{"id":29659,"date":"2021-05-03T11:59:37","date_gmt":"2021-05-03T06:29:37","guid":{"rendered":"https:\/\/corpbiz.io\/learning\/?p=29659"},"modified":"2021-10-11T18:05:09","modified_gmt":"2021-10-11T12:35:09","slug":"co-lending-model-for-banking-sector","status":"publish","type":"post","link":"https:\/\/corpbiz.io\/learning\/co-lending-model-for-banking-sector\/","title":{"rendered":"Co-lending Model for Banking Sector: Underlining its Significance"},"content":{"rendered":"\n<p class=\"has-drop-cap\">A few months back, RBI set out the framework related to the co-origination of loans by NBFCs and banks in the priority sector. This model came into existence to neutralize the liquidity crisis at NBFCs to improve the credit flow of priority sectors. The model was widely recognized as a Co-lending model, aka CLM.<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_82_2 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title ez-toc-toggle\" style=\"cursor:pointer\">Page Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 eztoc-toggle-hide-by-default' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/corpbiz.io\/learning\/co-lending-model-for-banking-sector\/#What_is_the_Co-Lending_Model\" >What\nis the Co-Lending Model?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/corpbiz.io\/learning\/co-lending-model-for-banking-sector\/#What_are_the_Major_Benefits_of_the_Co-Lending_Model\" >What\nare the Major Benefits of the Co-Lending Model?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/corpbiz.io\/learning\/co-lending-model-for-banking-sector\/#What_is_the_Potential_Applicability_of_the_Co-lending_Model\" >What\nis the Potential Applicability of the Co-lending Model?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/corpbiz.io\/learning\/co-lending-model-for-banking-sector\/#Interest_Rates_on_Loan_Originated_under_Co-lending_Model\" >Interest\nRates on Loan Originated under Co-lending Model<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/corpbiz.io\/learning\/co-lending-model-for-banking-sector\/#Role_of_NBFCs_under_the_Co-lending_Model\" >Role\nof NBFCs under the Co-lending Model<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/corpbiz.io\/learning\/co-lending-model-for-banking-sector\/#What_are_the_Operational_Aspects_of_Co-lending_Model\" >What\nare the Operational Aspects of Co-lending Model&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/corpbiz.io\/learning\/co-lending-model-for-banking-sector\/#Conclusion\" >Conclusion<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_the_Co-Lending_Model\"><\/span>What\nis the Co-Lending Model?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Co-lending refers to a collective operation of two or more entities in the financial sector. In general, co-lending happens between banks and <a href=\"https:\/\/corpbiz.io\/nbfc-registration\"><strong>NBFCs<\/strong><\/a> or smaller banks and larger banks. Financial interfaces between different entities may take the form of co-lending, securitization, direct assignment, loan referencing, banking correspondents, etc.<\/p>\n\n\n\n<p>While securitization &amp;\ndirect assignment have been in existence for some time, co-lending was allowed\nby Reserve Bank under its prevailing norms on &#8216;Co-origination of loans between\nbanks and NBFC-SIs for granting a loan to the priority sector&#8217;.<\/p>\n\n\n\n<p>Given the Developmental and Regulatory Policies&#8217; statement, <em><strong>Reserve Bank<\/strong><\/em><sup><a href=\"https:\/\/en.wikipedia.org\/wiki\/Reserve_Bank_of_India\"><em><strong>[1]<\/strong><\/em><\/a><\/sup> decided to broaden the spectrum of co-lending, currently allowed only for NBFC-SIs, to all NBFCs. Accordingly, the Reserve Bank came with a new regulatory framework vide notification regarding Co-Lending Model emphasizing priority sector loans dated Nov 5, 2020. The Co-lending supersedes the prevailing norms on co-origination.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_are_the_Major_Benefits_of_the_Co-Lending_Model\"><\/span>What\nare the Major Benefits of the Co-Lending Model?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<ul><li>Enables a bank to give out the more substantial chunk of funds&nbsp;<\/li><li>Allows traditional lenders to associate with Fintech firms<\/li><li>Provide an excellent avenue for NBFCs to grow their assets under management.<\/li><li>Omit funding-related challenges or capital constraints<\/li><li>Facilitate healthy growth of priority sector loans<\/li><\/ul>\n\n\n\n<p class=\"text-left\"><b>Read our article<\/b>:<mark style=\"background: #fffd03 !important;\"><a href=\"https:\/\/corpbiz.io\/learning\/what-are-the-updated-ecb-norm-for-nbfc\/\">What are the Updated ECB Norms for NBFC?