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UPSC » Daily News Analysis ‘RBI Proposes New Framework for Co-Lending Arrangements’ : 10 April

Daily News Analysis ‘RBI Proposes New Framework for Co-Lending Arrangements’ : 10 April

Table of Content

What is Co-Lending?

  • Co-Lending Arrangement (CLA) refers to a system where two regulated financial entities jointly extend credit to borrowers, sharing the loan in a pre-determined ratio, as permitted by RBI guidelines. 
  • Typically, these involve:
    • Banks and NBFCs co-originating loans.
    • Loans extended to priority sector borrowers (e.g., agriculture, MSMEs).
    • Banks claim priority sector lending (PSL) benefits on their share of the loan.

Existing Guidelines

  • Presently, RBI guidelines allow co-lending only between banks and NBFCs.
  • The arrangement is limited to Priority Sector Lending (PSL).
  • Introduced to leverage NBFCs’ outreach and banks’ lower cost of funds.

Key Proposals in the Draft Framework

  • Expansion of eligible entities: All regulated entities under RBI to be allowed to participate in co-lending, excluding Regional Rural Banks (RRBs), Small Finance Banks (SFBs), and Local Area Banks (LABs).
  • Inclusion of all loan categories: Co-lending to be extended to both priority and non-priority sector loans.
  • Credit policy transparency: Lending entities must clearly disclose:
    • Targeted customer segment
    • Terms and conditions of the loan
    • Internal borrower limits
    • Risk-sharing mechanisms
  • Due diligence and risk-sharing to remain the responsibility of the participating entities.
  • End-use monitoring, recovery, and grievance redressal frameworks to be clearly defined in co-lending agreements.

Significance of the Move

  • Wider credit access allows for larger and diversified loan offerings, particularly in sectors previously underserved by banks or NBFCs alone.
  • Operational flexibility permits customized lending models, especially in rural and semi-urban areas.
  • Efficient capital deployment enhances risk diversification and fund utilization across financial institutions.

Why in News?

  • The Reserve Bank of India (RBI) has released a draft framework to expand co-lending arrangements beyond the current scope of banks and Non-Banking Financial Companies (NBFCs).