Co-Lending Model by Banks and NBFCs for Priority Sector
In a bid to the bring best of banks and NBFCs together, Reserve Bank of India (RBI) has issued guidelines under the Co-Lending Model that non-banking finance companies (NBFCs) and banks can jointly lend. The Co-Lending Model (CLM), which is an improvement over the co-origination of loan scheme announced in September 2018, seeks to provide greater flexibility to the lending institutions.
Key points of Co-Lending Model (CLM), as per the RBI guidelines:
- Banks and NBFCs can provide loans to priority sector borrowers based on a prior agreement.
- Both Banks and NBFCs share risks and rewards according to the agreement.
- NBFCs need to retain a minimum of 20% share of the loans on their books.
- Grievance redressal mechanism: The co-lenders must put in place a suitable mechanism to resolve any complaint registered by a borrower with the NBFC within 30 days.
- If the complaint is not resolved, the borrower can escalate the same with the concerned Banking Ombudsman or Customer Education and Protection Cell (CEPC) in RBI.
Advantages of Co-lending Model:
- It provides greater operational flexibility to the lending institutions.
- It provides an excellent opportunity to NBFCs to grow their assets under management.
- It improves the flow of credit to the underserved sections of the economy.
- It makes available funds to the PSL beneficiary at an affordable cost, given the lower cost of funds from banks and the greater reach of the NBFCs.
- It will bring down interest rates and the borrowers of NBFCs like Housing Finance Companies (HFCs) will benefit.
The Co-lending Scheme of RBI is a welcome step especially when the economy is affected by Covid-19. Apart from stimulating Priority Sector lending and boosting NBFCs, the Co-Lending Model has the potential to kick-start the investment activity in the economy to “bring back better” from the Covid-19 crisis.