The Reserve Bank of India (“RBI”), by way of its earlier circular dated September 21, 2018, had  issued guidelines on ‘Co-origination of loans by Banks and NBFCs for lending to priority sector’ (“Co-origination Guidelines”) to banks (excluding small finance banks) and non-deposit accepting systemically important NBFCs.

In view of the feedback received from stakeholders, RBI vide its circular dated November 5, 2020, has now stated that banks can co-lend with all registered NBFCs (including HFCs) based on a prior agreement "Co-Lending Model"). The central focus of the Co-Lending Model is to synergise the greater reach of NBFCs and the lower cost of funds from the banks to enhance the flow of credit to the unserved/ underserved sector of the economy, and make funds available to the ultimate beneficiary at a modest cost.

Banks and NBFCs are required to formulate board approved policies for entering into the Co-Lending Model and place the approved policies on their websites.

The essential features of the Co-Lending Model are as follows:

Master Agreement:

1. Banks and NBFCs can enter into a master agreement in accordance with their policies for implementing the Co-Lending Model (“Master Agreement”). The Master Agreement shall, inter alia, include the terms and conditions of the arrangement, suitable representations and warranties, the criteria for selection of partner institutions, the specific product lines and areas of operation, along with provisions related to segregation of responsibilities as well as customer interface and protection issues, etc.
2. The Master Agreement may contain necessary representations and warranties which the originating NBFC will be liable for in respect of the share of the loans taken by the bank into its books.
3. Banks are required to take their share of the individual loan on a back-to-back basis in their books and NBFCs are required to retain a minimum of 20% (twenty percent) of the individual loan in their books.
4. The Master Agreement may either provide the banks to mandatorily take their share of individual loans as originated by the NBFC in their books, or to retain the discretion to reject certain loans, in accordance with their due diligence process, prior to taking in their books.

If the Master Agreement provides for the bank to mandatorily take their share of individual loans as originated by the NBFC in their books, such arrangement must comply with the extant Guidelines on Managing Risks and Code of Conduct in Outsourcing of Financial Services by Banks, issued by RBI.  In specific, the banks and NBFCs will have to put in place mechanisms for ex-ante due diligence by the bank. Additionally, in this scenario, the banks will also have to comply with the extant Master Directions - Know Your Customer (KYC) Direction, 2016, issued by RBI.

If the Master Agreement provides for the bank to retain the discretion to reject certain loans subject to its due diligence, such arrangement will be akin to a direct assignment transaction and will have to comply with the extant Guidelines on Transactions Involving Transfer of Assets through Direct Assignment of Cash Flows and the Underlying Securities issued vide RBI/2011-12/540 DBOD.No.BP.BC-103/21.04.177/2011-12 dated May 07, 2012 and RBI//2012-13/170 DNBS. PD. No. 301/3.10.01/2012-13 August 21, 2012 respectively, issued by RBI, with the exception of Minimum Holding Period (“MHP”) which shall not be applicable in such transactions undertaken in terms of this Co-Lending Model. However, the MHP exemption shall only be available when the prior agreement between the banks and NBFCs contains a back-to-back basis clause and is in compliance with all the other conditions provided for in the guidelines for direct assignment.

Customer related issues:

NBFCs will be the single point of interface for the borrowers and the loan agreement should mention all the features of the arrangement between the banks and NBFCs.

The obligations of banks and NBFCs, as provided for in the guidelines related to customer service and fair practice code shall also apply to the loans advanced as per the Co-Lending Model.

Banks and NBFCs are also required to put in place a suitable arrangement for grievance redressal of the borrowers for resolution of the complaints filed with the NBFCs within 30 (thirty) days, failing which, the borrower may approach the banking ombudsman for NBFCs or the Customer Education and Protection Cell in RBI.

In accordance with the extant guidelines that govern banks and NBFCs, the co-lenders may agree to an all-inclusive tax, which the ultimate borrower will be charged.

Operational issues:

To avoid inter-mingling of funds, all transactions relating to Co-Lending Model shall be routed through escrow account maintained with banks. The manner of appropriation between the co-lenders shall be clearly encapsulated in the Master Agreement.

Banks and NBFCs are required to establish a framework for monitoring and recovery of the loans and arrange for creation of security and charge as per mutually agreeable terms. 

Loans under the Co-Lending Model shall be included in internal/ statutory audit of banks and NBFCs in order to ensure compliance with their respective internal guidelines, terms of the Master Agreement etc. Further, banks and NBFCs will also have to comply with asset classification and provisioning requirements, as per respective regulatory guidelines including reporting to credit information companies.

Banks and NBFCs are also required to implement a business continuity plan to ensure uninterrupted service to the borrower till repayment of the loans, in the event of termination of the arrangement between the co-lenders.

Any assignment of the loan under Co-Lending Model can be done only with the consent of the other lender.

Applicability:

The Co-Lending Model does not apply to foreign banks (including wholly owned subsidiaries) with less than 20 (twenty) branches and banks are not allowed to enter into co-lending arrangement with an NBFC belonging to their promoter group.

The Co-Lending Model supersedes the Co-origination Guidelines. The outstanding loans under the Co- origination Guidelines will continue as priority sector loans till their repayment or maturity, whichever is earlier. 

Please find a copy of the circular here.

This update has been contributed by Aastha (Partner), Gayatri Dabir and Arjun Gopalakrishnan (Associates).