“We got a call saying that although being an NBFC, we will be lending at an interest rate of 14% plus a 1% processing fee,” he said.
The co-lending model, declared dead on arrival in September 2018, has come back to life over the past year, following a change in regulations in November 2020. The last few months have seen a series of agreements being signed. between banks and non-bank financial corporations (NBFCs) to offer last mile financing under the co-lending model.
Certainly, stagnant credit growth, especially in public sector banks, and a more onerous regulatory framework for NBFCs may also play a role in promoting co-lending arrangements.
Bankers said the November 2020 review of co-lending guidelines allowed banks to reject loans issued under a particular deal.
Rajeev Kumar, executive director of IDBI Bank, said that under the 2018 guidelines, the co-origin model does not give banks the right to reject. “So there were credit risk issues. This was an obstacle to take off the model.
“Now the banks have the right to refuse by adding the co-loan option (option B) in which the banks can say ‘no’ to the loan issued by the NBFC if it does not fall within the pre-agreed parameters. Therefore, it reduces the credit risk for banks, ”Kumar said. IDBI Bank has entered into a deal with U GRO Capital and is in talks with a few other NBFCs.
The revised framework allows for two co-lending options, one of which involves the bank and the NBFC jointly sanctioning the loan based on mutually agreed underwriting standards. The second option, involving direct assignment without the NBFC needing to adhere to a minimum holding period, made the model better in terms of customer experience, industry executives said.
Hari Rajagopal, vice president – Capital Markets and Strategic Initiatives at Agri-financier Samunnati, said under the second option, the NBFC can sanction the loan and then get reimbursed by the bank. “This improves the turnaround time for the customer. According to the original guidelines, the bank and the NBFC were to simultaneously sanction each loan. The new guidelines have made it very convenient for banks to gain exposure to unexplored asset classes, ”Rajagopal said.
Co-loan agreements also help reduce the cost of borrowing for the end customer. Samunnati has entered into a co-loan agreement with IndusInd Bank to finance agricultural producer organizations (OPAs) across the country. According to Rajagopal, a borrower with a collective of farmers would typically get a loan at 18-20% per annum. “We got a call saying that although being an NBFC, we will be lending at an interest rate of 14% plus a 1% processing fee,” he said.
Many co-loan reconciliations made in recent months involve public sector banks (PSBs) that rely on non-bank partners to provide loans to customer segments that have historically been inaccessible to them. Anil Gupta, Vice President and Sector Head of Financial Sector Rating, Icra, said PSBs have largely focused on corporate lending in the past and now want to focus on the granular segments of the business of retail, agri and MSMEs (RAM). “While they also have a significant market share in RAM, these mergers help them accelerate the incremental growth they are targeting. However, so far portfolio buybacks have been a much larger part of portfolio growth. The co-loan hasn’t caught on yet, but it’s just the start, ”Gupta said. Co-lending works well for non-banks who have origination strength but not balance sheet strength to borrow heavily, he added.
Bankers believe the co-lending is a smart option for NBFCs who don’t want to increase their balance sheet too much at a time when regulatory standards for large NBFCs are tightened. The co-loan helps them earn commission and interest income without significantly increasing their balance sheet. “In 2017-18, the NBFCs were looking to grow. Now that the RBI is talking about a tiered approach to regulation, there are NBFCs that are unwilling to expand, either because of increased oversight or because they lack capital. The alternative is to go for co-lending partnerships, ”said a senior executive from a PSB.
Although it is still in its infancy for the co-lending model, some in the industry see it becoming important, given its role in lowering borrowing costs. Kumar, of IDBI Bank, said: “Over a period of time, co-lending is the future of PSL (Priority Sector Lending) and will help reduce the cost of financing for the last mile borrower. “
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