Co-lending model between banks and NBFCs- Key Features

The Reserve Bank of India (RBI) brought out a notification on the co-lending model which has to be incorporated between banks and NBFCs. This notification was brought out through RBI/2020-21/63 FIDD.CO.Plan.BC.No.8/04.09.01/2020-21 on 05 November 2020. The main objective of this notification is to increase the collaboration between banks and NBFCs when it comes to areas of lending in the priority sector. Through this notification, the government plans to create effective harmonisation of loans in several sectors. This notification is related to the co-origination of loans brought out by different banks and NBFCs in the priority sector.

Which Institutions would this Co-lending model be for?

The Co-Lending model is a binding agreement between the parties of the contract. The terms of the agreement have to be negotiated in advance before entering into the contract.

This co-lending model would apply to the following institutions:

• Banks;
• Non-Banking Financial Companies (NBFCs);
• Housing Finance Companies (HFCs); and
• All Scheduled Commercial Banks.

Main Objectives of this Co-lending model

Some of the main objectives of the Co-Lending Model are:

• To Increase Collaboration- To increase collaboration between banks and NBFCs, the government came out with this Co-lending scheme. Through this scheme, different objectives and goals of banks and NBFCs can be achieved and harmonised. The government has brought out several schemes to increase collaboration between NBFCs and Fintech Companies. Through this scheme, the chances of collaboration will increase when it comes to lending.

• Improve Flow of Credit- India is a large country and the major proportion of population in India represents the underserved and the rural sector. To achieve the flow of seamless credit, the government brought out this initiative to help the rural sectors of society.

• Sharing of Risks and Returns- Collaboration would not only mean improvement of lending strategies and development of technology, but it would include sharing of different forms of risks and returns between the banks and NBFC.

• Making Funds Available- Usually, the rural sector finds it hard to afford loans provided by large public sector undertakings and financial institutions. Hence banks have collaborated with NBFCs to serve the rural sector. NBFCs predominately serve the rural sector, hence through this collaboration; banks would also reach this sector.

Features of the Co-Lending Model

The RBI brought out this Co-lending scheme with a view to increasing lending terms between banks and NBFCs.

The following are the features of the Co-Lending Model:

• Master Agreement- Basically, the form of contract or agreement entered between the bank and NBFC would be a master agreement. This would effectively have the properties of a master services agreement. As per this agreement, banks have to take a percentage of their share of the original loans which arise as a result of origination from the NBFC. The entire loans share taken must be recorded in their books. However, these loans are subjected to rejection if they do not comply with the requirements of due diligence.

• Compliance with Law- Any form of agreement entered between the bank and NBFC must comply with the requirements of the guidelines related to Managing Risks and Code of Conduct in Outsourcing of Financial Services. This guideline was issued in the year 2015 vide Reserve Bank of India RBI/2014-15/497 DBR.No.BP.BC.76/21.04.158/2014-15.

• Systems- The banks and NBFC have to ensure that there are effective systems in place to carry out measures on Anti-Money Laundering and Due Diligence.

• KYC Directions- All the agreements related to loans must comply with the Know Your Client (KYC) guidelines which were issued by the RBI. These guidelines were issued in 2016 vide RBI/DBR/2015-16/18 Master Direction DBR. AML. BC.No.81/14.01.001/2015-16. As per the above guidelines, customer due diligence (CDD) has to be carried out according to the requirements of the banks. Hence this Co-lending model takes into consideration due diligence of customers.

• Discretion of Banks- The discretion regarding taking loans originated from NBFCs is based on the prudence and independence of the bank. Sometimes, if the loan is taken into the books, then the transaction would act as per the requirements of the agreement. During this transaction, if there is some form of transfer of loan, then compliance must be maintained related to the transfer. This must be in accordance with the guidelines which were brought out by the RBI. This would correspond to Transactions Involving Transfer of Assets through Direct Assignment of Cash Flows, and the Underlying Securities issued vide RBI/2011-12/540 DBOD. No.BP.BC-103/21.04.177/2011-12 which was brought out in May 2012. All these transactions would act on an independent basis. The Minimum Holding Period (MHP) would not apply to such transactions.

• Minimum Holding Period- In the Co-lending model between the bank and NBFC, the MHP would only be applicable if the agreement has pre-negotiated such requirements. Apart from this, the agreement must contain a back-to-back clause regarding the same. All the other conditions related to the assignment of contracts must be complied by the parties.

• Promoter Groups- Under this Co-lending model, banks are not allowed to enter into any other co-lending schemes, where the NBFC has direct control through a promoter group.

• Customers- When dealing with customers, the terms of the agreement will be negotiated by NBFCs with customers. Hence NBFCs would be the point of contact related to the terms of the agreement. Apart from this, the agreement must contain the roles and responsibilities of banks and NBFCs.

• Consent- All information of the co-lending model must be disclosed to customers. Apart from this each and every customer’s consent must be received for the agreement for the co-lending scheme.

• Interest Chargeable- The borrower will be charged an interest rate after mutual consensus between the bank and the NBFC. The rates of interest calculated must be in accordance with the requirements of interest compliance provisions.

• Customer Service- All respective guidelines issued by the RBI related to customer care and service must be complied by the NBFCs and Banks. These guidelines would be applicable to all agreements coming out from the Co-lending model.

• Information Sharing and Data Protection- NBFCs have to ensure that there is a unified bank statement prepared for customers as per the co-lending model. This statement must be shared with the bank. Apart from this, the co-lending model must adhere to the principles related to data protection.

• Grievance Handling- There has to be effective systems in place to handle any form of grievances of customers. A cell has to be set up by the Co-leaders as per the co-lending model. All grievances of customers must be handled effectively in a fast manner. NBFCs have to ensure that any complaint made must be solved within 30 days from the date of the complaint. If this is not resolved between the Co-lenders, the borrowers can appeal their grievances to the banking ombudsman or the NBFC ombudsman. The customer can also take their grievances to the Customer Education and Protection Cell^[1] (CEPC) in the RBI.

• Maintenance of Escrow Account- Under the Co-lending model all banks and NBFCs have to maintain individual accounts for respective transactions which are carried out. However, all reimbursements and payments will be routed through an escrow account. This account has to be maintained by the banks. This will reduce the amount of mixing of funds between the banks. The terms and conditions of the Master Agreement will have the rules related to appropriation.

• Representations and Warranties- All agreements which incorporate the terms of the co-lending model will have representation and warranties. These representation and warranties have to be according to pre-negotiated terms and conditions between the banks and NBFCs. All NBFCs under this Co-lending scheme would be liable for the share which is recorded in the books of the Bank.

• Recovery of Loans- The Co-lending scheme would have respective arrangements relating to recovery of loans from customers. Such terms related to recovery has to be mutually agreed by the customers.

• Security- Terms related to creation of security in the Co-lending model have to be decided between the bank and the NBFC.

• Asset Classification- All the co-lenders must comply with the rules related to asset classification. This would also be applicable when parties under the co-lending model have to report information to Credit information Companies.

• Internal Audit- Any form of loans provided under the Co-lending scheme must be in accordance to the guidelines of internal/ external audit between the banks and NBFC. Compliance is required for the same.

• Assignments of Loans- Any form of assignment to a third-party lender can only be carried out after securing the consent of the other co-lenders.

• Business Continuity- The provisions relating to any co-lending agreement must not affect the regular business which is maintained between banks and NBFCs with customers. Till the repayment of loan, this scheme must be made operational. Until and unless the scheme is terminated, the co-lending scheme must be operational.

Conclusion

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