Co-origination Model : A new lending horizon
In the Statement on Developmental and Regulatory Policies issued by RBI in Sep 2018, the idea of co-origination of loans was suggested as a measure to augment the flow of credit to Priority Sector when the micro-lending through NBFC was dwindling due to liquidity crisis ailing NBFC sector. In simple words, when a bank and NBFC come together to disburse a loan, it is called co-origination. Under this concept, all scheduled commercial banks (excluding Regional Rural Banks and Small Finance Banks) have been given permission to partner with NBFC-ND-SIs (Non-Banking Financial Companies – Non-Deposit taking- Systemically Important) for lending to priority sector. The co-origination model of lending prescribes joint contribution of credit by both lenders (Banks and the NBFCs) at the facility level which involves sharing of both risks and rewards between them. They are also called co-lenders. To ensure proper alignment of respective business objectives of Bank and NBFCs and regulation of the functional aspects of this arrangement, RBI issued comprehensive guidelines in Sep 2018.
While State Bank of India was the first bank to pioneer in this segment, some other PSBs followed suit later.
How does co-origination work?
- Sharing of Business: The Bank and NBFC shares exposure depending upon risk appetite by way of direct exposure. The NBFC needs to hold the minimum 20% of the combined exposure as well as to give an undertaking to the partner bank that it has not availed funding for its share from either the partnering bank or another group company of the partner bank.
- Interest Rate: Both NBFC and Bank may fix the price of their part of the exposure in terms of their respective regulatory guidelines, risk appetite and assessment of the borrower but the price offered to the client would be a single blended/ Weighted Average Interest. For example,
|Blended interest rate calculations||Bank||NBFC|
|Benchmark Interest Rate||7%||9%|
|Interest rate to consumer||9% (A)||11% (B)|
|Loan contribution ratio||80%(C)||20%(D)|
|Blended interest rate (A*C)+(B*D)= E||9.40%|
- Know Your Customer (KYC) and Loan sanction: The co-lenders need to comply with KYC guidelines issued by RBI. The requirement of the fund, as well as the risk associated with the borrower, is independently assessed by the co-lenders where after a tripartite loan agreement is executed among the borrower, Bank and NBFC.
- Disbursement: The disbursement mechanism is set up in such a manner that loan contributions for disbursal shall be pooled into an escrow account without allowing it to be used as a floating fund. The NBFC/ Bank shall maintain individual borrower’s accounts but an arrangement is made to generate a single unified statement to be shared with the customer.
- Monitoring, Repayment, Security and charge creation: All these aspects are ensured as per mutually agreed terms. Any assignment of loans by any of the lenders as well as any change in loan limit of the co-originated facility can be done only with the mutual consent of both the lenders. The repayment gets shared between the bank and the NBFC under escrow arrangement in proportion to their share of credit and interest.
- Provisioning/Reporting Requirement: Usual process as applicable to individual loans in respect of provisioning, Asset classification and reporting to CICs and others shall be followed by the co-lenders individually for their portion of the loan.
- Business Continuity Plan & Grievance Redressal: Both the bank and the NBFC have to ensure unhindered service to the borrowers through ensuring compatibility of the lending platform. Exclusive products have been designed for customers. The customer can register its complaint at any entity which will be shared to the Bank/NBFC. The customer also has the option to escalate the issue with the concerned Banking Ombudsman/Ombudsman for NBFCs if the grievance is not addressed within 30 days.
Benefits of the co-origination model
As per the model, the lending bank shall give maximum 80% while the NBFC will lend minimum 20%. Commercial banks have relatively low cost of funds due to CASA advantage, while NBFC has high cost of funds but their operating cost is relatively low due to automation of various processes. Thus with constructive collaboration, cost would be controlled and the intended sector may get lending at competitive cost transparently.
NBFC sector has been already facing liquidity crisis and continuing Asset – Liability maturity mismatch since the recent past. The case of IL&FS has exposed the inherent high business risks in NBFC business models causing risk aversion of the lender. Through sharing the asset they can effectively manage asset growth without adversely impacting its goodwill in the market.
Banks have some geographical restrictions and they cannot reach out to all the customers. Further, the customer has a demand for the customised product which some time face policy restrictions and as such the product offering as well as the risk of return is quite challenging. On the other hand, NBFCs are generally powered by Fin-tech and leverage digital platform for lending and lead management. Therefore, the co-origination model shall provide innovation, better product mix and positioning.
NBFC will identify the prospective borrowers, conduct preliminary investigations and then accept the applications found to be suitable as per its laid down eligibility criteria. The process of getting the loan as well as its repayment would be in single point contact mode.
As the said model was introduced to largely buttress the liquidity crisis of NBFC, the association of Banks and NBFCs after integration of their technology platform would go a long way in fulfilling the need of the priority sector basically MSME sector. The borrower would enjoy the credit on the digital platform at a competitive rate which would be fully automated to suit the need of the hour.
The NBFC sector which was very agile in maintaining high margins and golden growth rate in past would regain its faded sheen whereas the traditional bank would get diversified business interests to remain profitable by leveraging each other’s strength. This transparent mechanism will facilitate much needed healthy growth of priority sector.
Vineet Kumar Das,(5004071)
Chief Manager (Faculty)