POLICY ON

CO-LENDING BY BANK AND NBFCS TO PRIORITY SECTOR

Credit Department - CPPI

South Indian Bank Ltd.

Head Office
T.B Road, Mission Quarters, Thrissur 680 001,Kerala, India

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Policy on Co-Lending by bank and NBFCS to Priority Sector

Introduction

RBI has released guidelines on Co-lending by banks and NBFCs to Priority Sector vide circular
RBI/ 2020-21/63 FIDD.CO. Plan.BC.No.8/04.09.01/2020-21 dated 05.11.2020. As per
guidelines banks shall formulate Board approved policies for entering in to Co-Lending Model
(CLM) and place the approved policies in the website. Accordingly, Policy on Co-lending by
banks NBFCs to Priority Sector has been framed. This policy supersedes bank’s policy on Co-
Origination of Loans by Bank and NBFCS for Lending to Priority Sector.

Co-lending is joint contribution of credit/loans by Bank and NBFC at facility level with sharing
of risk and reward.

The Co-lending model (CLM) is to improve the flow of credit to the unserved and underserved
sector of the economy and make available funds to the ultimate beneficiary at an affordable cost,
considering the lower cost of funds from the banks and greater reach of the NBFCs.

General Guidelines

 In terms of CLM, banks are permitted to co-lend with all Registered NBFCs (including
HFCs) based on prior agreement. The bank will take their share of the individual loans on
a back-to-back basis in their books. However, NBFCs should retain a minimum 20 %
share of the individual loans in their books.
 Based on the CLM policy, banks may enter into master agreement with the eligible
NBFC, including terms and conditions of the arrangement, criteria for selection of partner
institutions, specific product lines and areas of operation, provisions related to
segregation of responsibilities, customer interface, protection issues etc.
 The master agreement may provide for banks to either mandatorily take bank’s share of
the individual loans originated by the NBFCs in bank’s books as per the terms of the
agreement, or to retain the discretion to reject certain loans after bank’s due diligence
prior to taking into bank’s books.
 Bank can claim priority sector status in respect of bank’s share of credit under CLM
adhering to extant norms related priory sector lending issued by RBI/Govt of India.
Eligibility

The NBFC shall meet the following eligibility criteria to consider for the Co-Lending
arrangement;

a) All Registered NBFCs (including HFCs) are eligible to be considered under CLM

b) The arrangement shall be only for the creation of Priority sector assets.

c) The NBFC should have a Board approved policy for tie ups with banks for co-lending.

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 d) Minimum CRAR of NBFC as per latest AFS should be 15%, with minimum Tier 1
capital of 10%.

e) Bank is not allowed to enter into co-lending arrangement with an NBFC belonging to the
promoter Group.

f) NBFCs with satisfactory external rating of “BBB” and above shall be considered under
this arrangement.

g) The NBFC shall have minimum lending experience of 3 years in the

sector/portfolio/industry from where the loans are considered for Co-lending.

h) Net NPA percentage as per the latest AFS should be less than 3%.

Co-lending Model /arrangement sanction

 HO-CC1 be empowered to approve Co-lending arrangements with those NBFCs meeting
the eligibility criteria. Asset quality, monitoring, collection & recovery mechanisms,
underwriting quality of the NBFC shall be considered while approving the
agreement/arrangement.
 While approving the arrangement, the sanctioning authority shall fix the exposure ceiling
for the loans sanctioned under the respective arrangement and also specify the maximum
stress permissible in the portfolio/arrangement.
Sanction of individual loans under CLM

 Sanctioning of individual loans shall be done as per the approved scheme & agreement
with NBFC agreed as per the Master Agreement between bank and NBFC.

Bank may explore tie-ups with NBFCs to improve the flow of credit to the unserved and
underserved sector of the economy including MFI/MSME lending. NBFCs’ technological
advantage and dominance in reach may be helping them to cater the demand of such segments.
Fixing common criteria in the form of experience, rating etc may prevent bank in exploring tie-
ups with such NBFCs. To capitalize the opportunity by tie up with NBFCs with innovating
technology, digital models, strong innovating business model etc, Management Committee of the
Board (MCB) may relax the eligibility conditions on a case to case basis.
Features and Scope of the Co-lending model
1. General features

The Master Agreement entered into by the banks and NBFCs for implementing the CLM may
provide either for the bank to mandatorily take bank’s share of the individual loans as originated
by the NBFC in its books or retain the discretion to reject certain loans subject to its due
diligence.

