RBI's Expansion of Colending
The Reserve Bank of India (RBI) has announced that all regulated entities can participate in colending, extending the scope beyond priority-sector lending (PSL). This move allows banks to collaborate not only with non-banking financial companies (NBFCs) but also with each other, and similarly, NBFCs can partner with other NBFCs.
Implications and Benefits
- Increased Credit Flow: This expansion aims to boost credit availability for underserved segments like micro, small, and medium enterprises (MSMEs), enhancing financial inclusion.
- Customer Protection: Colending arrangements ensure stronger customer protection measures.
- Lower Interest Rates: Borrowers benefit from lower interest rates as banks provide funds at a lower cost, complemented by NBFCs.
Challenges
- Complex Partnership Formation: The process of forming partnerships and executing agreements is lengthy.
- Risk Sharing: Regulated entities must share the risk of client defaults, adding a burden on banks and NBFCs.
Key Statements
RBI Governor Sanjay Malhotra emphasized the win-win nature of this arrangement for banks and NBFCs, while Kirti Timmanagoudar from IIFL Finance highlighted the opportunity for small NBFCs to partner with larger entities and banks.
Revised Guidelines on Colending
- Non-Performing Asset Classification: If any entity declares a client a non-performing asset, it is classified similarly for all involved entities.
- Default-Loss Guarantees: Regulated entities can provide default-loss guarantees up to 5% of loans outstanding, governed by digital lending guidelines.
Effects on Financial Inclusion
Colending is recognized as a powerful mechanism for expanding credit access and enhancing financial inclusion, particularly in sectors like MSMEs, electric vehicles, and agricultural loans.
Current Collaborations and Potential
- Commercial banks have collaborated with seven NBFCs, while private banks have fewer such partnerships, indicating significant untapped potential.
- Non-PSL Loans: 75% of colending volumes handled by banks are in non-PSL loans, signaling a potential scale-up in volumes.