Context:
The Reserve Bank of India (RBI) has proposed a new co-lending model requiring simultaneous loan disbursal by both banks and non-bank financial companies (NBFCs). The existing model, which allows NBFCs to originate and assign loans to banks, may be phased out. The Finance Industry Development Council (FIDC) is preparing to represent NBFC concerns formally to the RBI.
RBI to Expand Co-Lending Framework Beyond NBFCs and PSL
The Reserve Bank of India (RBI) is set to roll out a new, more inclusive co-lending framework, expanding the scope beyond existing arrangements between banks and NBFCs and beyond Priority Sector Lending (PSL).
Current Co-Lending Framework (Status Quo)
- Applicable Parties: Banks and Non-Banking Financial Companies (NBFCs) only
- Scope: Restricted to Priority Sector Lending (PSL) categories
- Risk Sharing: Typically, NBFCs initiate and service the loan, while banks share the risk and funding
- Objective: Leverage NBFC reach with bank liquidity to serve underserved segments
Why Change is Needed
- Increased Complexity: Co-lending models have diversified, sometimes involving fintechs and multilayered structures
- Elevated Interest Rates: Some arrangements led to higher borrower costs, drawing regulatory concern
- Inconsistent Risk Sharing: Varying practices created regulatory grey areas
- Consumer Protection Risks: Need for better transparency, grievance redressal, and fair lending practices
Related Developments
- RBI sees lower inflation in FY26: Forecast cut to 4%
- Repo Rate Cut: 25 bps reduction; stance now ‘accommodative’
- NPCI Empowered on UPI Limits: Can revise P2M transaction limits after consultation with banks
- Securitisation of Stressed Assets: RBI plans to enable market-based resolution
Implications of Expanded Co-Lending Framework
- For Borrowers: Potential for wider access to affordable credit with improved transparency
- For Banks & NBFCs: Clearer rules may reduce compliance uncertainty and risk exposure
- For Fintechs: Opportunity to be part of regulated co-lending partnerships
- For Economy: Supports financial inclusion and MSME growth with diversified credit models
The RBI’s Co-lending Framework
The RBI’s Co-lending Framework allows two financial institutions, like a bank and a non-banking financial company (NBFC), to jointly fund a loan portfolio in a pre-agreed proportion, with both sharing revenue and risk. This framework aims to improve credit flow to underserved sectors by combining the low-cost funding of banks with the reach of NBFCs and other financial entities.
Key Aspects:
- Joint Funding: Co-lending involves two or more financial institutions jointly disbursing loans to borrowers.
- Pre-agreed Proportion: The lending partners agree on the proportion of the loan each will fund.
- Risk and Revenue Sharing: Both partners share the risks and rewards associated with the loan portfolio.
- Sourcing and Management: Co-lending arrangements can include provisions for one partner to handle loan sourcing, credit appraisal, and management, while the other provides funding.
- Expansion Beyond Priority Sector: The RBI has expanded the framework to include all regulated entities and loan types, not just priority sector lending.
- Escrow Accounts: Escrow accounts are used to ensure transparency and compliance with regulations in co-lending partnerships.
Benefits of the Co-lending Framework
- Improved Credit Access: It allows financial institutions to reach a wider range of borrowers, including those in underserved areas.
- Risk Diversification: Sharing risks and rewards allows institutions to manage their lending portfolios more effectively.
- Credit Cost Optimization: The blending of low-cost bank funding with higher-cost NBFC funding can lead to more competitive lending rates.
- Enhanced Credit Delivery: NBFCs’ and other lenders’ strong distribution networks help reach borrowers that might be difficult for banks to access.
RBI’s Role:
- Regulatory Framework: The RBI provides the regulatory framework for co-lending, ensuring transparency, compliance, and consumer protection.
- Expanding Access: The RBI’s recent expansion of the framework aims to make it more accessible to all regulated entities and loan types, further promoting credit flow to underserved sectors.
- Customer Grievance Redressal: The RBI’s guidelines emphasize the importance of customer grievance redressal mechanisms within the co-lending framework.
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