RBI/2018-19/49
FIDD.CO.Plan.BC.08/04.09.01/2018-19
September
21, 2018
The Chairman / Managing
Director/
Chief Executive Officer
All Scheduled Commercial Banks (excluding RRBs & SFBs) and
All NBFC-ND-SIs
Dear Sir/ Madam,
Co-origination
of loans by Banks and NBFCs for lending to priority sector
Please refer to Para 3 of
the Statement on Developmental and Regulatory
Policies of the Third Bi-Monthly
Monetary Policy Statement 2018-19 dated August 1, 2018, introducing
the Co-origination Model between Banks and Non-Banking Financial Companies
- Non-Deposit taking - Systemically Important (NBFC-ND-SIs) for providing
competitive credit to priority sector. The detailed guidelines in this
regard are as under.
2. All scheduled commercial
banks (excluding Regional Rural Banks and Small Finance Banks) may engage
with NBFC-ND-SIs (hereinafter referred to as NBFC) to co-originate loans
for the creation of priority sector assets. The arrangement should entail
joint contribution of credit at the facility level, by both lenders. It
should also involve sharing of risks and rewards between the bank and the
NBFC for ensuring appropriate alignment of respective business objectives,
as per the mutually decided agreement between the bank and the NBFC,
inter-alia, covering the essential features as indicated in Annex 1.
3. The bank can claim priority
sector status in respect of its share of credit while engaging in the
co-origination arrangement. However, the priority sector assets on the
bank’s books should at all times be without recourse to the NBFC. Further,
the loans extended by foreign banks under the co-origination framework
shall be restricted only to loans qualifying as priority sector assets.
4. Based on the respective
interest rates and proportion of risk sharing, a single blended interest
rate should be offered to the ultimate borrower in case of fixed rate
loans. In the scenario of floating interest rates, a weighted average of
the benchmark interest rates in proportion to the respective loan
contribution, should be offered. The interest rate charged by the bank for
its portion of credit, shall be subject to applicable directions on
interest rates on advances. Further, the NBFC-MFIs which are categorized as
NBFC-ND-SIs, are also required to abide by the pricing of credit and other
applicable guidelines for loans covered under “Qualifying Assets” regarding
their contribution towards the co-originated loan. It is envisaged that the
benefit of low cost funds from banks and lower cost of operations of NBFC
would be passed on to the ultimate beneficiary through the blended rate/
weighted average rate. In this regard, banks/NBFCs shall provide all the
information like loan details including interest rate and other charges,
details of risk sharing arrangement, etc., as and when called for by the
Reserve Bank of India.
5. While engaging in
co-origination arrangements, inter-alia, the bank/ NBFC is required to
adhere to extant guidelines on outsourcing of financial services.
Accordingly, though the NBFC is expected to source loans as per the
mutually agreed parameters between the bank and the NBFC, bank shall not
outsource its part of credit sanction component to the NBFC.
6. With regard to grievance
redressal, any complaint registered by a borrower with the NBFC/ bank shall
also be shared with the bank/ NBFC; in case the complaint is not resolved
within 30 days, the borrower would have the option to escalate the same
with the concerned Banking Ombudsman/ Ombudsman for NBFCs.
7. The bank/ NBFC shall
formulate a Board approved policy for entering into a co-origination
agreement with the NBFC/ bank. The loans under the co-origination agreement
shall be subjected to periodic verification by bank’s/ NBFC’s internal
auditors to ensure adherence to its internal guidelines, terms of the
agreement and extant regulatory requirements.
Yours faithfully,
(Gautam Prasad Borah)
Chief General Manager-in-Charge
Encl: As above
Annex
1
Essential
Features of Co-origination Model between Banks and NBFC-ND-SIs
I. Sharing of Risk and
Rewards: Minimum 20% of the credit risk by way of direct exposure
shall be on NBFC’s books till maturity and the balance will be on bank’s
books. The NBFC shall give an undertaking to the bank that its contribution
towards the loan amount is not funded out of borrowing from the
co-originating bank or any other group company of the partner bank.
II. Interest Rate: NBFC
would have the flexibility to price their part of the exposure, while bank
shall price its part of the exposure in a manner found fit as per their
respective risk appetite/ assessment of the borrower and the RBI
regulations issued from time to time. An indicative illustration for
arriving at the single blended/ weighted average rate is detailed in Annex 2. However, notwithstanding the charging of
a single blended/ weighted average rate of interest from the borrower, the
repayment/ recovery of interest shall be shared between the bank and the
NBFC in proportion to their share of credit and interest.
