CO-LENDING MODEL

November 2020

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In this edition, we will be seeing about the Co-Lending by Banks and NBFCs to Private Sector Guidelines issued by RBI. We will have our usual Legal terms and News Bites related to notifications by MCA, SEBI, RBI, IT and GST following the article.

CEO CS Saranya Deivasigamani,

CEO

CO-LENDING MODEL

To promote those sectors of the economy which may not get timely and adequate credit, RBI introduced Priority Sector Lending for 8 broad categories in 2016.

In order to provide the much-needed competitive edge for credit to the priority sector, RBI decided that all scheduled commercial banks (excluding Regional Rural Banks and Small Finance Banks) may co-originate loans with Non-Banking Financial Companies – Non-Deposit taking- Systemically Important (NBFC-ND-SIs), for the creation of eligible priority sector assets.

The Banks and NBFCs shall enter into a co-origination arrangement which shall entail joint contribution of credit by both lenders at the facility level.

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.

As a continuous efforts to facilitate the model, on September 21, 2018, RBI issued a detailed guidelines for Co-origination of loans by Banks and NBFCs for lending to priority sector and on November 05, 2020 based on the feedback received from the stakeholders, the RBI decided to provide greater operational flexibility to the lending institutions, while requiring them to conform to the regulatory guidelines on outsourcing, KYC, etc. and rechristened as “Co-Lending Model” (CLM)

Priority Sectors

8 Sectors under priority sector are:

  1. Agriculture
  2. Micro, Small and Medium Enterprises
  3. Export Credit
  4. Education
  5. Housing
  6. Social Infrastructure
  7.  Renewable Energy
  8. Others

Banks involved

All scheduled commercial banks (excluding Regional Rural Banks and Small Finance Banks) may engage with NBFC-ND-SIs (hereinafter referred to as NBFC) to co-originate loans for the creation of priority sector assets. The arrangement should entail joint contribution of credit at the facility level, by both lenders. It should also involve sharing of risks and rewards between the bank and the NBFC for ensuring appropriate alignment of respective business objectives, as per the mutually decided agreement between the bank and the NBFC, inter-alia, covering the essential features

CLM

In terms of the 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. However, NBFCs shall be required to retain a minimum of 20 per cent share of the individual loans on their books.

The banks and NBFCs shall formulate Board approved policies for entering into the CLM and place the approved policies on their websites. Based on their Board approved policies, a Master Agreement may be entered into between the two partner institutions which shall inter-alia include, 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, as detailed in the Annex.

The Master Agreement may provide for the banks to either mandatorily take their share of the individual loans originated by the NBFCs in their books as per the terms of the agreement, or to retain the discretion to reject certain loans after their due diligence prior to taking in their books, subject to the conditions specified in the Annex.

The 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.

Essential Features

The Master Agreement entered into by the banks and NBFCs for implementing the CLM may provide either for the bank to mandatorily take their share of the individual loans as originated by the NBFC in their books or retain the discretion to reject certain loans subject to its due diligence.

Banks shall not be allowed to enter into co-lending arrangement with an NBFC belonging to the promoter Group.

The NBFC shall be the single point of interface for the customers and shall enter into a loan agreement with the borrower, which shall clearly contain the features of the arrangement and the roles and responsibilities of NBFCs and banks.

All the details of the arrangement shall be disclosed to the customers upfront and their explicit consent shall be taken.

The ultimate borrower may be charged an all-inclusive interest rate as may be agreed upon by both the lenders conforming to the extant guidelines applicable to both.

The extant guidelines relating to customer service and fair practices code and the obligations enjoined upon the banks and NBFCs therein shall be applicable mutatis mutandis in respect of loans given under the arrangement.

The NBFC should be able to generate a single unified statement of the customer, through appropriate information sharing arrangements with the bank.

With regard to grievance redressal, suitable arrangement must be put in place by the co-lenders to resolve any complaint registered by a borrower with the NBFC within 30 days, failing which the borrower would have the option to escalate the same with the concerned Banking Ombudsman/Ombudsman for NBFCs or the Customer Education and Protection Cell (CEPC) in RBI.

The co-lending banks and NBFCs shall maintain each individual borrower’s account for their respective exposures.

The Master Agreement may contain necessary clauses on representations and warranties which the originating NBFC shall be liable for in respect of the share of the loans taken into its books by the bank.

The co-lenders shall establish a framework for monitoring and recovery of the loan, as mutually agreed upon.

The co-lenders shall arrange for creation of security and charge as per mutually agreeable terms.

Each lender shall adhere to the asset classification and provisioning requirement, as per the respective regulatory guidelines applicable to each of them including reporting to Credit Information Companies, under the applicable regulations for its share of the loan account.

The loans under the CLM shall be included in the scope of internal/statutory audit within the banks and NBFCs.

Any assignment of a loan by a co-lender to a third party can be done only with the consent of the other lender.

Both the banks and the NBFCs shall implement a business continuity plan to ensure uninterrupted service to their borrowers till repayment of the loans under the co-lending agreement, in the event of termination of co-lending arrangement between the co-lenders.

Legal Terms

Subpoena

  1. an order of the court for a witness to appear at a particular time and place to testify and/or produce documents in the control of the witness (if a “subpena duces tecum”).

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