Way to Go

Context: The recent liquidity measures taken by the Reserve Bank of India and Non-Banking Financial Companies to revive the economy have failed in isolation; Banks and NBFCs should work together in the co-lending domain to ensure economic revival.

Challenges face by the banks:

• Averse to lending: Banks have been reluctant to provide credit to borrowers

• • • • The credit growth rate has slowed down to 6.1% - February 2020.

• Economic uncertainty:

• De-growth predicted at 5% in GDP terms by many agencies.
• Ready capital not available for the people to spend.

• Lack of flexibility in handling Micro, Small and Medium Enterprises:

• • • Due to underwriting challenges.
    • Inherent limitations in terms of time and costs often restrict their real-time response.

• Non-operational Co-lending: The RBI’s thought of a co-lending mechanism involving banks and NBFCs has not been operationalized.

• • • Cumber some guidelines: For E.g. in Know Your Customer, when the NBFC has fulfilled all the obligations required by the RBI, banks should not be asked to do it again.

• More burden on banks:

• • • Credit assessment: As most nationalized banks are decentralized, credit decision often rests with the nearest branch, making it a complex process.
    • High operational and credit costs: do not justify the reduction in interest rates irrespective of cheaper fund availability.

Co-lending with NBFCs: Where banks cannot reach, NBFCs can.

• Better on ground presence: NBFCs play an important role due to their knowledge of ground realities and better adapted to handle risks.

• • • • In retail lending, the risk quantum is relatively low as small borrowers respect the lenders and are conscientious enough to honour their commitments.

• Use of technology and tools: Advanced technology and tools being used by the NBFCs for under- writing can be extended to the banks.

Way Forward: 

• Separate cell in Banks: to be institutionalized to handle co-lending requirements and loan bookings.

• Interest rate should not be lowered: as small borrowers who may not be able to pay in time would be borne by the NBFC.

• RBI needs to provide relaxations: when funding is to be done simultaneously in a joint account.

• Adopt First Loss Default Guarantee (FLDG) co-working framework: where banks grant loans to retail borrowers and NBFCs provide the first loss guarantee.

• The sharing of returns between the banks and NBFC happens by the way of service charge, subject to Goods and Services Tax.
• This makes the co-lending arrangement more efficient.