The Reserve Bank of India vide notification dated 28th July 2021 allowed authorised non-banks p...
Recently, the Reserve Bank of India has proposed the Co-Lending Model scheme, where in the commercial banks can now provide credit in collaboration with the NBFCs. This scheme is for providing easy loans to the commercial borrowers of the priority sector. As per this scheme, the loans shall be provided to the businessmen on the basis of an agreement to be signed in advance.
As we all know that the during the period of lockdown due to COVID-19, the Government has given certain reliefs to the borrowers by way of extending the moratorium on loans. The long period of inactivity during lockdown and the substantial reliefs that Government had to give to the borrowers, collectively had deepened the NPA crisis in Indian banking system. As a result, the commercial banks are facing difficultly in providing new loans due to the fall in their asset value.
In order to mitigate the crisis of the banks, the RBI has introduced the Co-Lending Model between Banks and NBFC– Non-Deposit taking – Systemically Important (NBFC-ND-SIs). The key objective behind the CLM scheme is to enable the financial institutions to provide easy credit to the borrowers of the priority sector.
Firstly, we must understand the meaning of priority sector and which all business activities are included in it.
RBI considers some crucial sectors of the economy as Priority Sectors. These are the sectors of the economy where timely and sufficient credit may not reach easily. The Priority Sector includes the categories as follows:
We shall now understand the guidelines regarding this scheme in details.
The Central Bank has given broad guidelines regarding the Co-Lending Model vide its notification dated 5th November 2020. We will discuss those guidelines in detail.
RBI direct all the scheduled commercial banks, except the Rural Banks and Small-Finance Banks, to co-work with NBFC-ND-SIs for co-lending and giving loans to the priority sector. The system must involve the combined contribution of credit by both the lenders.
This will also imply sharing of the risks and profits among the lending bank and the lending NBFC. This is for the fulfilment of the joint business objectives, in accordance with the mutually signed agreement between the 2 lenders. Hence, we can see that both the lenders shall be required work like a joint venture.
Co-lending with housing finance companies:
The RBI shall also permit banks to co-lend with the home loan entities having NBFC registration, especially the Housing Finance Companies (HFCs) on basis of the prior agreement. The co-lending banks will then be allowed to take their share of individual loans subsequently in their book of accounts. However, the NBFCs in such case must show a minimum of 20% share of the individual loan in their books.
Board Resolution for CLM:
The co-lending banks & NBFCs shall be required to appoint a Board for formulate and approve policies to enter into the CLM. The board-approved policies have to be uploaded on their websites. On the basis of these Board approved policies; a Master Agreement shall be signed by the 2 co-lending institutions. This Master Agreement shall inter-alia include the following:
Rejection of certain loans
As per the Master Agreement, the banks shall have 2 options: whether to take their share of the individual loans co-originated with the NBFCs in their books strictly according to the terms of the agreement; or to retain their discretion of rejecting some loans.
However, this will be permissible only upon their due diligence by a 3rd party, which shall be done much prior to entering in their book of accounts.
Banks as priority sector units
The banks themselves can also claim the status of a priority sector with respect to their share of credit, while being entered into the CLM. However, in such situation, the banks shall be subject to certain specific conditions.
Role of the foreign banks
The RBI has laid down separate criteria for the foreign banks in CLM. Foreign banks (incl. WOS) having branches below 20 shall not be eligible for the CLM.
Now we shall discuss the key regulations of entering into the CLM. This shall entail the following aspects:
Customer grievance redressal
For effective grievance redressal, the following directives have been laid down:
Grievance redressal mechanism:
With respect to the grievance redressal mechanism, an appropriate methodology must be there as per which the co-lenders can resolve the complaints of the borrowers.
The operational aspects of the co-lenders have been clearly spelled out by the RBI as below:
Separate accounts for transactions:
Conditions for sharing of loan:
Both lenders must adhere to the regulatory guidelines for asset classification and requirements for creating provisions, and report the same to the Credit Information Companies.
Central Bank statutory audit
The loans given as per the CLM shall come under the purview of internal or statutory audit of the RBI. Both the lenders shall be subject to audit to ensure proper compliance to their respective internal guidelines, terms of the agreement and the extant regulatory requirements.
Transferring of loan:
Transfer of a loan can be done by a co-lender to any3rd party only on the consent of the other co-lender.
In such case, both the co-lenders shall execute a “business continuity plan” that will assure an uninterrupted service to the customer still his repayment of loan under the CLM agreement. Such a case implies termination of the co-lending arrangement among the co-lenders.
As discussed earlier, bank has the option to mandatorily take their loan share originated by the NBFC into its book of accounts, or to reject certain loans subject to proper due diligence. In this regard,
Read our article:Difference between Banks and NBFCs