The Reserve Bank of India (RBI) has written to at least four banks asking them to be cautious about their co-lending partnerships. The regulator is concerned about the poor underwriting standards of loans in some cases and potential asset quality issues in loans originating through such channels, bank officials said.
Co-lending refers to partnerships between two lenders, typically a bank and a non-bank to offer loans to different segments.
In a communication to some banks, the RBI has cautioned managements, asking them to closely monitor their co-lending partnerships, four bankers familiar with the development told Moneycontrol. The central bank has highlighted concerns on poor underwriting standards and asset quality issues regarding the co-lending partnerships of these banks, the bankers said.
None of the banks wanted to be identified given the sensitivity of the issue. Emails sent to the RBI seeking comments remained unanswered till the time of filing this report.
“The RBI wants some banks to closely monitor their co-lending deals. They highlighted issues on asset quality of these partnerships,” one of the bank officials told Moneycontrol.
Another banker, who too requested anonymity, said that issues on the poor underwriting of some co-lending deals have been concerning the central bank.
Regulatory caution
In February 2024, RBI Governor Shaktikanta Das met top bank chiefs in Mumbai and asked them to be vigilant about any build-up of risks. He told the banks’ top officials that there was no scope for any complacency. Das also highlighted issues relating to business model viability, high growth in personal loans, adherence to co-lending guidelines, bank exposure to the NBFC sector, liquidity risk management, IT and cyber security preparedness, operational resilience, digital frauds and strengthening of the internal rating framework.
In October 2023, Das cautioned banks and non-banking finance companies (NBFCs) on the high growth in personal loans and said it was monitoring the segment for any sign of stress. “Banks and NBFCs would be well-advised to strengthen their internal surveillance mechanisms, address the build-up of risks, if any, and institute suitable safeguards in their own interest. The need of the hour is robust risk management and stronger underwriting standards,” Das had said.
In the same month, the central bank released a notification on Amendment to the Master Direction — Credit Card and Debit Card — Issuance and Conduct Directions, 2022. According to the RBI notification, co-branded cards should explicitly indicate that the card has been issued under a co-branding arrangement with a clear mention of the card-issuer. The RBI also said: “The co-branding partner shall not advertise/market the co-branded card as its own product. In all marketing/ advertising material, the name of the card-issuer shall be clearly shown.”
Recent co-lending deals
In January 2024, IREDA and Indian Overseas Bank partnered for a co-lending partnership for renewable energy projects.
Ratings agency CRISIL in a note on April 8, 2024, said that co-lending books of lenders will see mixed growth due to regulatory action. “Co-lending books for all asset classes will grow, the pace of growth for personal loans is expected to be slower than that seen in the recent past. This is because of the revision in the risk weight of unsecured consumer credit to 125 percent now from 100 percent earlier, which would lead to some moderation in growth for unsecured loans”.
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