

This can help banks enter areas such as:

• Small manufacturing

• Retail businesses

• Transport operators

• Service enterprises

• Rural businesses

The approach can therefore increase credit penetration while keeping customer-acquisition costs manageable.

NBFCs Could Benefit From Cheaper Funding

For NBFCs, co-lending can provide access to bank balance sheets without requiring the NBFC to finance the entire loan itself.

This can increase lending capacity.

If the economics are structured efficiently, lower funding costs can also be partly passed on to borrowers.

That is particularly important for MSMEs because even modest differences in interest rates can materially affect profitability.

Technology Can Make Co-Lending More Scalable

Co-lending requires coordination between two financial institutions.

Historically, operational complexity could make such partnerships difficult.

Technology can increasingly automate:

• Loan origination

• Credit assessment

• Documentation

• Fund flows

• Repayment tracking

• Portfolio monitoring

Standardised technology infrastructure could therefore make co-lending economically viable for smaller loan sizes.

Credit Quality Must Remain Central

Expanding MSME lending cannot come at the expense of underwriting discipline.

Small businesses can be vulnerable to:

• Economic slowdowns

• Commodity-price changes

• Delayed customer payments

• Interest-rate movements

• Sector-specific downturns

Banks and NBFCs therefore need robust systems to evaluate repayment capacity.

Poorly structured rapid credit expansion could eventually create asset-quality problems.

Risk Sharing Should Not Weaken Accountability

Co-lending distributes exposure between institutions, but each lender still needs appropriate incentives to maintain credit standards.

If one partner originates loans while another carries most of the economic risk, underwriting discipline can weaken.

Effective co-lending therefore requires:

• Clear responsibilities

• Meaningful risk retention

• Transparent underwriting

• Portfolio monitoring

• Customer protection

Regulatory oversight will remain important as the model scales.

MSME Formalisation Improves Financing Potential

India's expanding digital tax and registration systems are gradually creating more reliable financial records for smaller businesses.

Formalisation can improve credit access because lenders gain better visibility into:

• Turnover

• Tax compliance

• Banking activity

• Customer relationships

• Business longevity

A stronger financial trail can reduce perceived risk and potentially lower borrowing costs.

Better Credit Access Can Support Investment

Access to affordable finance affects much more than short-term liquidity.

MSMEs require capital to:

• Purchase machinery

• Expand factories

• Adopt technology

• Hire employees

• Build inventory

• Enter export markets

Greater credit availability can therefore support productivity and business expansion.

Manufacturing MSMEs Could Benefit

Manufacturing businesses can have particularly high financing requirements.

They often need substantial working capital for raw materials while also investing in equipment.

Co-lending could help banks and NBFCs jointly serve manufacturers that have strong operating businesses but limited collateral.

This could complement India's broader push toward domestic manufacturing.

Exporters Need Reliable Working Capital

Export-oriented MSMEs face additional financing requirements because international payment cycles can be lengthy.

They may need capital to purchase inputs and manufacture goods well before overseas customers make payment.

Improved working-capital finance can therefore help smaller Indian exporters accept larger orders without creating excessive liquidity pressure.

Women and First-Time Entrepreneurs Could Gain Greater Access

Alternative underwriting and wider distribution could also improve access for entrepreneurs with limited traditional banking histories.

Digital financial data can help lenders assess the actual performance of a business rather than relying entirely on historical credit relationships.

This could expand opportunities for first-time borrowers and businesses operating outside major financial centres.

Regional Credit Gaps Remain Important

Access to finance varies considerably across India.

Large urban centres generally have stronger banking and financial-service networks than many smaller towns.

NBFCs and fintech-enabled lenders can help extend formal credit into underserved areas.

Co-lending provides a mechanism through which bank capital can follow those distribution networks.

MSME Credit Is Also a Major Banking Opportunity

Improving MSME lending is not simply a policy obligation.

The sector represents a large commercial opportunity for financial institutions.

Banks capable of identifying strong smaller businesses early can build long-term relationships as those companies grow.

These relationships can expand into:

• Working-capital finance

• Term loans

• Payments

• Trade finance

• Foreign exchange

• Cash management

MSME lending can therefore become an important source of durable banking revenue.

What Banks and NBFCs Should Watch

The parliamentary push toward wider co-lending puts several developments in focus:

• RBI co-lending framework

• MSME loan growth

• Credit costs

• Asset quality

• TReDS adoption

• Account Aggregator usage

• Cash-flow underwriting

• Credit guarantees

• Digital lending infrastructure

• Regional credit penetration

The effectiveness of these mechanisms will ultimately be measured by whether viable smaller businesses obtain formal credit at sustainable costs.

Outlook

The parliamentary panel's recommendation reinforces a broader shift in India's MSME financing strategy.

Rather than expecting banks, NBFCs, fintech companies or government schemes to solve the credit problem independently, policymakers are increasingly building an interconnected financing ecosystem.

Banks can provide lower-cost capital. NBFCs can provide specialised underwriting and distribution. Digital infrastructure can reduce information gaps. Credit guarantees can reduce risk, while TReDS can address receivables-related liquidity.

If these mechanisms scale together, the result could be a more competitive and inclusive credit market for smaller businesses.

Conclusion

The parliamentary call for wider bank-NBFC co-lending highlights one of the central challenges facing India's MSME economy: businesses need greater access to formal credit, but lenders must provide that capital without compromising underwriting standards.

NBFCs have already demonstrated their ability to expand MSME lending, with their credit to the sector rising from ₹1.41 lakh crore in March 2021 to ₹4.82 lakh crore by March 2025.

Combining that reach with banks' lower-cost funding could create a more efficient financing channel.

The larger opportunity lies in integrating co-lending with credit guarantees, TReDS, Account Aggregators and cash-flow-based underwriting.

If executed effectively, this approach could move MSME financing away from excessive dependence on collateral and toward a system where credible business cash flows and digital financial records play a much larger role in determining access to capital.