The Reserve Bank of India (RBI) vide circular no. FIDD.CO.Plan.BC.08/04.09.01/ 2018-19 dated 21/09/18 had put in place a framework for co-origination of loans by Banks and a category of Non Banking Financial Companies (NBFCs) for lending to the priority sector. The arrangement entailed joint contribution of credit at the facility level by both the lenders as also sharing of risks and rewards.

Now, based on the feedback received from stakeholders and to better leverage the respective comparative advantages of the Banks and NBFCs in a collaborative effort and to improve flow of credit to unserved and underserved sector of the economy, RBI vide circular no FIDD.CO.Plan.BC.No.8/04.09.01/ 2020-21 dated 05/11/20 has extended the Scheme to all NBFCs (including HFCs) and rechristened the Scheme as “Co-lending Model (CLM)”.

Co-Lending Agreement Guidelines

The eligibility Criteria for NBFCs/HFCs for Co-lending with Bank

I) Minimum Years in Business

• RBI/NHB Registered NBFC/HFC which is in business for at least 2 years in the desired product segment.

II) Minimum AUM of NBFC/HFC

• i) Minimum AUM of NBFC/HFC for Co-lending (except Agriculture Loans) ~ Rs.1,000 Crores.
• ii) Minimum AUM of NBFC for Co-lending of Agriculture Loans ~ Rs.500 Crores.
• iii) All product categories of the NBFC/HFC to be taken for the AUM.

III) External Credit Rating

• i) External Credit Rating (Long Term Rating) should be A or higher or its equivalent.
• ii) External Credit Rating (Long Term Rating) of NBFC for Co-lending of Agriculture Loans should be BBB or higher or its equivalent.
• iii) External Credit Rating should not be more than 1 year old as on date of approval of Co-lending arrangement.

CAC is competent Authority to allow relaxation to consider NBFCs with Long Term Rating of BBB (for Co-lending of other than Agriculture Loans) on a case to case basis.

IV) Gross NPA in the Desired Product Segment

• i) Gross NPA in the desired Product segment (except MSME segment) should be less than 4% and Net NPA in the desired Product segment should be 2% or below during last two financial years (FY) i.e., as on 31st March of last Financial Years.

CAC is competent authority to allow relaxation to consider NBFCs with GNPA up to 4.5% in any or both of the last two FYs.

• ii) Gross NPA in MSME segment of NBFC should be 5% or below and Net NPA in MSME segment of NBFC should be 2% or below during last two financial years (FY) i.e., as on 31st March of last Financial Years.

V) Minimum CRAR

• i) Minimum CRAR (at the end of last FY) of NBFC/HFC for Co-lending by Bank should be 1% above RBI/NHB mandated minimum CRAR subject to minimum CRAR of 15%.

CAC is competent authority to allow relaxation in CRAR up to RBI Prescribed minimum CRAR subject to minimum CRAR of 15%.

VI) Profitability of NBFC

• NBFC/HFC should be profit making for last two Financial Years.

VII) Status of Loan Accounts of NBFC

• Loan Accounts of NBFC, if any, should not be in SMA-1/SMA-2 categories during last 12 months. However, Pool accounts opened in the name of NBFC are not required to meet this criterion.

• i) Loans sanctioned to Individuals, Proprietorship Concerns, Partnership Concerns, Pvt. Limited Companies, Limited Companies (not listed on any stock exchanges) for purposes eligible to be classified as priority sector will be considered for Co-lending.
• ii) Only Priority Sector Loans are eligible for Co-lending except the following Loans which will not be considered for Co-lending (even if eligible to be classified as Priority Sector):
  • I) Revolving credit facilities (e.g. Cash Credit accounts, Credit Card etc.)
  • II) Other facilities viz. Overdraft (OD), Packing credit / Post shipment, Non Fund Based and Foreign currency loans etc.
• iii) Maximum tenure of Loan, at the time of Sanction, to be as under:
  • Home Loans ~ 35 Years
  • Loan against Property ~ 15 Years
  • MSME Loans ~ 15 Years
  • Gold Loans ~ 1 Year
  • Agriculture Loans ~ 10 Years
  • For all other Loans, Bank’s extant guidelines applicable to such Loans would be applicable
• iv) No minimum tenure requirement.
• v) Minimum & Maximum Loan amounts in each Co-lending arrangement will be decided separately in discussion with respective NBFC/HFC subject to compliance of Loans with Priority Sector of RBI.
• vi) Loans originated from/prior to the date of execution of Master Agreement are eligible for Co-lending. NBFC to confirm that the details of the Co-lending arrangement are being disclosed to the Borrower.
• vii) Loans acquired under Co-Lending should be certified as Priority Sector Loans (PSL) by the CA. Such Certificate to be obtained by the Designated Branch from the NBFC every quarter and to be kept on record.

