Co-Lending Model by Banks and NBFCs

 

Co-Lending by Banks and NBFCs to Priority Sector

‘Co-Origination of loans’ Scheme for joint lending by banks and NBFCs to the borrowers in priority sector was introduced by RBI in Sep 2018. The arrangement entailed joint contribution of credit at the facility level by both the lenders as also sharing of risks and rewards. The scheme, now named as “Co-Lending Model” (CLM), has been revised significantly, as the original scheme did not take off in a great way. It aims to make available loans at affordable costs to beneficiaries in the un-served and under-served sectors of the economy, by integrating the low cost funds available in the banks with the greater reach of the NBFCs in these areas. The scheme also enables greater operational flexibility to the lending institutions, while requiring them to conform to the regulatory guidelines on outsourcing, KYC, etc.

Why New Name:  To clear any misunderstanding as to who should originate, the name has been changed to co-lending. The loan will be originated by the NBFC and it shall remain the single point of interface for the customers including execution of the loan agreement and other formalities.

Eligible Institutions: While the original scheme permitted only a particular segment of NBFCs to participate, the revised scheme is extended to include all the NBFCs (including HFCs). Foreign banks (including WOS) with less than 20 branches are not allowed to participate in the scheme.

How it operates: Banks are permitted to co-lend with all registered NBFCs (including HFCs) based on a prior Master Agreement. The co-lending banks will take their share of the individual loans on a back-to-back basis* in their books. However, NBFCs shall be required to retain a minimum of 20 per cent share of the individual loans on their books. The Master Agreement may provide for the banks to either mandatorily take their share of the individual loans originated by the NBFCs in their books as per the terms of the agreement, or to retain the discretion to reject certain loans after their due diligence prior to taking in their books, subject to the conditions specified.
(back-to-back basis* - Entire loan is disbursed by the NBFC based on the master agreement. The bank credits its share (back end) to the NBFC through an escrow a/c maintained in the books of NBFC. Repayments will also be at the NBFC counters and the bank’s share will be credited to the debit of the escrow a/c with the NBFC)

Single all inclusive interest rate to the Borrower:  The ultimate borrower will be charged an all-inclusive interest rate as may be agreed upon by both the lenders conforming to the extant guidelines applicable to both. (Both fixed and floating rates are allowed as per the scheme)

An example:

Loan Considered for sanction: R.10 lacs.

Applicable NBFC Interest rate: say 15%      Applicable Bank interest rate: say 12%

If the share is 80:20 between the bank and NBFC, the single inclusive rate is 10.6%  

(12 (bank rate) x80% plus 15 (NBFC rate)x20% = 10.6%)

If the share is 60:40 then the single inclusive rate is 13.2%

(12 (bank rate) x60% plus 15 (NBFC rate)x40% = 13.2%)

Benefits: Low cost funds of the bankers in co-lending agreement with NBFCs is made available to the borrowers at affordable costs in  the un-served and under-served geographies

Advantages:

Banker:

·        Its idle funds that might have otherwise gone into investments will get a better rate of return. 

·       Operational costs are reduced as NBFC does the sourcing and is the single interface with the ultimate borrower.

·     Improved loan recovery percentage in the loans sanctioned, in view of the reach of NBFC, which can visit the borrower any point of time.

·        It gets an opportunity to canvass the CASA account of the borrower plus it can also meet the working capital requirements, since NBFC cannot have operative accounts of the borrower.

NBFC:

·     It can go in for bigger volumes and big ticket size, irrespective of the funds available in its hands for lending, as the master agreement details out the assured back end support of the bank to disburse its share.

·         No business opportunity is lost to its competitor because of liquidity constraints. 

·      As it is the single interface with the borrower, it may enjoy the lion’s share of the processing charges.

Borrower

·         Gets it at cheaper rates, due to share in the loan from the bank, which has low cost funds,

·        Continue to enjoy the faster turnaround time in getting the loans processed and sanctioned as the processes at NBFC is simpler and faster as compared to banks (if necessary he gets the benefit to get the service at the back end)

·    He can establish long term relationship with the banker, who serve at the back end, for his current other needs as well as future requirements.

Chances of Success: There are several un-served and under-served packets in the country. Even State Bank of India, which has fourteen circles, more than 24000 bank branches and 66500 BCs to serve the nation may not claim that they are established everywhere. Same goes with major PSBs and private players like ICICI, Axis Bank, HDFC Bank also. So, this is an excellent opportunity for the major players in the banking industry to tie up with local area NBFCs and HFCs to tap the business potential available in these areas.  In places where they have limited presence, tie-up with NBFCs/HFCs will help them to have a better market share in such places and also face the competition from SFBs and RRBs. As far as NBFCs are concerned, it is a win-win situation only, as the entire interface with the borrower is through them only.  The only care they need to take is to prevent poaching by the other joint lender by suitably including preventive and do’s/dont’s clauses in the master agreement.

Doubts are expressed in some quarters that scaling up of co-lending  is likely to be limited due to issues like sentiment of hierarchy of banks versus NBFCs and the difficulties the smaller NBFCs/HFCs might face in establishing contact with the bigger banks. That should not be a cause for worry, since delegation of powers is decentralised in banks to such an extent that even agreements of a significant amount can be concluded at a Deputy General Manager’s level. In respect of loans to be reimbursed back-ended, the processing cells headed by a chief manager/assistant general manager in the banks have adequate sanctioning powers. To facilitate the enablers at a lower level, the Bank’s Board should detail out in the policy of co-lending, the delegation of powers for entering into business level agreements as well as sanctioning powers for individual loans under CLM. This will ensure that irrespective of the size of the bank, the NBFCs/HFCs need to  interact with a module head only for concluding business level agreements.

Summing up: CLM offers an excellent opportunity for both bankers and NBFCs/HFCs to reach out to the borrowers in the un-served/under-served areas and grow their diversified loan portfolio substantially

V.Viswanathan

7th November 2020

 

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