Co-Lending: How Two Lenders Fund One Loan Together

Co-lending is one loan funded by two lenders at the same time. A bank and a non-banking finance company each put in a stated share, each carries its own share on its own books, and each earns interest only on the part it put in. The borrower has one loan, one schedule and one amount to repay. The share each lender may hold is set by the Reserve Bank of India.

What does a loan actually promise, and who does it say supplied the money?

Strip a loan down and it is two promises pointing in opposite directions. Money now, against money later on stated terms. The two promises are the whole of a loan. Read them again and notice what is missing: neither promise says how many parties supplied the money now.

Once that gap is in view, a jointly funded loan stops being an exotic arrangement and becomes the ordinary case of one promise funded out of two purses. The borrower's half of the bargain was never described in terms of purses at all. A borrower is given an amount, a rate and a set of dates, and none of those three changes shape when a second purse opens.

Here is the everyday version. Two cousins put money into a delivery van for one vegetable stall, one paying four fifths and the other one fifth. The two cousins hold stated fractions of one van. The van does not become two vans, it does not get driven twice, and the stall does not owe two vans back. The cousins hold a division of one van, agreed between themselves, and the van itself is untouched by the agreement.

What is one loan funded by two lenders?

A loan is an amount handed over now against an agreement to hand back a larger amount later on stated terms. Nothing in that agreement fixes how many parties supplied the amount. A jointly funded loan is the case where two supply it in stated shares, and where each of the two records its own share as its own asset.

The shares are separate assets and the loan is one agreement, and everything else follows from that one line. There is one document that binds the borrower. Above the line there is a single obligation with a single schedule. Below the line there are two sets of books, and on each set of books sits an advanceA loan recorded as an asset by the lender that funded it, sitting on that lender's own books at the amount still outstanding. of a stated size. Neither lender records the whole loan. Neither lender records nothing.

The structural claim is worth being slow about. Two things sit inside it at once that sound like they should cancel. The agreement is indivisible: one borrower, one amount, one set of dates. The funding is divided: two lenders, two amounts, two sets of books. A reader who collapses those two into one picture gets a wrong answer to almost every question that follows.

What does each lender put in, and what does each one get back?

The transaction has two sides, and an account that describes only one of them is half a mechanism, so both sides are written out.

From the bank's side. Suvarna Commercial Bank Limited, an invented bank, funds its stated share of the loan. The bank records that share as an advance on its own books, at the amount it actually put in. The bank funds that share out of what it already holds, and what a bank already holds is overwhelmingly the money depositors have handed it. And it earns interest on that share only.

From the other side of the same transaction. Rukmini Finance Limited, an invented lender, funds its stated share. The finance company records that share as an advance on its own books, in exactly the same way. Rukmini Finance Limited is a non-banking finance companyA lender that lends but takes no deposits. The business itself, and how it differs from a bank, is covered separately. and takes no deposits at all, so it funds that share out of money it has borrowed in the market rather than out of deposits. And it too earns interest on that share only.

Neither lender earns anything on the other lender's share. The split divides the income and the exposure together rather than one of them without the other. The division is not a detail. Imagining that the smaller funder somehow shares in the whole loan's interest describes an arrangement nobody wrote, and imagining that the larger funder carries all the exposure describes a different one.

The split, worked once, as an arithmetic illustration

Take a loan of Rs 1,00,00,000/- shared 80 and 20. The bank's limb is Rs 80,00,000/- and the finance company's limb is Rs 20,00,000/-. A split that does not add back is not a split, and these two add back to the loan exactly.

Each limb then needs a price. Neither lender publishes a price for one individual loan. Each limb is therefore priced at that lender's own reported portfolio figure for the stated year: two unlike numbers, one blend, and the arithmetic in the open. For the year, interest of Rs 18,600 crore reached Suvarna Commercial Bank Limited on earning assetsThe assets a lender actually earns interest on, being its advances plus its investments, as distinct from everything else it holds. of Rs 2,04,000 crore, and Rs 18,600 crore over Rs 2,04,000 crore is 9.12 per cent for that year on that base. Rukmini Finance Limited reports a yieldInterest earned over a stated period divided by a named base. A yield with no base attached to it is not a figure, it is a decoration. of 14.50 per cent a year on its advances.

