RBI’s Circular on Co-origination of loans by Banks and NBFCs

A setup or an arrangement where banks and non-banks join hands for the joint contribution of credit for priority sector lending is known as Co-origination or co-lending. Co-origination of loans were initially designed to overcome the liquidity crisis in the NBFC sector. To push lending in priority sectors, including rural areas, renewable energy, and MSMEs, in 2018, RBI introduced the Co-origination circular (or guidelines).

The RBI Circular on Co-origination of loans

Under the Co-origination of loans RBI circular, a certain category of NBFCs can join hands with banks to provide loans to the underserved priority sectors based on a prior agreement. The RBI also directs NBFCs to maintain at least a 20% share of these individual loans in their books. 

• Commercial banks (except Regional Rural Banks and Small Finance Banks) may engage with certain NBFCs to co-originate loans to create priority sector assets. This setup involves joint credit contribution (at the facility level) by both lenders as well as sharing risks and rewards between both.
• The bank can claim priority sector status regarding its share of credit while engaging in the co-origination arrangement. 
• The benefit of banks’ low-cost funds and NBFCs’ low cost of operations would be passed on to the ultimate beneficiary. 
• While engaging in co-origination arrangements, both parties (banks/NBFCs) must adhere to extant guidelines on outsourcing financial services. 
• Complaints registered by a borrower with the NBFC/ bank for grievance redressal shall also be shared with both. However, the complaint can be escalated with the concerned Banking Ombudsman/ Ombudsman for NBFCs, if not settled within 30 days.
• The bank/ NBFC shall draft a policy approved by the Board to enter into a co-origination agreement. Further, the loans shall be subjected to regular verification by the internal auditors of the bank’s/NBFCs under the co-origination agreement. 

Consequently, through risk and reward sharing, both NBFCs and banks can benefit; NBFCs could concentrate more on client servicing and sales, while banks could expand their geographical reach.

Benefits of Co-origination RBI Circular

Although Co-origination loans have been around for quite a long time, in 2018, after the RBI set down the framework for Co-origination of loans, more banks and NBFCs joined hands to come together to make funds available to the priority sector. It is thus considered a significant step towards an efficient framework for micro-finance and MSME lending in India.

How do the NBFCs benefit?

• NBFCs focusing on the MSME segment and those qualifying for priority sector classification will be the key beneficiaries.
• With co-origination, NBFCs obtain a great avenue to grow their assets under management without facing funding-related challenges or capital constraints.

How do the Public Sector Banks benefit?

• PSBs (Public Sector Banks) also benefit from the origination of good quality. Also, high yielding retail loans help banks fulfil their priority sector lending requirements and enhance their loan portfolio diversity. 
• The Co-origination setup also helps the banking sector meet its priority sector lending.
• Co-origination also authorises the PSBs (Public Sector Banks) the opportunity to leverage the powerful fintech lenders that can assess vast amounts of data from disparate sources to examine customers’ creditworthiness satisfactorily.

How do the Borrowers benefit?

• Quick Loan Disbursal 
• Lower Interest Rates 
• Consumer-friendly lending terms
• Automated & Paperless Processes 
• Improvement in quality and turnaround time

The Co lending model (CLM)

Reserve Bank of India had earlier laid out the Co-origination framework in 2018, allowing banks and certain NBFCs to co originate loans. But, in 2020, RBI Co-origination guidelines were further amended by including all NBFCs (which included HFC’s) and re-named as the Co-Lending Model (CLM). As per the Co-origination RBI norms, a minimum of 20 % of the credit risk through direct exposure shall be on NBFCs books until maturity, and the balance of 80% will be on the bank’s books. The bank and NBFC split the repayment & recovery of interest in proportion to their shares in credit and interest, respectively, upon maturity. 

Why is a Co-origination platform for you? 

Co-origination platforms help connect NBFCs and Banks to disburse joint loans to the borrowers, thus opening up a world of co-lending for you. CredCo-Lend (by CredAvenue) is a fully integrated platform – a 1-stop solution that provides prospects for effortless discovery and seamless loan processing between Banks & NBFCs. This platform helps NBFCs discover Banks to meet loan origination needs. 

The platform collaborates with 500+ lenders, and thus you can associate with the bank at a price that suits you. It takes care of all the compliances and diverging essentials to power the complete co-lending ecosystem. Further, using this platform, the Banks can specify the NBFCs meeting your criteria with a transparent credit rating module and 240+ probable co-lending partners across numerous sectors. Also, CredAvenue’s all-in-one debt platform enables you to quickly get a term loan or working capital loan by just switching between the platforms.

FAQs-

Q: How is uninterrupted service to the borrower ensured by the RBI circular on Co-origination of loans?

A: The RBI circular on Co-origination of loans states that both bank and NBFC shall develop a business continuity plan to guarantee uninterrupted service to the borrowers till repayment of the loans under the co-origination agreement.

Q: What risk and reward sharing is under the RBI circular on Co-origination of loans?

A: As per the Co-origination of loans RBI circular, at least 20% of the credit risk by direct exposure shall be on NBFCs books till maturity, and the balance will be on the bank’s books. Also, an undertaking has to be provided to the bank by the NBFC that its portion towards the loan amount has not been financed out of borrowing from the co-originating bank/ or any other company of the partner bank.

Q: What is the RBI guideline for loan sanction in the Co-origination of loans?

A: The NBFC shall recommend the Bank proposals as relevant for joint lending. The lenders shall be entitled to assess the risks and requirements of the applicant borrowers independently, and the loan agreement would be tripartite between both the lenders (Bank and the NBFC) and the customer.