Borrowers may gain from lower rates under RBI draft co-lending norms: ICRA

The Reserve Bank of India (RBI) draft norms on co-lending, which have proposed a blended interest rate for borrowers to be arrived at by calculating the average of interest rates charged by the respective partners in the arrangement, are likely to benefit borrowers through lower interest rates. Under the current practice, they are being charged an all-inclusive interest as agreed upon by the lending partners, said rating agency ICRA.

 

RBI has proposed that the blended rate of interest is to be calculated as an average rate of interest derived from the interest rates charged by respective funding regulated entities (REs), weighted by their proportionate funding shares.

 

 

On April 9, RBI put out draft norms to expand the scope of co-lending arrangements to all regulated entities and to non-priority sector lending (PSL) sectors as well.

 

While the current co-lending norms between banks and non-banking financial companies (NBFCs) do not permit default loss guarantees (DLGs), under the proposed norms, DLGs have been uniformly restricted to 5 per cent of the loans outstanding.

 

Further, no implicit guarantees or absorption of credit losses via adjustments to servicing charges have been permitted. This, ICRA believes, would restrict unanticipated losses for the originating regulated entities and the sourcing/servicing partners.

 

“The current co-lending regulations between banks and NBFCs for PSL loans do not permit default loan guarantees. However, many NBFC–NBFC arrangements are prevalent, with cases where there are DLGs or loss compensation agreements,” the report mentioned.

 

The draft framework also offers enhanced coverage of all asset segments vis-à-vis only priority sector lending in the past. Additionally, the draft guidelines hold more importance owing to robust growth in co-lending transactions over the past few years.

 

It said that co-lending arrangements have emerged as a key funding source for medium and small NBFCs, enabled by the rapid improvement in IT systems and integration between entities. This has especially been led by various fintechs in segments such as personal loans, consumption loans and small business loans.

 

Moreover, as per the draft guidelines, the loan agreement signed by a borrower with lenders should make a prior disclosure regarding the segregation of roles and responsibilities such as sourcing, funding and servicing of partners involved, including entities having customer interface. Any subsequent change in customer interface shall only be done after taking explicit consent from the borrower.