Rs 7,29,600/- plus Rs 2,90,000/- is Rs 10,19,600/- for the year, and Rs 10,19,600/- over Rs 1,00,00,000/- is 10.20 per cent a year. The whole loan funded at 14.50 per cent a year would have cost Rs 14,50,000/-, or Rs 4,30,400/- more, and that difference is exactly Rs 80,00,000/- multiplied by the 5.38 percentage point gap between the two limb prices. Nothing has gone missing between the two ways of getting there.

Say the rounding out loud rather than hiding it. Carried at full precision the bank's figure is 9.1176 per cent a year rather than 9.12, its limb earns Rs 7,29,411.76 rather than Rs 7,29,600/-, and the blend comes out at 10.19 per cent a year rather than 10.20. No claim anywhere here turns on that difference.

The funding difference, and this one is exact

The two lenders do the same thing with the loan and completely different things behind it. Suvarna Commercial Bank Limited holds Rs 1,92,000 crore of deposits against total assets of Rs 2,40,000 crore, and Rs 1,92,000 crore over Rs 2,40,000 crore is 80.0 per cent of total assets. Rukmini Finance Limited takes no deposits whatsoever and holds Rs 14,400 crore of borrowings against Rs 18,000 crore of assets under management, and Rs 14,400 crore over Rs 18,000 crore is 80.0 per cent on that base.

Both of them fund four fifths of what they hold with money that is not theirs, and the entire difference between the two businesses is whose money it is and on what terms it can be taken back. The two are the same fraction struck on two different denominators. A figure carried away without its base is a number that means nothing.

Who finds the borrower, and who provides the money?

Finding a borrower and funding a borrower are two different jobs. Because they are separable, the arrangement exists at all.

One party does the reaching. The reaching lender finds the borrower, sits across the table, takes the application, collects the papers, does the originationThe work of reaching a borrower, taking the application and completing the paperwork that turns an enquiry into a loan. work and usually stays the borrower's one contact for the whole life of the loan. The other party does the funding. The funding lender supplies most of the money, records its share, and may never meet the borrower at all.

Reach and funding are separable, and separating them is the whole design rather than a side effect of it. An organisation that is good at being present in a place, at knowing a trade, at turning up when a small business needs an answer this week, is not necessarily the organisation sitting on the cheapest and largest pool of money. The reverse is just as common. When those two capabilities sit in different institutions, a loan that needs both has to be built out of both.

The everyday version is a shopping arcade. The person behind the counter of a shop knows every regular customer by name, knows who is good for credit until Friday and who is not, and knows what sells in that street in October. The money that paid for the stock on the shelves came from somewhere else entirely, and the arrangement works because neither of those two things had to come from the same place.

Corporate Lending: why is a shared loan usually written for a company?

A corporate loan is a loan made to a company rather than to a household. There are fewer of them. Each one is much larger. Each is written as its own agreement rather than run off a template, and each carries terms negotiated for that particular borrower rather than terms set for a product.

A loan large enough that one lender would rather not hold the whole of it is exactly the loan that two lenders share, and the shared structure therefore shows up in company lending before it shows up anywhere else. Size is the trigger. A loan of a few lakh rupees is not worth the trouble of splitting; the paperwork of the arrangement would cost more than the arrangement saved. A loan large enough to be a noticeable single position on somebody's books is a different matter.

Whether and how lending to households differs from lending to companies is a comparison run properly on its own, with its own criteria, and it is covered separately. Corporate lending supplies one thing only: the reason the shared structure appears where it does.

The Floating-Rate Loan: why must both shares move on one published reference?

A floating rate loan carries a rate built out of two pieces. There is a published benchmarkA published reference rate that a loan's interest rate is attached to, so that the rate moves when the reference moves rather than when a lender decides. that anybody can look up, and there is a spreadThe fixed amount added to a reference rate to arrive at a loan's own rate. The reference moves; the spread normally does not. added on top of it. The reference moves on its own cycle, for reasons that sit entirely outside this loan and entirely outside the person who took it.

Two lenders holding shares of one agreement need one rate that moves the same way on both shares at the same moment, and a published reference plus a spread is the only structure that does that without either party repricing the other party's share. Think about what the alternative would require. If each lender set the rate on its own limb by its own decision, on its own timetable, the borrower would be holding one agreement carrying two rates that drifted apart, and every movement in either would need the other lender's agreement to keep the document coherent. Neither lender is deciding anything, so the published reference removes the negotiation entirely. Both limbs simply follow a number that neither of them controls.

