What is ‘co-lending’, allowed by RBI — and why has it come in for criticism

Contact Counsellor

Last Updated14/12/2021

Banks are now going in for co-lending arrangements with non-banking finance companies (NBFCs) following a decision by the Reserve Bank of India to allow such lending practices.
Banks are authorised to co-lend with all registered NBFCs (including Housing Finance Companies or HFCs) based on a prior arrangement under the RBI's co-lending model.
NBFCs, on the other hand, would be compelled to keep a minimum of 20% of individual loans on their books.
As a result, innovative collaborations have emerged, such as the State Bank of India's intention to collaborate with Adani Capital ""to increase the flow of credit to unserved and underserved areas.""

Due to the sheer lower cost of funds from banks and the larger reach of NBFCs, the co-lending model aims to improve the flow of credit to the unserved and underserved sectors of the economy and make money available to the final recipient at an affordable cost.
Banks are required by RBI regulations to lend 40% of their net bank credit to sectors including agriculture, micro and small businesses, underserved communities, and emerging fields such as renewable energy.
On a back-to-back basis, banks will take their part of the individual loans.
According to the RBI, NBFCs must keep a minimum of 20% of the individual loans on their records.
The NBFC will serve as the customer's single point of contact and will enter into a loan agreement with the borrower that spells out the terms of the arrangement as well as the roles and obligations of NBFCs and banks.
Exception: This model will not be applicable to foreign banks with less than 20% branches.

Each individual borrower's account for their respective exposures will be maintained by the co-lending banks and NBFCs.
To avoid inter-mingling of money, all transactions (disbursements/ repayments) between banks and NBFCs connected to CLM must be routed through an escrow account maintained by the banks.

A Non-Banking Financial Company (NBFC) is a business entity governed by the Companies Act of 1956.
Loans and advances, acquisition of Government or local authority issued shares/stocks/bonds/debentures/securities or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business, but not any institution whose principal business is agriculture, industrial activity, purchase or sale of any goods (other than securities), or providing any services and sale/purchase/construct

Several banks have signed master agreements with NBFCs for co-lending, and others are in the works.
SBI, the country's largest lender, has entered into a co-lending agreement with Adani Capital, a tiny NBFC owned by a huge corporation, to assist farmers in purchasing tractors and agricultural tools.
Union Bank of India and Capri Global Capital Ltd (CGCL) have engaged into a co-lending arrangement with the goal of ""improving last-mile finance and driving financial inclusion to MSMEs by delivering secured loans between Rs 10 lakh and Rs 100 lakh"" through ""100+ contact points pan-India"" at first.

Several groups have criticised major banks' decision to partner with minor NBFCs for co-lending.
NBFCs must keep at least 20% of individual loans on their records under the CLM. This implies the banks will bear 80% of the risk, as they will be the ones to bear the brunt of any default.
The master agreement may stipulate that the banks must either accept their share of the individual loans originating by the NBFCs on their books or retain the option to reject particular loans after due diligence before putting them on.

If the co-lending concept takes off and is properly implemented, it will ensure that credit reaches the underserved and unserved.
There is a real credit gap in segments such as small and medium-sized businesses, credit to lower and middle-income groups, and rural areas.
Digital lending start-ups and mid-sized NBFCs may take advantage of the opportunity, and they can genuinely combine their distribution strength with bank funding.