The co-lending model of NBFCs & banks may reshape credit delivery. Will it?

It is lift-off time for the co-origination of loans by banks and non-banking financial companies (NBFCs). If the model were to fly, it has the potential to reshape the delivery of credit — early estimates peg the annual incremental flow at Rs 25,000 crore. But will it?

The operational part was flagged off on September 21, 2018, but it is only now that the building blocks are coming into view. The reason: the greater part of this time was taken up by the principals involved to dance around issues after the blowout in shadow banking; and iron out finer aspects of the model. Just about every other state-run (and select private) banks, are setting up dedicated co-lending verticals. The underlying idea is to carve out the risks between banks and NBFCs with an emphasis on long-term structural reforms. And the emerging model goes beyond the plain-vanilla, and is not restricted to the priority sector.

The Piramal Group has teamed up with IIFL Wealth Management for a Rs 2,000-crore Alternative Investment Fund to finance last-mile realty projects. Khushru Jijina, managing director of Piramal Capital & Housing Finance, will not tell you more than, “it is part of a strategy to build newer platforms for co-lending. We will initially seed the fund with existing loans from the Group’s portfolio, while continuing to explore quality deals from the market”.

UGRO Capital wants to be a market-maker to small and medium enterprises. “Smaller NBFCs can either list their loan books for which they are looking for co-origination partners, or sell their portfolios. We will on-board the larger banks which are keen to co-originate loans, or buy loan books”, says Shachindra Nath, executive chairman of UGRO Capital.

The devil lies in the details

Mrutyunjay Mahapatra, managing director and chief executive, Syndicate Bank, says, “There is no tripartite-agreement with each borrower. The master agreement for loan has a provision for the co-originator’s involvement and the borrower is aware of it”, And adds: “Co-originators are not middleman or brokers. They have skin in the game as they have deployed money in terms of technology and are equally interested in the success of the scheme. The new trend is fintech firms emerging as micro finance institutions”. But NBFCs don’t see it as being this simple.

Policies would have to be agreed upfront between banks and NBFCs. The former is more comfortable funding fleet operators; the latter is happier with new-to-credit commercial vehicle owners and market load operators. Banks service largely out of branches; NBFCs are fine with field decisions.

Says Jaspal Bindra, Executive Chairman of the Centrum Group: “The borrower will execute a tripartite loan agreement with us and the co-lender (bank). The disbursements would be through an escrow account and similarly, the repayments will be collected in a common collections account. This will enable robust monitoring of fund inflows and outflows”.

Gaurav Gupta, chief executive officer of Adani Finserv, points to the co-ordination needed on the field: “Banks have to adopt NBFCs’ underwriting process, which may be different from our current policies. If many changes are proposed, our field teams will find it difficult to switch between sole and co-lending mid-way through the underwriting process”. And what can prove irksome is banks expecting NBFCs to adopt their policies, “which will make it no different from a business-correspondent structure”, he adds.

Banging heads together

A problem which is now being worked upon is to how to marry the low cost of funds from banks with the lower cost of operations of NBFCs and pass this on to borrowers through a blended rate. Another catch is that while sharing of loan is in the 80:20 ratio (banks: NBFCs), the central bank has said that “NBFC shall give an undertaking to the bank that its contribution towards the loan amount is not funded out of borrowings from the co-originating bank, or any other group company of the partner bank”.

A blended rate, and the fact that NBFCs cannot source funds from the co-originating banking partners is causing headaches. Banks have current and savings accounts; NBFCs are funded through debentures and commercial papers, a route made tougher with the new asset-liability norms, and the general aversion on the part of banks to take on such exposures. “To say that NBFCs must not be funded by their partners would mean we have to tie up funds from another lot of banks (with whom co-origination will be ruled out) unless these limits are vacated”, points out an NBFC official. It calls for a fine balancing act.

“Depending on the product, credit appetite, roles and responsibilities, co-lenders can decide their respective rates and the co-lending ratio after which the blended interest rate would be offered to the customer”, points out Bindra. Says Arijit Basu, managing director of State Bank of India: “The borrower is looking at interest rates lower than what NBFC’s charge. The bank is looking at having a slightly higher rate than what it normally charges on loans to small and medium enterprises”. Notes Gupta: “It may be more effective if this condition (blended rate) is done away with and instead, banks agree on an origination or collection fee for NBFC’s, keeping in light the bank’s effective returns on such products”.

In all this, the central bank may well have to relook at priority sector lending certificates (PSLCs) which is akin to trading in carbon credits. Under this arrangement, the overachievers sell excess priority sector obligations, while underachievers buy the same with no transfer of risks or loan assets. 

With the introduction of PSLC’s, and more loans (including consumption loans in some cases) qualifying for priority sector, securitisation (of NBFCs assets) has become less attractive for banks.

For now, yours and mine are fine. Not ours!