Co-Lending Model for Bank and NBFC

• IAS NEXT, Lucknow
• 16, Dec 2021

Reference News-

In September 2018, the RBI had permitted the banks to co-lend with all registered NBFCs (including HFCs) to increase lending to the priority sector based on a prior agreement.

• Following this, several banks have entered into co-lending ‘master agreements’ with NBFCs, and more are in the pipeline.

What’s the concern now?

This has led to unusual tie-ups between banks and NBFCs. For instance, SBI signed a deal with Adani Capital, a small NBFC, for co-lending to farmers to help them buy tractors and farm implements.

Greater risk in co-lending: NBFCs are required to retain at least a 20 per cent share of individual loans on their books. This means 80 per cent of the risk will be with the banks — who will take the big hit in case of a default.

Corporates in banking: While the RBI hasn’t officially allowed the entry of big corporate houses into the banking space, NBFCs — mostly floated by corporate houses — were already accepting public deposits. They now have more opportunities on the lending side through direct co-lending arrangements.

What is the Co-Lending Model?

Co-Lending Model allows for a joint contribution of credit at the facility level by both the lenders, as also sharing of risks and rewards.

• AIM: to improve the flow of credit to the unserved and underserved sector of the economy.

Significance of the model:

• The lower cost of funds from banks and greater reach of the NBFCs will make available funds to the beneficiary at an affordable cost.
• It will help banks to expand customer base and enables them to provide last mile banking services.