Bank-NBFC co-loan: how it works, and the concerns it raises

A November 2020 decision by the Reserve Bank of India (RBI) allowing banks to “lend jointly with all registered NBFCs (including HFCs) on the basis of prior agreement,” has led to unusual reconciliations like the one announced earlier this month. between the State Bank of India (SBI) and Adani Capital.

The “co-loan model”

In September 2018, the RBI announced a “loan co-organization” by banks and non-bank financial corporations (NBFCs) for priority sector loans. “The agreement involved a joint contribution of the credit at the facility level by the two lenders as well as a sharing of risks and rewards,” said the RBI.

Subsequently, based on stakeholder feedback and “to better leverage the respective comparative advantages of banks and NBFCs in a collaborative effort,” the central bank granted lenders greater operational flexibility, while at the same time providing them with greater operational flexibility. requiring compliance with regulatory guidelines.

The main objective of the revised program, renamed the “Co-loan Model” (CLM), was to “improve the flow of credit to the unserved and underserved sector of the economy and make funds available to the public. affordable end-beneficiary, given the lower cost of funds for banks and the greater reach of NBFCs, ”the RBI said in a circular issued on November 5 last year.

Bank-NBFC links

Several banks have signed co-lending “framework agreements” with NBFCs, and more are in the pipeline.

On December 2, SBI, the country’s largest lender, signed an agreement with Adani Capital, a small NBFC of a large corporation, for a co-loan to farmers to help them purchase tractors and farm implements.

SBI’s giant network includes 22,230 branches, 64,122 automatic teller machines (ATMs) and cash dispensers (CDMs) and 70,786 commercial correspondent points (BCs) across the country. Adani Capital has a network of just 60 branches and has shelled out around Rs 1,000 crore, according to its website.

On November 24, Union Bank of India entered into a co-loan agreement with Capri Global Capital Ltd (CGCL), with the aim of “improving last mile financing and fostering financial inclusion of MSMEs by offering loans guaranteed between Rs 10 lakh and Rs. 100 lakh “initially through” 100+ pan-India contact points “.

Risk in the co-loan

The big banks’ decision to partner with small NBFCs for the co-loan drew criticism from several sides.

Under the CLM, NBFCs are required to keep at least 20 percent of individual loans on their books. This means that 80% of the risk will fall on the banks, which will take the brunt of it in the event of default.

The terms of the framework agreement may provide that banks must take their share of individual loans issued by NBFCs on their books, or that they retain the discretion to reject certain loans after due diligence before taking them on their books. .

Interestingly, the RBI guidelines provide for NBFCs to be the single point of interface for clients and to enter into loan agreements with borrowers, who should define the characteristics of the agreement and roles. and responsibilities of NBFCs and banks. Indeed, while the banks finance the major part of the loan, the NBFC decides on the borrower.

Businesses in banking

While the RBI has not formally authorized the entry of large corporations into the banking space, NBFCs – mainly issued by corporations – already accepted public deposits. They now have more opportunities on the lending side thanks to direct co-lending agreements.

It came at a time when four major financial firms – IL&FS, DHFL, SREI and Reliance Capital – which raised public funds through term deposits and non-convertible bonds, collapsed in the past three years despite close scrutiny. of the RBI. Collectively, these companies owe investors approximately Rs 1 lakh crore.

While the RBI has referred to “the greater reach of NBFCs,” many bankers point out that the reach of banks is much broader than small NBFCs with networks of 100 branches to serve underserved and unserved segments.

SBI on the co-loan

Announcing the tie-up with Adani Capital, SBI Chairman Dinesh Khara said the partnership “will help SBI expand its customer base, connect with the underserved agricultural segment of the country and further contribute to the growth of the economy. Indian agriculture “. SBI, he said, “would continue to work with more NBFCs to reach as many customers as possible in remote areas and to provide last mile banking services.”

Managing Director and CEO of Adani Capital, Gaurav Gupta, said the company aims to “make economic credit available to Indian micro-entrepreneurs”. Through the partnership with SBI, it sought to “contribute to agricultural mechanization and play a role in improving the productivity and income of the agricultural segment”.

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