<\/a><\/mark><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_the_Potential_Applicability_of_the_Co-lending_Model\"><\/span>What\nis the Potential Applicability of the Co-lending Model?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The form norms for priority\nsector lending encompassed co-lending transactions of NBFCs-SI and Banks. But,\nCo-Lending Model covers all Non-Banking Financial Companies, including HFCs, under\nits ambit.<\/p>\n\n\n\n<p>Most Fintech organizations\nleverage Algo-based originations and proactively use the internet for\noriginations, and these firms pass a considerable part of their lending to\neither banks or NBFCs.<\/p>\n\n\n\n<p>Therefore, the broadened\nspectrum of the CLM will improve the penetration and ensure widespread reach,\nmeet the goal of financial inclusion, &amp; minimize the cost for the loans&#8217;\nbeneficiary. Smaller NBFCs excel on their distribution capabilities &amp;\noperational efficiencies; thus, this is a prudent move.<\/p>\n\n\n\n<p>Moreover, the Reserve Bank\nexcluded overseas banks, including wholly-owned subsidiaries having less than\n20 branches, from the CLM&#8217;s ambit. Also, small banks, Urban Cooperative Banks,\nUrban Cooperative Banks, &amp; Local Area Banks have received the same treatment.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Pre-Condition on Co-Lending Model<\/h3>\n\n\n\n<p>An interesting question that\narises here is whether such exclusion should be interpreted as a limitation on\nsuch entities or relaxation from the CLM&#8217;s applicability. It&#8217;s worth noting\nthat the Co-Lending model is a precondition for Priority Sector lending\ntreatment of the loans. The aim is not to bar on existence on CLM arrangement\noutside Co-lending model. <\/p>\n\n\n\n<p>With that said, if the loan,\ngranted by the principle co-lender in the form of a priority sector loan, the\nparticipating co-lender can treat the participant&#8217;s share of the loan as a\nPriority Sector Loan, subject to adherence to the CLM&#8217;s conditions. This means\nif the loan fails to meet the CLM&#8217;s conditions, the participating bank may not\naccord a PSL status, even if the loan in question is a PSL loan.<\/p>\n\n\n\n<p>Further, this indicates that\nexcluded banking entities may operate as co-lender. However, PSL Master\nDirections have a different implication: it explicitly excludes RRBs, UCBs,\nSFBs, and LABs under co-origination of loans by SCBs NBFCs to PS.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Interest_Rates_on_Loan_Originated_under_Co-lending_Model\"><\/span>Interest\nRates on Loan Originated under Co-lending Model<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The former guidelines\nspecifically emphasize&nbsp;Blended Interest Rate Calculations&nbsp;to estimate\ninterest rate charged on the loans under co-lending guidelines. Nonetheless, as\nper the new model, the estimation of interest rate shall be done by assigning\nweights corresponding to risk exposure to the respective lender&#8217;s benchmark\ninterest rate.<\/p>\n\n\n\n<p>The prevailing norms require\nthat the interest rate be an inclusive rate, mutually agreed upon by the\nparties. But, it should make sure that the interest rate imposed is not\nstringent as the same would violate the conditions cited under the fair\npractice code.&nbsp;<\/p>\n\n\n\n<p>This change would impart\nflexibility to the lenders and also make sure that the cost incurred in\ndisbursals to the remote sector is aptly compensated.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Role_of_NBFCs_under_the_Co-lending_Model\"><\/span>Role\nof NBFCs under the Co-lending Model<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The preceding provisions\nspecified that the share of the co-lending NBFC should not be less than 20%.\nThe same has been maintained in the Co-lending model as well, requiring NBFCs\nto maintain at least of 20% share of individual loans in their books.&nbsp;<\/p>\n\n\n\n<p>Under the CLM, co-lending NBFC\nshall act as a single point of interface for the clients. Moreover, the\ngrievance redressal function should also be set up and carried out by these\nentities.