RBI allows banks to co-originate loans with NBFCs to boost priority sector lending

In a bid to boost banking services for the low-margin priority sectors, the central bank has asked banks to consider collaborating with large non-banking finance companies (NBFCs) to provide priority sector loans.

The Reserve Bank of India (RBI) has allowed non-deposit taking systemically important NBFCs to co-originate priority sector loans with the banks.

It should also involve sharing of risks and rewards between the banks and the NBFCs for ensuring appropriate alignment of respective business objectives, as per their mutual agreement, RBI said.

“While it (co-origination) would ensure skin in the game for both parties (lenders), it would benefit the borrowers under the priority sector segment in terms of cost of credit, which, on account of blending, could be substantially lower,” said RBI Deputy Governor MK Jain.

Currently, banks are required to ensure that 40 percent of all their loans go towards segments deemed as priority sector. This includes loans to agriculture, micro, small and medium enterprises, affordable housing and small education loans.

If banks fall short on their priority sector loans, they are permitted to buy these loans or priority sector lending certificates from other lenders.

According to bankers, the option will help both banks and NBFCs.

VG Kannan, Chief Executive Officer of Indian Banks’ Association, said: “We need to see how it can be worked out. It is an innovative idea. They (RBI) are saying that banks have money and many of the NBFCs have the reach. A combination of banking and NBFCs could ensure they have a servicing facility. It is almost an outsourcing facility. Like today we have securitization by NBFCs, this could be a modified version of it.”

Many NBFCs used to sell loan portfolios to banks, so that they can meet their priority sector limits. Under the new arrangement, this selling can happen even at the level of an individual loan facility.

In its statement, the banking regulator pointed out that both lenders will have to participate in providing the credit facilities to the borrowers.  Guidelines in this regard will be issued by end of September 2018.

According to data available with the RBI, priority sector loans by banks stood at nearly Rs 25 lakh crore as on June 30, 2018, up 6.3 percent year-on-year.

Credit to NBFCs rose 35 percent year-on-year and stood at Rs 4.6 lakh crore in the same period.