“We got a call that even though we are an NBFC, we would be able to make loans at 14% interest plus a 1% processing fee,” he said.
The co-lending model, pronounced dead on arrival in September 2018, was relaunched last year after a change in regulations in November 2020. In the past few months, a number of agreements have been made between banks and non-banking financial companies (NBFCs) to offer last-mile financing under the co-lending model.
Certainly, stagnation in credit growth, particularly among public banks, and a more burdensome regulatory framework for NBFCs can also play a role in encouraging co-loans.
Bankers said the November 2020 revision of the joint lending guidelines allowed banks to refuse loans made under a specific agreement.
Rajeev Kumar, Executive Director of IDBI Bank, said the co-original model does not give banks a right of objection under the 2018 guidelines. âSo there were problems related to credit risk. That was an obstacle for the model to take off.
âNow banks have the right to refuse by adding the joint lending option (Option B) where banks can say ‘no’ to the NBFC loan if it does not fall within the pre-agreed parameters. Hence, it reduces the credit risk for banks, âsaid Kumar. IDBI Bank has signed an agreement with U GRO Capital and is in talks with several other NBFCs.
The revised framework provides two joint lending options, one of which is for the bank and NBFC to jointly sanction the loan based on mutually agreed underwriting standards. The second option, which involves direct assignment with no minimum holding period required by the NBFC, has improved the model in terms of customer experience, industry leaders said.
Hari Rajagopal, Vice President – Capital Markets & Strategic Initiatives at agricultural financier Samunnati, said the second option allows NBFC to sanction the loan and then ask for a refund from the bank. âThat helps to improve the lead time for the customer. Under the original guidelines, both the bank and NBFC had to sanction each loan at the same time. The new guidelines have made it very convenient for banks to gain exposure to unexplored asset classes, âsaid Rajagopal.
Co-lending agreements also help lower the cost of credit for the end customer. Samunnati has entered into a joint lending arrangement with IndusInd Bank to fund Agricultural Producer Organizations (FPOs) across the country. Typically, according to Rajagopal, a borrower with a farming collective would get an 18-20% loan per annum. “We got a call that even though we are an NBFC, we would be able to make loans at 14% interest plus a 1% processing fee,” he said.
Many of the co-lending ties in place in recent months involve public banks (PSBs), which rely on non-banking partners to lend to customer segments that have historically been inaccessible to them. Anil Gupta, Vice President and Sector Head – Financial Sector Ratings, Icra, said the PSBs have focused primarily on corporate lending in the past and now want to focus on the granular segments of retail, agriculture and MSMEs (RAM). âWhile they also have a large share of the RAM market, these mergers are helping them accelerate the incremental growth we are looking for. However, portfolio buyouts have been a much larger part of portfolio growth so far. Joint lending has not yet caught on there, but it is still in its infancy, âsaid Gupta. Collaborative lending works well for non-banks that have strong lending but don’t have the strength of the balance sheet to borrow large amounts, he added.
Bankers feel that co-lending is a smart option for NBFCs who don’t want to over-grow their balance sheets at a time when regulatory norms for large NBFCs are tightened. Joint lending helps them generate fee and interest income without adding significantly to their balance sheets. âIn 2017-18 NBFCs wanted to scale. Now that the RBI is talking about a tiered regulatory approach, there are NBFCs that do not want to increase because of increased supervision or a lack of capital. The alternative is to go for co-lending partnerships, âsaid a senior PSB officer.
While the co-lending model is still in its infancy, some in the industry see it as an important one given its role in lowering the cost of borrowing. 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 borrowers on the last mile.”
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