Source: BS
Context:
Despite recent relaxations in co-lending norms, Indian banks are showing a clear preference for direct assignment of loans from NBFCs rather than engaging in co-lending arrangements.
Direct Assignment vs. Co-Lending:
- Direct Assignment (DA): Banks buy a pool of loans directly from NBFCs without using a special purpose vehicle (SPV).
- Advantages:
- Banks acquire ownership and the right to receive borrower payments.
- Allows banks to free up capital for NBFCs.
- Enables banks to cherry-pick high-quality loans.
- Helps meet priority-sector lending targets.
- Advantages:
- Co-Lending: Banks and NBFCs jointly lend to borrowers, sharing risk and returns.
- Complexity has increased due to RBI’s new rules (15-day assignment window, tech integration requirements).
Reasons for Banks’ Preference:
- Risk Transfer: Direct assignment allows a clean transfer of credit risk.
- Operational Simplicity: Less administrative burden compared to co-lending.
- Profitability: Banks can retain higher-margin loans.
- Portfolio Expansion: Immediate exposure to new loan pools.
Definitions:
- Direct Assignment (DA): Transfer of loans from NBFCs to banks without SPV; bank assumes ownership and repayment rights.
- Co-Lending: Joint lending model where banks and NBFCs share loan disbursement, risk, and returns.
- A Special Purpose Vehicle (SPV) — also known as a Special Purpose Entity (SPE) — is a legally separate subsidiary company created by a parent organization to isolate financial risk and carry out a specific project or transaction.
- It acts as an independent legal entity with its own balance sheet, assets, and liabilities, distinct from its parent organization.
