‘Co-lending’ Scheme

Source: By George Mathew: The Indian Express

Banks are now going in for co-lending arrangements with non-banking finance companies (NBFCs) following a decision by the Reserve Bank of India to allow such lending practices. The result has been interesting tie-ups like the State Bank of India’s decision to team up with Adani Capitalto improve the flow of credit to the unserved and underserved sectors”.

What is the co-lending scheme?

Under the RBI’s co-lending model, banks are permitted to co-lend with all registered NBFCs (including Housing Finance Companies or HFCs) based on a prior agreement. However, NBFCs will be required to retain a minimum 20 per cent share of individual loans on their books.

The primary focus of the scheme is to improve the flow of credit to the unserved and underserved sectors of the economy, and to make available funds to the ultimate beneficiary at an affordable cost, considering the lower cost of funds from banks, and the greater reach of the NBFCs.

NBFCs which will be the single point of interface for the customers should enter into a loan agreement with the borrowers.

What is SBI’s tie-up with Adani?

The decision by the country’s largest lender State Bank of India (SBI) to tie up with Adani Capital for co-lending has come under the spotlight.

Questions have been raised over the need for an arrangement with the small NBFC of a big corporate house for co-lending to farmers for purchase of tractor and farm implements. Critics have asked whether SBI, with its network of 22,230 branches, really need Adani Capital — which has a network of just 60 branches and has disbursed around Rs 1,000 crore, according to its website — to finance farmers.

“SBI…teaming up with Adani Capital is bizarre. It seems to be a move to appease corporates who have not taken well retreat from farm laws. Adani was making strong moves to control agri markets,” tweeted Thomas Isaac, the former finance minister of Kerala.

Is there a risk in co-lending?

NBFCs are required to retain a minimum 20% share of the individual loans on their books. This means 80% of the risk will be with the banks. If there is a default, banks will take the big hit.

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

Several banks have entered into co-lending tie-ups with NBFCs and more such alliances are in the pipeline.

Interestingly, the NBFC will be the single point of interface for customers, and it will enter into a loan agreement with the borrower, which should clearly contain the features of the arrangement and the roles and responsibilities of NBFCs and banks. In short, banks will fund the exercise while the NBFC decides the borrower.

Is this allowing corporate backdoor entry into banking?

The RBI hasn’t officially allowed the entry of big corporate houses into the banking space. But NBFCs — which are mostly floated by corporate houses — were already accepting public deposits. Now, they are being given more opportunities on the lending side.

“The central bank is allowing corporate houses in banking through such co-lending arrangements. It's a backdoor entry of corporate houses in banking,” said a bank union leader.

Four big finance firms — IL&FS, DHFL, Srei, and Reliance Capital — which collected public funds through fixed deposits and non-convertible debentures, have collapsed in the last three years despite tight monitoring by the RBI. Collectively, they owe around Rs 1 lakh crore to investors.

While the RBI mentioned “the greater reach of the NBFCs” when it allowed co-lending, bankers say they have a wider reach than the NBFCs in serving the underserved and unserved.

And what have SBI and Adani said?

Announcing the tie-up, SBI chairman Dinesh Khara said: “This partnership shall help SBI to expand its customer base as well as connect with the underserved farming segment of the country and further contribute towards the growth of India’s farm economy. We will continue to work with more NBFCs in order to reach out to maximum customers in far flung areas and provide last mile banking services.”

With this partnership, SBI would be able to target farmer customers in the interiors of the country looking for adoption of farm mechanization to enhance productivity of crops, SBI said. SBI is actively looking at co-lending opportunities with multiple NBFCs for financing farm mechanization, warehouse receipt finance, and farmer producer organizations (FPOs) to enhance credit flow to double farmers’ income, it said.

Adani Capital MD & CEO Gaurav Gupta said, “Our aim is to make economical credit available to the micro-entrepreneurs of India. Our partnership with SBI is to target the unbanked/underserved Indian farmers. Through this partnership our aim is to contribute to farm mechanization and play a role in improving productivity and income of the farm segment.”