It has been almost a year since the Reserve Bank of India (RBI) laid out the framework for co-origination of loans by banks and non-deposit taking non-banking finance companies (NBFCs) in the priority sector. Banks are now looking at NBFCs with digital platforms to explore this route. While some have announced their tie-ups recently, others are still working out the details.
"We have gone on the platform with one company that primarily lends to the SME sector. We are in discussion with 4-5 NBFCs at the moment," said Arijit Basu, Managing Director, State Bank of India (SBI). He added that the lender is looking at opportunities in the areas where NBFCs have expertise in lending. It may take a few more months to finalize them, he said.
In April, SBI announced tie-up with Paisalo Digital for disbursement of loans with ticket size of Rs 10,000 to Rs 2 lakh in agriculture and small and medium enterprises. The NBFC has operations in Uttar Pradesh, Maharashtra, Himachal Pradesh, Gujarat, Rajasthan, Delhi, Haryana, Punjab, Uttarakhand and Bihar.
Other lenders like Bank of Baroda and Union Bank of India are also in talks with such NBFCs. While the NBFCs will help with on-boarding of more customers, banks will provide customer service and grievance redressal to the borrowers.
"The model will help us connect the last mile for micro-lending in areas which are inaccessible by banks,” said senior official at Union Bank of India. The official added that the bank is also in talks with a few digital lending platforms and will ink the deal in next few months. "The product is being developed and will require testing before we are ready to launch," the official said.
As per the norms issued by RBI in September last year, the arrangement should involve sharing of risks and rewards between banks and NBFCs, with the later taking minimum of 20 percent credit risk by way of direct exposure. Also, the NBFC will have to give an undertaking to the bank that its contribution towards the loan amount is not funded out of borrowing from the co-originating bank or any other group company of the partner bank.
Bank of Baroda has also signed an agreement for co-origination of loans with ECL Finance, a subsidiary of Edelweiss Financial Services in June for MSME, self-employed and priority sector groups.
Bank lending to NBFCs took a hit after a series of defaults in the sector last year. With lenders reluctant to increase their exposure directly to NBFCs, the co-origination route will allow them to help the troubled sector get back on track with their lending business.
Latest data from RBI showed that bank credit to NBFCs has shrunk by one percent since the start of current financial year. However, on year-on-year basis, the lending grew by 37.6 percent as on June 21, 2019. Meanwhile, bank lending to priority sector grew 10.2 percent as compared to 6.3 percent last year.