On July 28, Yes Bank and Indiabulls Housing Finance entered into a strategic co-lending agreement which, the companies said, aim to offer home loans to homebuyers at competitive interest rates.
"The partnership aims at synergizing capabilities to provide an efficient and seamless experience to retail home loan customers," Yes Bank said in a press release.
The co-lending framework laid down by Reserve Bank of India provides a collaboration tool to benefit from the low-cost funding model of a bank and the cost-efficient sourcing and servicing capabilities of a non-bank, the bank said.
It was in November last year, the Reserve Bank of India came up with guidelines on co-origination of loans or co-lending of loans under which banks and NBFCs (non-banking finance companies) can lend to priority sector or economically weaker sections. The idea is to encourage credit flow to this segment.First of all, what is co-lending model (CLM)?
Under CLM, banks are permitted to co-lend with all registered NBFCs (including HFCs) based on a prior agreement. The co-lending banks will take their share of the individual loans on a back-to-back basis in their books.
Is there a minimum lending share requirement for NBFCs?
Yes. The RBI has clearly said that NBFCs shall be required to retain a minimum of 20 percent share of the individual loans on their books. This means, if the loan size is Rs 10 crore between the bank and NBFC, the NBFC needs to retain at least Rs 2 crore on its books.
What about risk sharing?
The risks and rewards of co-lending will be shared among the borrowers to the extent of their individual exposures.
What are the terms of co-lending?
Banks and NBFCs need to formulate Board-approved policies for entering into the CLM and need to enter into a master agreement. This agreement should have terms and conditions of the arrangement, the criteria for selection of partner institutions, the specific product lines and areas of operation, along with provisions related to segregation of responsibilities as well as customer interface and protection issues.
Who can they co-lend to?
The co-lending model has been introduced primarily aiming at the un-served and under-served sectors of the economy and making available funds to the ultimate beneficiary at an affordable cost. Basically, this is aimed at the priority sector or economically weaker segments. Banks need to necessarily lend 40 percent of their loans to this segment.
Can banks show these loans for priority sector lending (PSL) purpose?
Yes. Banks can claim priority sector status in respect of their share of credit while engaging in the CLM adhering to the specified conditions. The CLM shall not be applicable to foreign banks (including WOS) with less than 20 branches.
But why co-lending?
The idea is banks have the money and lower cost of funds while NBFCs have greater reach on the ground. “This is a brilliant initiative to push credit to economically weaker sections. Banks have the money, NBFCs have people on the ground. A marriage makes sense. It all depends on how much you believe in each other,” said a senior official at a development institution.
How will borrowers benefit?
From the point of view of the borrower and NBFCs, the idea makes a lot of sense. NBFCs process loan applications much quicker than banks and have a better reach among borrowers than banks in many geographies.
“NBFCs can get bigger and top rated borrowers on its books through this arrangement, which wouldn’t have been possible otherwise,” said Naresh Malhotra, a former SBI senior executive.
But is this a new idea?
Not really, co-lending has existed in other forms earlier as well. Banks used to lend jointly for project funding but what is new here is the participation of NBFCs including HFCs. This is good news for NBFCs because they can enter bigger loan deals relying on the support of partnering banks.
Will this be a game changer?
Unlikely. According to P Satish, Executive Director of Sa-dhan, a body of microlenders, co-lending didn’t take off earlier because if the loan proposal is good, lending institutions are reluctant to share it with other lenders. If the borrower quality is bad, it is difficult to find a co-lender.
Co-lending is unlikely to work in a big way since credit is a function of demand and joint-lending is not really a new idea. That said, co-lending is a good model.
Banks have the money, NBFCs have people on the ground. A marriage makes sense. But, the key question is why would a bank share a good borrower with an NBFC?(This is an updated version of an explainer published earlier on Moneycontrol)