a. If the agreement entails a prior, irrevocable commitment on the part of the bank to take
into its books its share of the individual loans as originated by the NBFC, the
arrangement must comply with the extant guidelines on Managing Risks and Code of
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 Conduct in Outsourcing of Financial Services by Banks issued vide RBI/2014-15/497
/DBR.No.BP.BC.76/21.04.158/2014-15 dated March 11, 2015 and updated from time to
time. In particular, the partner bank and NBFC shall have to put in place suitable
mechanisms for ex-ante due diligence by the bank as the credit sanction process cannot
be outsourced under the extant guidelines.
b. Bank shall also be required to comply with the Master Directions - Know Your Customer
(KYC) Direction, 2016, issued vide RBI/DBR/2015-16/18 Master Direction DBR.
AML.BC.No.81/14.01.001/2015-16 dated February 25, 2016 and updated from time to
time, which already permit regulated entities, at their option, to rely on customer due
diligence done by a third party, subject to specified conditions.
c. If the bank can exercise its discretion regarding taking into its books the loan originated
by NBFC as per the Agreement, the arrangement will be akin to direct assignment
transaction. Accordingly, the bank shall ensure compliance with all the requirements in
terms of Guidelines on Transactions Involving Transfer of Assets through Direct
Assignment of Cash Flows and the Underlying Securities issued vide RBI/2011-12/540
DBOD.No.BP.BC-103/21.04.177/2011-12 dated May 07, 2012 and RBI//2012- 13/170
DNBS. PD. No. 301/3.10.01/2012-13 August 21, 2012 respectively, as updated from time
to time, with the exception of Minimum Holding Period (MHP) which shall not be
applicable in such transactions undertaken in terms of this CLM.
d. The MHP exemption shall be available only in cases where the prior agreement between
the banks and NBFCs contains a back-to-back basis clause and complies with all other
conditions stipulated in the guidelines for direct assignment.

Customer service a. The NBFC shall be the single point of interface for the customers and
and related aspects shall enter into a loan agreement with the borrower, which shall
clearly contain the features of the arrangement and the roles and
responsibilities of NBFCs and banks.
b. All the details of the arrangement shall be disclosed to the customers
upfront and their explicit consent shall be taken.
c. The ultimate borrower may be charged an all-inclusive interest rate as
may be agreed upon by both the lenders conforming to the extant
guidelines applicable to both.
d. The extant guidelines relating to customer service and fair practices
code and the obligations enjoined upon the banks and NBFCs therein
shall be applicable mutatis mutandis in respect of loans given under
the arrangement.
e. The NBFC should be able to generate a single unified statement of the
customer, through appropriate information sharing arrangements with
the bank.
f. With regard to grievance redressal, suitable arrangement must be put
in place by the co-lenders to resolve any complaint registered by a
borrower with the NBFC within 30 days, failing which the borrower
would have the option to escalate the same with the concerned
Banking Ombudsman/Ombudsman for NBFCs or the Customer
Education and Protection Cell (CEPC) in RBI

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 Other operational Aspects
The co-lending banks and NBFCs shall maintain each individual
Borrower accounts
borrower’s account for their respective exposures. However, all
& escrow
transactions (disbursements/ repayments) between the banks and NBFCs
mechanism
relating to CLM shall be routed through an escrow account maintained
with the banks, in order to avoid inter-mingling of funds.
Segment and loan Sanctioning authority of the CLM may decide on the segment and areas
ticket size where co-lending arrangement can be made by ensuring that the loans
under this arrangement falls under Priority sector. Maximum ticket size of
loans under co-lending model also may be decided based on the segment,
area of operation and credentials of the co-lending partner.
Interest rate Bank shall price our part of the exposure, in a manner found fit as per our
respective risk appetite/ assessment of the borrower and the RBI
regulations issued from time to time. The ultimate borrower may be
charged an all-inclusive interest rate as may be agreed upon by both the
lenders conforming to the extant guidelines applicable.

Documentation The loan agreement would be tripartite in nature, wherein, both the Bank
and the NBFC shall be parties as lenders to the loan agreement with the
customer. Documentation process, execution, preservation of executed
documents, making the same available to the internal auditors etc shall be
as per the terms of the agreement. Formats of documents/ loan agreements
to be developed in co-ordination with the Legal Departments of the bank
and NBFC. The documentation formats shall be the part of the agreement
between the bank and NBFC. Responsibilities for execution of documents,
bearing of loss on account of fake documents/title
deeds/forgery/documentation faults shall also be covered in the agreement.

The co-lenders shall arrange for creation of security and charge as per
Security creation
mutually agreeable terms.

Creation of security and charge shall be completed as per mutually

agreeable terms of the agreement. Necessary clauses & arrangement for
creation of security, maintenance, statutory charge creation etc shall be
included in the agreement with NBFC.

Monitoring,  The co-lenders shall establish a framework for monitoring and

recovery and asset recovery of the loan, as mutually agreed upon.
classification  Each lender shall adhere to the asset classification and provisioning
requirement, as per the respective regulatory guidelines applicable
to each of them including reporting to Credit Information
Companies, under the applicable regulations for its share of the
loan account.
The loans under the CLM shall be included in the scope of
Inspection and
audit internal/statutory audit within the banks and NBFCs to ensure adherence to
their respective internal guidelines, terms of the agreement and extant
regulatory requirements.
Other conditions  The Master Agreement may contain necessary clauses on

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 representations and warranties which the originating NBFC shall be
liable for in respect of the share of the loans taken into its books by the
bank.
 Any assignment of a loan sourced through this arrangement by a co-
lender (NBFC) to a third party can be done only with the consent of the
other lender (bank).
 Both the banks and the NBFCs shall implement a business continuity
plan to ensure uninterrupted service to their borrowers till repayment of
the loans under the co-lending agreement, in the event of termination of
co-lending arrangement between the co-lenders.

Conclusion

The primary focus of the revised scheme, rechristened as “Co-Lending Model” (CLM), is to
improve the flow of credit to the unserved and underserved sector of the economy and make
available funds to the ultimate beneficiary at an affordable cost, considering the lower cost of
funds from banks and greater reach of the NBFCs. The policy is framed as per the guidelines
published by RBI. Any amendments to the policy due to internal requirements or due to
modification in RBI norms shall be submitted to Board for approval.

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