III. Know Your Customer
(KYC): The co-originating lenders shall adhere to applicable KYC/
AML guidelines, as prescribed by Department of Banking Regulation (DBR)/
Department of Non-Banking Regulation (DNBR) and may also be guided by Para
14 of Master Directions on KYC, issued
by DBR.
IV. Loan Sanction: The
NBFC shall recommend to the Bank proposals as found relevant for joint
lending. The lenders shall be entitled to independently assess the risks
and requirements of the applicant borrowers. 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.
V. Common Account: The
Bank and the NBFC shall open an escrow type common account for pooling
respective loan contributions for disbursal as well as to appropriate loan
repayments from borrowers, without holding the funds for usage of float.
Regarding loan balances, the NBFC/ Bank shall maintain individual
borrower’s accounts and should also be able to generate and share a single
unified statement to the customer, through appropriate sharing of required
information with the Bank/ NBFC.
VI. Monitoring &
Recovery: Both lenders shall create the framework for day to day
monitoring and recovery of the loan, as mutually agreed upon.
VII. Security and Charge
Creation: The lenders shall arrange for creation of security and
charge as per mutually agreeable terms.
VIII. Provisioning/Reporting
Requirement: Each of the lenders shall follow its independent
provisioning requirements including declaration of account as NPA, as per
the regulatory guidelines respectively applicable to each of them. Each of
the lenders shall carry out their respective reporting requirements
including reporting to Credit Information Companies, under respectively
applicable law and regulations for their portion of lending.
IX. Assignment/ Change
in Loan Limits: Any assignment of loans by any of the lenders can
be done only with the mutual consent of both the lenders. Further, any
change in loan limit of the co-originated facility can be done only with
the mutual consent of both the lenders.
X. Grievance Redressal: It
shall be the responsibility of the NBFC to explain to end borrower
regarding the difference between products offered through the
co-origination model as compared to its own products. The front-ending
lender will be primarily responsible for providing the required customer
service and grievance redressal to the borrower. However, any complaint
registered by a borrower with the NBFC and/or bank shall also be shared
with the bank/ NBFC and in case, the complaint is not resolved within 30
days, the borrower would have the option to escalate the same with
concerned Banking Ombudsman/ Ombudsman for NBFCs.
XI. Business Continuity
Plan: Both the bank and the NBFC shall formulate a business
continuity plan to ensure uninterrupted service to the borrowers till
repayment of the loans under the co-origination agreement.
Annex
2
Indicative
Illustration for calculation of Blended/ Weighted Average Interest Rate
Scenario 1: Fixed interest rates
Customers are offered fixed
interest rate throughout life of loan.
|
Example
1
|
Example
2
|
Blended
interest rate calculations
|
Bank
|
NBFC
|
Bank
|
NBFC
|
Benchmark Interest Rate
|
8%
|
9%
|
8%
|
9%
|
Spread
|
2%
|
3%
|
2%
|
3%
|
Interest rate to consumer
|
10% (A)
|
12% (B)
|
10% (A)
|
12% (B)
|
Loan contribution ratio
|
80%(C)
|
20%(D)
|
70%(C)
|
30%(D)
|
Blended interest rate
(A*C)+(B*D)= E
|
10.40%
|
10.60%
|
Scenario 2: Floating interest
rates
|
Example
1
|
Example
2
|
Change
in Weighted Average interest rate
|
Bank
|
NBFC
|
Bank
|
NBFC
|
Benchmark Interest Rate
|
8% (A)
|
9% (B)
|
8% (A)
|
9% (B)
|
Loan contribution ratio
|
80% (C)
|
20% (D)
|
70% (C)
|
30% (D)
|
Weighted Average Benchmark
Interest Rate (X = A*C + B*D)
|
8.20%
|
|
8.30%
|
Spread
|
2% (E)
|
3% (F)
|
2% (E)
|
3% (F)
|
Weighted Average Spread (Y =
E*C+F*D)
|
2.20%
|
|
2.30%
|
Weighted Average interest rate
offered to customer at the time of disbursement (X + Y)
|
10.40%
|
|
10.60%
|
Change in Benchmark Rate
|
0% (F)
|
+1% (G)
|
0% (F)
|
+1% (G)
|
Revised Weighted Average
Benchmark Interest Rate X’ = [(A+F)*C + (B+G)*D]
|
8.40
|
|
8.60
|
New Weighted Interest Rate (X’
+ Y)
|
10.60%
|
|
10.90%
|
Other Charges
Any other applicable charges,
will be decided mutually between co-originating lenders and communicated to
the customer.
Note: The above illustration is
only indicative in nature and is not mandatory. However, irrespective of
the methodology employed by the lenders to arrive at the blended interest
rate, it is envisaged that the benefit of low cost funds from banks and lower
cost of operations of NBFC is passed on to the ultimate beneficiary.
|