The Reserve Bank of India recently introduced the Co-Lending Model Guidelines for Banks and NBFCs to enhance credit flow to priority sectors of the economy. The guidelines were issued on 5th November 2020 to enable efficient and seamless credit flow to the under-served and un-served segments of the economy.
The Co-Lending Model Guidelines allow banks to co-lend with registered NBFCs to increase the flow of credit to the priority sector. These sectors include agriculture, MSMEs, education, housing, and social infrastructure.
Under this model, banks can co-lend with NBFCs in a borrower-centric model, where both entities share the risks and rewards of the loan portfolio in proportion to their contribution. This enables NBFCs to leverage their customer base and will allow banks to leverage their low-cost funds and the regulatory benefits of priority sector lending.
To ensure transparency and ease of monitoring, the RBI has mandated that banks and NBFCs adopt a loan agreement that delineates the terms of the co-lending. The guidelines also mandate that banks and NBFCs should have a board-approved policy for co-lending, which should include the criteria for loan selection and credit appraisal and the roles and responsibilities of both entities.
The Co-Lending Model Guidelines are a positive step towards enhancing credit flow to priority sectors and will enable NBFCs to leverage their customer base while allowing banks to leverage their low-cost funds and the regulatory benefits of priority sector lending. The guidelines benefit MSMEs and other under-served and un-served segments of the economy by increasing access to credit and lowering borrowing costs.
To conclude, the Co-Lending Model Guidelines are a welcome move by the RBI towards increasing the flow of credit to the priority sectors of the economy. The guidelines provide a framework for banks and NBFCs to collaborate and share risks and rewards in a borrower-centric model, increasing access to credit and lowering borrowing costs for under-served and un-served segments of the economy.
