Context:
The Department of Revenue has rejected a recommendation by a panel led by State Bank of India (SBI) to exempt the 18% Goods and Services Tax (GST) levied on activities of co-lending between commercial banks and non banking financial companies (NBFCs).
Reason for Rejection
- Department of Financial Services has already entrusted SBI to form a colending committee to look into problems in the business model, which has several types of agreements between banks and the NBFCs.
- A fitment committee determined that these agreements are too vague and need to be looked into more in depth before a decision on GST exemption can be reached.
Co-lending
Co-lending refers to the pooling of funds from two or more lenders for provision of credit to a borrower. The lead lender is normally a bank, though the co-lender could be an NBFC, another bank, or a fintech company.
- How it works?
- The lead lender originates the loan application and is responsible for credit assessment and documentation.
- The co-lender contributes part of the funding.
- Both lenders are sharing the loan risks and benefits.
- Benefits
- Co-lending enhances access to credit to the underserved areas.
- This enhances the effectiveness of lending procedures.
- It also allows lenders to take advantage of the strengths that other lenders can provide.
- Example
- In India, the RBI has introduced co-lending to the MSMEs in the year 2020. According to the model by RBI on co-lending, it involves banks’ low-cost capital combining with the reach of NBFCs.
Co-lending Model
In this model, NBFCs keep at least 20% of individual loans in their book, while rest is kept by banks.
The RBI has permitted colending of loans by banks and NBFCs, including housing finance companies, for expansion of credit access to the under and un served sectors of the economy.
Growth Projections of Co-lending
- Crisil Ratings has observed that the portfolios of NBFCs are likely to reach ₹1 trillion by June 2024, and in the medium term, it is expected to register an annual growth rate of 35-40%.
- According to PwC India, co-lenders have provided about ₹ 47,000 52,000 crore in FY23, which may increase fivefold to reach ₹22.5 trillion over the next five years.
