The co-lending model declared lifeless on arrival in September 2018, got here again to lifestyles ultimate year, following a regulatory alternate in November 2020.
In recent months, a series of agreements have been signed between banks and companies non-bank financial institutions (NBFC) to offer last-mile financing according to the co-lending model.
Certainly, stagnant credit growth, especially in public sector banks, and a more restrictive regulatory framework for NBFCs could also play a role in promoting co-lending agreements.
Bankers stated the November 2020 evaluation of co-lending recommendations allowed banks to showdown loans from a specific deal. Rajeev Kumar, executive director of IDBI Bank, said that according to the 2018 guidelines, the co-origin model does not give banks the right to refuse. “So there were credit risk issues. This was an obstacle to taking off the model.
“Banks now have the proper to say no by adding the co-lending option (Option B) whereby banks can say ‘no’ to the loan from NBFC if it doesn’t fit within pre-established parameters. The credit risk for the banks is therefore reduced, Kumar said. IDBI Bank has signed an agreement with UGRO Capital and is in talks with other NBFCs.
The revised framework allows for two co-lending options, one of which provides for the bank and the NBFC to jointly sanction the loan based on agreed underwriting rules.
The second option, which involves a direct divestiture without the NBFC needing to adhere to a minimum holding period, improved the model in terms of customer experience, industry executives mentioned.
Hari Rajagopal, Vice President- Capital Markets and Strategic Initiatives at Samunnati Agrifinance, said that with the second option, the NBFC can sanction the loan and thus get repayment from the bank.
This improves turnaround times for the customer. According to the original guidelines, the bank and the NBFC were to sanction each loan at the same time. The new guidelines have made it very easy for banks to realize exposure to unexplored asset classes, said Rajagopal.
Crowdfunding agreements also help lower the cost of lending for the end customer. Call saying that although we are an NBFC, we will lend at an interest rate of 14% plus a processing fee of 1%, he said.
Many of the co-lending deals made in recent months involve public sector banks that rely on non-bank partners to provide loans to historically inaccessible customer segments. Bankers think Co-lending is a smart option for NBFCs who In 2017-18 the NBFCs were trying to gain scale.
The alternative is to go for co-lending partnerships, said a PSB executive. Over a while, co-lending is the future of PSL and will help reduce the cost of financing for the last mile borrower.
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