Banks Prefer Direct Assignment Over Co-Lending

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.
• 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.