The Reserve Bank of India’s Co-Lending Model has led to unusual tie-ups like the one announced earlier this month between the State Bank of India (SBI) and Adani Capital.
About the Co-Lending Model
- In September 2018, the RBI had announced “co-origination of loans” by banks and Non-Banking Financial Companies (NBFCs) for lending to the priority sector.
- The arrangement entailed joint contribution of credit at the facility level by both the lenders as also sharing of risks and rewards.
- To put it simply, under this arrangement, both banks and NBFCs share the risk in a ratio of 80:20 (80 percent of the loan with the bank and a minimum of 20 percent with the non-banks).
How does a co-lending model work?
- The Reserve Bank of India (RBI) had come out with the co-origination framework in 2018 allowing banks and NBFCs to co-originate loans.
- These guidelines were later amended in 2020 and rechristened as co-lending models (CML) by including Housing Finance Companies and some changes in the framework.
- The primary aim of CLM is to improve the flow of credit to the unserved and underserved segment of the economy at an affordable cost. This happens as banks have lower cost of funds and NBFCs have greater reach beyond tier-2 centres.
- As per RBI norms, a minimum 20 percent of the credit risk by way of direct exposure shall be on NBFC’s books till maturity and the balance will be on the bank’s books. Upon maturity, the repayment or recovery of interest is shared by the bank and NBFC in proportion to their share of credit and interest.
- This joint origination allows banks to claim priority sector status in respect of their share of credit. NBFCs act as the single point of interface for the customers and a tripartite agreement is done between the customers, banks and NBFCs.
What are the opportunities?
- The co-lending model if it takes off and is executed rightly will ensure delivery of credit to the unserved and underserved
- The real gap of credit exists with the segments such as small and medium businesses, credit to lower and middle-income groups, rural areas
- The opportunity can be taken up by digital lending start-ups and mid-size NBFCs, and they can actually marry their strength of distribution with bank’s funds
What is the way forward?
- to address the huge credit gap the co-lending model is one of the right ways to go forward, but challenges around tech integrations and ground-level executions should be addressed.
- The country’s largest lender, SBI, recently said it is actively looking at co-lending opportunities with multiple NBFCs / NBFC-MFIs for financing farm mechanisation, warehouse receipt finance, farmer producer organisations (FPOs), etc., for enhancing credit flow to double the farmers’/individuals’ income.
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