Recently, RBI issued revised directions for Co-lending Arrangements (CLA) between banks and Non-bank Financial Companies (NBFCs) under various provisions of the Banking Regulation Act (1949), Reserve Bank of India Act (1934), and National Housing Bank Act (1987).
What is co-lending?
- Under CLAs, Regulated entities (REs) can enter into a lending arrangement with other REs for extension of credit to the borrowers, subject to compliance with the extant prudential regulations.
Key highlights of the revised Directions
- Minimum share: Each RE to retain a minimum 10% share of the loans.
- Priority Sector Lending (PSL) status: Each lender can claim PSL status for its share under co-lending, if the loan qualifies as priority sector.
- Uniform asset classification system: If one lender tags a loan as Non- performing Asset (NPA), other co-lenders must do the same.
- Blended interest rate: Interest rate charged to borrowers will be calculated based on the weighted average of each RE’s internal rate, proportionate to their funding contribution.
Significance of co lending
- For Banks: Increased penetration in the remote regions due to NBFCs last mile connectivity, enhanced compliance with PSL targets, etc.
- For NBFCs: Shared credit risk, enhanced access to cheaper capital, etc.
- For Consumers: Access to cheaper credit due to competitive interest rates, better customization as NBFCs often offer flexible loan structures suited to local market realities, etc.