Resets are covered separately: what one changes, when it happens, and which side of the table carries a rate move.

What does the borrower see when the split moves?

One agreement. One amount. One schedule of dates. One instalment. Usually one party to speak to when something needs saying. A jointly funded loan looks like that from the borrower's side of the counter, and the list is very nearly the whole of what the borrower sees.

The split is an arrangement between the lenders about who funded what, and the borrower never agreed to a split, so the obligation itself does not move. The borrower agreed to an amount, a rate and a set of dates. Move the split from 80 and 20 to 20 and 80 and every one of those three is exactly where it was.

The list of parties the borrower is obliged to does move, and so does the list of parties who must agree before anything about the loan changes. Two parties now have to agree rather than one, and the difference matters at precisely the moments when a borrower most needs an answer: a request to change the terms, a request to settle part of the amount early, a request for more time on one instalment. The Reserve Bank of India, rbi.org.in, sets what a borrower must be told about who the lenders on the loan are.

How Credit Underwriting Affects Lending Economics: where does the assessment land?

How a lender decides whether to lend is covered separately. Where the decision lands is a different question, and more often missed.

The decision lands in two places, and both of them are numbers written on the arrangement. The first is the price attached to the loan. The second is the share each lender is willing to fund. A third consequence arrives later, if the loan stops being repaid: the amount each lender has to set aside as a provisionAn amount a lender sets aside against a loan that may not be repaid in full. How much, and when, is set by the Reserve Bank of India rather than by the lender. against its own share.

An assessment is not a filter that runs once and then disappears, it is the input that fixes the two numbers on the arrangement, and both of those numbers stay on the loan for the whole of its life. The connection people miss sits exactly there. The assessment feels like a gate the borrower passes through and forgets. The assessment is closer to a setting the borrower carries: it decided the rate being paid in year four, and it decided which lender holds which piece of the loan when something needs renegotiating.

What happens to each lender when the loan stops being repaid?

Something stops, and it is worth naming precisely what. The recognition of interest as income stops. A lender that has stopped receiving the interest stops writing it into its profit as though it had arrived, and that stopping happens for both lenders at once, in proportion to what each of them funded.

Each lender then sets aside an amount against its own share. Not against the loan, against its own share of the loan. Its own share is what sits on its own books.

Nothing about the split changes who is affected: a loan that stops performing stops performing for everybody holding a piece of it, in the same proportions in which they funded it. There is no seniority hiding inside an ordinary shared loan, no quiet arrangement by which the party at the counter absorbs the first slice on everyone's behalf. Arrangements in which one partner does absorb a first slice exist and are covered separately, and they are a different thing that has to be written into the agreement on purpose.

When interest stops being recognised as income, and what has to be set aside once it does, are both set by the Reserve Bank of India, rbi.org.in. Both move, and a figure written out for either one would go from correct to false on the day of the revision, with nothing on its face to show it.

A loan that stops being repaid is something that happens to an agreement, and the agreement is what carries the consequence. Whatever the borrower's own difficulty turns out to be, the arrangement between two lenders settles one thing only: how the shortfall divides. The shortfall divides in the funding proportions, on both sets of books, at the same moment.

Who decides what share each lender may hold?

The things a lender does not get to decide run long. The share of a jointly funded loan each lender may hold. The record the arrangement between the two of them must keep. How each of them has to report the loan. When interest stops being recognised as income. The amount to be set aside once it does. The fair practice requirementsThe conduct rules a lender must meet in its dealings with a borrower, covering how it communicates, collects and handles a complaint. that govern dealings with the borrower. The disclosure a borrower must be given about who the lenders are. How the rate must be benchmarked. And what a lender that takes no deposits must do to be registered at all.

Nine separate requirements sit in that list. Every one of them belongs to the Reserve Bank of India, and every one of them moves.

The useful fact is not what any of the nine currently says. Nine of them exist, and naming the authority still points at the right place after the next revision to any of them. A requirement copied out becomes untrue the moment it is revised. Being untrue and looking finished at the same time is the expensive combination. The name Reserve Bank of India beside the address rbi.org.in goes on pointing at whatever the requirement is now.

How does anyone actually use this?