1. 1. All Loans should be KYC complied. Bank and NBFC should comply with Master Directions – Know Your Customer (KYC) Direction, 2016 issued vide RBI. /DBR/2015-16/18 Master Direction DBR.AML.BC. No.81/14.01.001/2015-16 dated 25.02.2016 and updated from time to time. The extant KYC guidelines permit Banks to rely on the customer due diligence done by a third party (NBFC), subject to following conditions:

      1. Records or the information of the customer due diligence carried out by the third party is obtained within two days from the third party or from the Central KYC Records Registry.
      1. Adequate steps are taken by Bank to satisfy itself that copies of identification data and other relevant documentation relating to the customer due diligence requirements shall be made available from the third party upon request without delay.
      • The third party is regulated, supervised or monitored for, and has measures in place for, compliance with customer due diligence and record-keeping requirements in line with the requirements and obligations under the PML Act.

1. 1. i) There is no restriction on number of days from date of Sanction within which Loans are to be shared by NBFC with Bank for Co-lending.

   However, while entering into Co-lending arrangement with NBFC/HFC, respective business vertical may prescribe requirements such as fresh CIBIL Score, Regular repayment history etc. for Co-lending of Loans sanctioned prior to certain number of days (as mutually agreed by Bank and NBFC) from current date.

   1. ii) No minimum Holding Period required as permitted by RBI.
   • iii) Minimum Retention Requirement of 20% to be complied by NBFC/HFC for the entire tenure of the Loan.
   1. iv) No overdue account to be accepted for Co-lending.

1. 1. 1. i) Pan India i.e. Loans sanctioned by NBFC/HFC across India would be eligible for Co-lending.
      1. ii) City/Centre/Branches for Co-lending:
      • Cities/Centres for Co-lending will be identified by respective Business vertical in consultation with NBFC/HFC.
      • Need based Branches of the Bank in each identified City would be authorised for Co-lending business. Branch for maintaining Escrow Account to be decided in consultation with the NBFC/HFC.

As per RBI directives, Stress Testing will be done by Risk Management Department on Quarterly basis taking into account factors such as increase in default rate, economic downturn, rise in prepayments due to fall in ROI or any other relevant factor.

• i) Audit and Inspection Department, Head Office on an ongoing basis will arrange to audit Co-lending portfolio during Concurrent and/or Regular audit of Branch. Further, special Audit of Portfolio may be also undertaken by Audit and Inspection Department, Head Office as and when need for the same arises.

 

1. ii) Auditors for the purpose would be guided by Master & Escrow Agreements and guidelines issued by Bank on entering Co-lending arrangement NBFC/HFC along with relevant regulatory guidelines.

 

• iii) Audit and Inspection Department, Head Office would have this task conducted through their normal channel of Field Inspectorates and through the RBIA Audit mechanism.

 

1. iv) Audit and Inspection Department, Head Office to ensure the Co-lending business at Designated Branches is audited by Concurrent Auditors of same/nearby Branch on Monthly basis.

 

1. v) Concurrent Auditors to be directed to submit the Audit report to respective Business Vertical along with Field Inspectorate/Audit & Inspection Department, Head Office. Designated Branch to submit a copy of the compliance of observations of Concurrent Audit to respective Business Vertical.

• i) NBFC/HFC would also act as Service Provider. The roles and responsibilities of Service Provider among other things, include:
  • a. Recover Monies in relation to Co-lent Loans from Borrowers on due dates
  • b. Enforcement of underlying securities by way of auction/other legal measures
  • c. Notify Bank on becoming aware of non-payment of Principal/Interest
  1. ii) The detailed roles and responsibilities of NBFC/HFC as Service Provider would be part of the Master Agreement.

• i) Three escrow accounts would be opened separately for Disbursement, Collection and Service Provider Fee Payment
  • Disbursement of all sanctioned accounts to be made to Disbursement escrow account maintained with UCO Bank
  • NBFC/HFC in its role as Service Provider deposits the collections made in Co-lent Loan Accounts in the "Collection Escrow account" maintained with UCO Bank
  • Entire Collections will be credited to Escrow Account and then shared with Bank & NBFC/HFC proportionately as per their respective share.
  • Collections in the escrow account are to be credited in individual accounts with Bank as per the information shared by NBFC/HFC on value date basis
  • Service Provider Escrow Account to be maintained for payment of Service Provider Fee
  1. ii) Day to day operations in Escrow Accounts would be made by Escrow Manager on advice of NBFC/HFC. Mandates for operating these accounts by authorised officials of NBFC/HFC will be submitted to the Escrow maintaining Branch for their suitable action.
  • iii) Detailed Roles and Responsibilities of Escrow Manager will be included in the Master/Escrow Agreements.
  1. iv) All escrow accounts will be reconciled by NBFC/HFC and they will share the report with Bank on regular basis, frequency of which may be defined in Master Agreement.

NBFC/HFC to ensure adequate insurance cover of underlying Security/Borrower’s life to protect the interest of Co-lenders.

Reconciliation of Individual Accounts would be done by NBFC/HFC on regular basis, frequency of which may be defined in Master agreement.

As per the extant RBI Guidelines, Co-lenders shall adhere to the asset classification and provisioning requirement, as per the respective regulatory guidelines applicable to each of them.

Under no circumstances NBFC should enter into compromise/settlement or write off process in respect of co-lent loans including their own share unilaterally on their own. In respect of NPA accounts where the recovery aspects are bleak, NBFC can enter into compromise/settlement with Borrower after taking prior approval/consent of the Bank.