RBI Revises Co-Lending Framework to Enhance Transparency and Risk Sharing

The Reserve Bank of India (RBI) issued revised guidelines to strengthen the co-lending framework between banks and non-bank financial companies (NBFCs). The new rules mandate that all regulated entities (REs) involved in co-lending arrangements (CLAs) must retain at least 10% of each individual loan on their own books.

Objectives

• Strengthen the co-lending partnership framework between banks and non-bank lenders.
• Improve risk alignment, ensure uniform asset classification, and protect borrower interests.
• Expand co-lending applicability beyond priority sector lending (PSL) to non-priority sector loans.

Key Features of the Revised Co-Lending Norms:

1. Minimum Loan Retention Requirement:

• All regulated entities (REs) must retain at least 10% of each loan on their own books.
• Promotes risk participation and skin in the game for both partners.

2. Default Loss Guarantee (DLG) Provision:

• Originating lender may offer a first-loss guarantee up to 5% of the outstanding loan amount.
• Aligns with existing FLDG norms under digital lending.

3. Uniform Asset Classification:

• If one partner classifies a loan as an SMA (Special Mention Account) or NPA, the same must be adopted by the co-lender for their portion.
• A Special Mention Account (SMA) is a classification used by banks to identify potentially stressed loan accounts before they officially become Non-Performing Assets (NPAs).

4. Credit Policy Alignment:

• All REs must explicitly incorporate co-lending provisions in their internal credit policies.

5. Mandatory Disclosures in Loan Agreement:

• Loan agreements must clearly define roles of each partner (e.g., sourcing, servicing).
• Must mention the single point of contact for the borrower.

6. Blended Interest Rate Mechanism:

• Borrowers will be charged a blended rate, calculated based on the weighted average of each lender’s internal rate in proportion to their contribution.

7. Annual Percentage Rate (APR) Transparency:

• All additional fees or charges beyond the blended rate must be factored into the APR and disclosed.

8. Escrow-Based Transaction Handling:

• All loan disbursements and repayments must flow through an escrow account maintained with a bank.
• An Escrow Account is a temporary, third-party account where funds are held safely until all conditions of a transaction are fulfilled by the involved parties.
• Ensures real-time settlement, audit trail, and greater transparency.

9. Timely Loan Recognition:

• Loan portions must be reflected on each partner’s books within 15 days of origination.

10. Expanded Applicability:

• Framework now covers:
  • Non-priority sector lending
  • Co-lending between any regulated entities (not just bank-NBFC partnerships)

ET