The Reserve Bank of India (RBI) has released the guidelines on co-origination of loans by banks and non-deposit taking Non-Banking Financial Companies (NBFCs) in the priority sector, following its announcement in the August credit policy.
The move is aimed at leveraging the reach of NBFCs to help banks meet their priority sector lending targets, leveraging the reach of NBFCs.
The co-origination arrangement should entail "joint contribution of credit by both lenders", & "sharing of risks and rewards between banks and NBFCs", according to the central bank. Priority sector lending includes loans to sectors such as agriculture, micro enterprises, social infrastructure, education and renewable energy.
The Need for Co-lending:
Before the approval of co lending, banks were lacking the outreach to the priority sector. Banks the past have taken various measure like forming regional rural banks and engaging business correspondents to improve their outreach and to augment the priority sector advance. But the results have shown a slow paced growth in credit to masses in priority sector. Further as we all know NBFC have always faced the issue of shortage of capital and advanced skills for credit processing and analytics for handling massive scale of priority sector lending.
But ven in the past, banks and NBFC have been working together in past too by way of on lending, or sale/purchase of pool of assets for increasing with exposure to priority sector but co lending or co-origination was waiting the green signal from RBI.
Indicative Illustration for Calculation of Blended/Weighted Average Interest Rate
The RBI Guideline:-
RBI vide its notification dated 22.09.18 allowed 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 bank can claim priority sector status in respect of its share of credit while engaging in the co-origination arrangement.
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