- December 13, 2021
- Posted by: OptimizeIAS Team
- Category: DPN Topics
Subject – Economy
Context – 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.
- Under the RBI’s co-lending model, banks are permitted to co-lend with all registered NBFCs (including Housing Finance Companies or HFCs) based on a prior agreement.
- However, NBFCs will be required to retain a minimum 20 per cent share of individual loans on their books.
- The primary focus of the scheme is to improve the flow of credit to the unserved and underserved sectors of the economy, and to make available funds to the ultimate beneficiary at an affordable cost, considering the lower cost of funds from banks, and the greater reach of the NBFCs.
- NBFCs which will be the single point of interface for the customers should enter into a loan agreement with the borrowers.
Is there a risk in co-lending?
- NBFCs are required to retain a minimum 20% share of the individual loans on their books. This means 80% of the risk will be with the banks. If there is a default, banks will take the big hit.
- The Master Agreement may provide for the banks to either mandatorily take their share of the individual loans originated by the NBFCs on their books as per the terms of the agreement, or to retain the discretion to reject certain loans after due diligence prior to taking them on their books.
- Several banks have entered into co-lending tie-ups with NBFCs and more such alliances are in the pipeline.
- Interestingly, the NBFC will be the single point of interface for customers, and it will enter into a loan agreement with the borrower, which should clearly contain the features of the arrangement and the roles and responsibilities of NBFCs and banks. In short, banks will fund the exercise while the NBFC decides the borrower.
Is this allowing corporates backdoor entry into banking?
- The RBI hasn’t officially allowed the entry of big corporate houses into the banking space.
- But NBFCs — which are mostly floated by corporate houses — were already accepting public deposits. Now, they are being given more opportunities on the lending side.