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Is Co-lending the ultimate Answer To The NBFC Crisis?

2019 was a warning call for the RBI, Government, and therefore the economic experts to specialise in the NBFC crisis on priority, if the lending industry is to be saved from a collapse.

The IL&FS issue had long remained unsolved, and therefore the dehydration of funds from the PSU Banks within the rise of unearthing of scams led to a decent capital crunch for the NBFCs.

Banks refusing to refinance loans has cropped up a huge dearth of liquidity. Many veteran bankers including Uday Kotak and Marzban Irani feel that it's only a matter of your time before the turbulence within the financial sector affects the whole economy.

While RBI has tried to elevate things by cutting Repo rate for the 5th time during a single year (2019) to the 9-year low, the govt looks hopeful about co-lending because the potential and permanent solution. RBI had already laid out the framework for the co-origination model quite a year ago, but it had been around April 2019 that SBI actively started talks with 4-5 NBFCs to roll out its co-lending model.

What is co-lending/co-origination of loan?
  • Co-lending, or co-origination of loan is an appointment between a domestic full service bank and an NBFC to jointly issue credit and manage loans at the power level.
  • Co-lending, or co-origination of loan lifts the burden and risk of a whole loan from the shoulders of one entity.
  • A bank and an NBFC jointly issue a loan with the exposure ratio being 80:20 of all the risks and rewards between them.
  • Such co-originated loans can only be issued for “priority sector lending”.
What does Priority sector include?
  • Agriculture
  • MSMEs
  • Export Credit
  • Education
  • Housing
  • Social infrastructure
  • Renewable energy, et al. .
Why is co-origination/co-lending of loans important?
  • According to the RBI Master Circular, domestic scheduled commercial banks got to have the entire priority sector lending (PSL) at 40% of the new adjusted bank credit or credit equivalent amount of off-balance sheet exposure, whichever is higher.
  • There also are sub-targets for every sector; especially for agriculture and MSMEs.
  • However, currently the banks, which barely manage, and sometimes incredibly fail to properly evaluate, assess, and underwrite the credit of the borrowers of the urban PSL category thanks to lack of resources, have little time and energy to spare for the remote geographies.
  • Hence, banks are trying to find new avenues to satisfy the targets without it being a burden on their existing resources, which inserts within the co-lending model.
  • It is an effort by the RBI to make sure the flow of capital to the priority sectors while mitigating challenges by the financial institutions in doing so.
How will co-lending actually work?
  • Currently there are not any RBI guidelines to manage co-lending. However, it's soon promised to return up with them to systematically establish and run the co-lending model.
  • The entire process of lending- right from co-origination of loans to the loan management/monitoring to the loan recovery and settlement will happen digitally through automation, with none human intervention, as suggested by the SBI in a politician statement.

How many entities in India are already a neighborhood of the co-lending model?

State Bank of India, Bank of Baroda, and therefore the Union Bank of India have already announced their ventures with respective NBFCs. Other banks are expected to follow them.

Is this really beneficial for the NBFCs?
  • From all the discussions it's like though the model was chalked out thanks to the rising challenges within the NBFC sector, it serves more as a medium for the large banks to succeed in to the grass-root level borrowers and MSMEs.
  • However, to deny that NBFCs don't benefit within the entire process would be ignorance.
  • It addresses the main problem NBFCs in India are facing for an extended time- lack of established systems of the banks to scale back the danger of defaults.
  • With co-lending, NBFCs can exploit the expertise and diligent processes of the banks to issue loans, and also share the danger of default.
  • It also encourages NBFCs to travel fully digital with their operations to extend transparency within the ecosystem
  • Lastly, co-lending/co-origination of loans boosts the expansion , assets, and profitability of the NBFCs without much investment.

The ultimate goal of the co-lending/co-origination lending model is to eventually bridge the gap in micro-lending between the banks and therefore the remote areas which were otherwise inaccessible without the NBFCs. However, it yet remains to be seen how, what looks so promising on paper, seems to get on execution.

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