NPA Crisis

Co-Lending Model for Banks-NBFCs


From UPSC perspective, the following things are important :

Prelims level: NBFCs

Mains level: Co-Lending and associated issues

A November 2020 decision by the RBI to permit banks to “co-lend with all registered NBFCs based on a prior agreement” has led to unusual tie-ups between the banks and companies.

 The ‘Co-Lending Model’

  • In September 2018, the RBI had announced “co-origination of loans” by banks and Non-Banking Financial Companies (NBFCs) for lending to the priority sector.
  • The arrangement entailed joint contribution of credit at the facility level by both the lenders as also sharing of risks and rewards.
  • Subsequently, based on feedback from stakeholders, the RBI allowed the lenders greater operational flexibility, while requiring them to conform to regulatory guidelines.
  • The primary focus of the revised scheme, rechristened as ‘Co-Lending Model’ (CLM), was to “improve the flow of credit to the unserved and underserved sector of the economy.

Repercussions of Co-Lending

(1) Bank-NBFC tie-ups at indiscriminate scale

  • Several banks have entered into co-lending ‘master agreements’ with NBFCs, and more are in the pipeline.
  • SBI, the country’s largest lender, signed a deal with Adani Capital, a small NBFC of a big corporate house, for co-lending to farmers to help them buy tractors and farm implements.

(2) Greater risk in co-lending

  • NBFCs are required to retain at least a 20 per cent share of individual loans on their books.
  • This means 80 per cent of the risk will be with the banks — who will take the big hit in case of a default.

(3) Corporates in banking

  • While the RBI hasn’t officially allowed the entry of big corporate houses into the banking space, NBFCs — mostly floated by corporate houses — were already accepting public deposits.
  • They now have more opportunities on the lending side through direct co-lending arrangements.

Back2Basics: Non-Banking Financial Company (NBFC)

  • An NBFC is a company incorporated under the Companies Act 2013 or 1956.
  • According to section 45-I (c) of the RBI Act, a Non–Banking Company carrying on the business of a financial institution will be an NBFC.
  • It further states that the NBFC must be engaged in the business of Loans and Advances, Acquisition of stocks, equities, debt etc issued by the government or any local authority or other marketable securities.

NBFC business:

The NBFC business does not include business whose principal business is the following:

  1. Agricultural Activity
  2. Industrial Activity
  3. Purchase or sale of any goods excluding securities
  4. Sale/purchase/construction of any immovable property – Providing of any services

Difference between Banks and NBFCs:

  • NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a few differences as given below:
  1. NBFC cannot accept demand deposits;
  2. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;
  3. Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in the case of banks.


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