more 1.4 billion In India, about 63% of the population still lives in rural areas, and a significant portion of them are unaware of formal financial services. Even today, LIG (low income group), EWS (economically vulnerable group), priority sectors (including agriculture, micro, small and medium enterprises (MSME) sector) and other important sectors are struggling to secure liquidity for their daily working capital needs.
People in these segments contribute significantly to India’s economic growth, so it is important to provide financial services to these categories. For example, the MSME sector alone contributes to about a third of India’s economic growth and is expected to contribute further. 1 trillion dollars We will increase India’s exports by 2028.
The Reserve Bank of India has identified this gap faced by MSMEs and other priority sectors and has introduced the following policy changes: Joint Loan A key component. Although the adoption of formal financial services has been slow in this segment, these people prefer the co-lending model because of the ease of cash transactions.
What is a joint loan?
Joint Loan Traditional lenders (e.g. bankWith a partner Non-Banking Financial Company (NBFC) The two lenders will work together to provide loans at low interest rates to improve the flow of credit to underserved sectors. NBFC(Non-bank financial companies) Takes care of the tedious tasks of loan applications and paperwork. bank We will provide liquidity strength to fund the majority of the loans. This partnership creates a symbiotic relationship where both parties benefit and share risks and rewards throughout the loan life cycle.
NBFCs have always benefited from the ability to use modern technology to penetrate smaller and more difficult to reach geographical areas. Loan origination software And banking. On the other hand, banks have more cash and bigger fee structures. But the problem is that banks have not been able to reach the underprivileged and NBFCs do not have enough cash to service these segments. Co-lending is a give-and-take model that can help NBFCs improve their liquidity, profitability and customer base. At the same time, banks can leverage NBFCs’ market access, loan origination and servicing insights.
The NBFCs’ co-lending volume is expected to reach USD 1.8 trillion. 1 trillion rupees by June 2024, It has been over five years since this model was introduced, indicating a significant increase in the adoption of co-lending agreements.
How can a co-lending model promote financial inclusion and economic growth?
Priority sectors have played a significant role in advancing financial inclusion and overall economic growth since then. However, the traditional lending model followed by banks makes it difficult for priority sectors to access liquidity. NBFCs, which are closely linked to this sector, lack the liquidity to fill this gap. According to statistics, bank credit growth in India will fall in the following ranges: 14-14.5% For the fiscal year 2024-25. These figures highlight the growth potential of the Indian banking sector and underscore the importance of involving banks in meaningful expansion of credit. Joint lending model It acknowledges that banks hold huge liquidity reserves and provides an opportunity to tap into this untapped potential.
On the one hand, co-lending provides access to credit to more individuals and businesses that NBFCs serve. On the other hand, banks can leverage technology for back-end operations, KYC processes and documentation. This allows for a seamless flow of credit to the underserved. In other words, banks can extend credit to borrowers whose loan applications would otherwise be rejected. This leads to greater financial inclusion.
Terms of the joint loan agreement
On November 5, 2020, RBI issued the following notification: ‘Joint lending to priority sectors of banks and NBFCs‘ The 2018 amendments to the Loan Co-Issuance Scheme have been amended to include Housing Finance Companies (HFCs) under the umbrella term Non-Banking Financial Companies (NBFCs). Some of the common terms of the agreement between the parties are as follows:
- 80-20 split: Banks and NBFCs generally take a capital deployment ratio of 80:20, and NBFCs are required to maintain a minimum of 20% of their capital throughout the life of the loan. The funds of both parties are to be collected and allocated in an agreed ratio at the time of funding and at the time of collection of repayment, and neither party should use the other party’s funds.
- Joint Acquisition: Since both institutions are equally involved in the loan agreement, the underwriting is also done jointly, allowing for double verification.
- Risk-Reward Split: Splitting capital deployment 80:20 also reduces the amount of risk and return shared between the two companies.
- Final Interest Rate: Both parties can charge their own interest rates, and the final rate charged to the customer is usually a blended rate, which is somewhere between the rates charged by the bank and the NBFC individually.
- Defined Roles: Typically, NBFCs are responsible for sourcing, customer experience and management, product innovation, rapid documentation and fast turnaround times, while banks are responsible for attracting funds and establishing credibility. Risk assessment is carried out by both NBFCs and partner banks. Loan origination All processing is done to the customer through the NBFC.
How does a joint loan agreement work?
Here are the four steps to how co-lending works:
- First, NBFCs perform Loan origination Through activities Co-lending Software After identifying a potential customer, we recommend that customer to our partner bank with the relevant documentation.
- The bank independently conducts a customer requirements analysis and risk assessment, and conducts an examination if it determines that the customer is creditworthy.
- NBFCs and banks enter into a tripartite agreement between the lender and the borrower, provided all requirements are met.
- Banks and NBFCs pool funds into a common escrow account to disburse loans. Each lender allocates funds according to a predetermined ratio in the contract. Both lenders maintain accounts for their customers, but they must share information and work together to produce a consolidated account statement to facilitate the borrower’s repayment.