RBI lets banks, NBFCs do co-lending to priority sector

The Reserve Bank of India (RBI) said on November 5 that banks and non-banking finance companies (NBFCs) could do co-origination of loans to the priority sector.

Priority sector refers to economically weaker sections such as agriculture. Co-origination refers to joint contribution of credit at the facility level by both the lenders as also sharing of risks and rewards.

The co-lending model is aimed at improving the flow of credit to the unserved and underserved sector of the economy and making available funds to the ultimate beneficiary at an affordable cost, considering the lower cost of funds from banks and greater reach of the NBFCs.

Under this, banks are permitted to co-lend with all registered NBFCs (including HFCs) based on a prior agreement, the RBI said. The co-lending banks will take their share of the individual loans on a back-to-back basis in their books. However, NBFCs shall be required to retain a minimum of 20 per cent share of the individual loans on their books, the central bank said.

Banks and NBFCs need to formulate board approved policies for entering into the CLM and place the approved policies on their websites, the RBI said.

Based on this, the two partner institutions need to enter into an agreement that should specify, terms and conditions of the arrangement, the criteria for selection of partner institutions, the specific product lines and areas of operation, the RBI said.

Banks can claim priority sector status in respect of their share of credit while engaging in the CLM adhering to the specified conditions, the central bank said.

However, the CLM will not be applicable to foreign banks with less than 20 branches, the RBI said.