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_are_the_Operational_Aspects_of_Co-lending_Model\"><\/span>What\nare the Operational Aspects of Co-lending Model&nbsp;<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><em><strong>Following are the operational aspects of the Co-lending model suggested by the Reserve Bank of India via notification:-<\/strong><\/em><\/p>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter\"><img decoding=\"async\" width=\"1000\" height=\"346\" src=\"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2021\/05\/What-are-the-Operational-Aspects-of-Co-lending-Model.png\" alt=\"Co-lending Model \" class=\"wp-image-29664\" srcset=\"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2021\/05\/What-are-the-Operational-Aspects-of-Co-lending-Model.png 1000w, https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2021\/05\/What-are-the-Operational-Aspects-of-Co-lending-Model-300x104.png 300w, https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2021\/05\/What-are-the-Operational-Aspects-of-Co-lending-Model-768x266.png 768w\" sizes=\"(max-width: 1000px) 100vw, 1000px\" \/><\/figure><\/div>\n\n\n\n<h3 class=\"wp-block-heading\">Escrow Account<\/h3>\n\n\n\n<p>The CLM specifies the opening\nof an escrow account for the purpose of disbursals, collections, etc. The\nco-lending banks &amp; NBFCs were obligated to maintain every borrower&#8217;s\naccount for proper exposures assessment. The escrow mechanism helps in avoiding\nthe commingling of funds. The bank and NBFC should sign a master agreement\nenclosing rights &amp; duties regarding the escrow account.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Accounting<\/h3>\n\n\n\n<p>Each of the lenders must post\ntheir respective exposures in their books. The asset classification, as well as\nprovisioning, should also be done for the purpose of exposure. To serve this\npurpose, the account&#8217;s monitoring may either done by the co-lender or one of\nthem, as per the conditions in the Master Agreement. Generally, the monitoring\nfunctions stay with the NBFC since it has done the dealing with the\ncustomers.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Creation of\nSecurity<\/h3>\n\n\n\n<p>The method for creating a\ncharge on the security for the loan shall be mentioned in the Master Agreement\nitself.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Conclusion\"><\/span>Conclusion<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Co-lending Model enables the\nbanks to give more funds and allows and lenders to link with fintech firms that\nhave greater digital reach and alternative credit scoring models. <\/p>\n\n\n\n<p>It will also provide a conducive platform for NBFCs to thrive their assets under management. It will mitigate the funding crisis and capital constraints by ensuring by empowering NBFCs to provide sustainable credit to the priority sector.&nbsp;<\/p>\n\n\n\n<p class=\"text-left\"><b>Read our article<\/b>:<mark style=\"background: #fffd03 !important;\"><a href=\"https:\/\/corpbiz.io\/learning\/rbi-proposed-to-revamp-nbfcs-regulatory-framework\/\">RBI Proposed to Revamp NBFCs Regulatory Framework<\/a><\/mark><\/p>\n","protected":false},"excerpt":{"rendered":"<p>A few months back, RBI set out the framework related to the co-origination of loans by NBFCs and banks in the priority sector. This model came into existence to neutralize the liquidity crisis at NBFCs to improve the credit flow of priority sectors. The model was widely recognized as a Co-lending model, aka CLM. What [&hellip;]<\/p>\n","protected":false},"author":22,"featured_media":29663,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[91],"tags":[1710],"acf":{"service_id":"8"},"authorName":"Pankaj Tyagi","authorImageUrl":"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2022\/01\/MicrosoftTeams-image-42.jpg","authorDescription":"Pankaj has a diverse experience of writing research papers, blog, and articles during his college time. Earlier, he was working as a tax consultant in a financial firm, but his interest in writing drives him to pursue a career in the writing field.","postViews":6768,"readingTime":4,"_links":{"self":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/29659"}],"collection":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/users\/22"}],"replies":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/comments?post=29659"}],"version-history":[{"count":8,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/29659\/revisions"}],"predecessor-version":[{"id":36425,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/29659\/revisions\/36425"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/media\/29663"}],"wp:attachment":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/media?parent=29659"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/categories?post=29659"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/tags?post=29659"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}