After making Small Financial Banks (SFBs) eligible for the Category I Authorized Reseller (AD) License, the Reserve Bank of India (RBI) could take another step in liberalizing its scope of business. This could allow these banks to co-lend with non-bank financial companies (NBFCs).
Currently, SFBs are not allowed to co-lend with another lender. Only regular commercial banks and NBFCs are allowed to lend jointly to priority sectors such as agriculture; micro, small and medium enterprises (MSMEs), education, housing, among others.
Encourage lending to priority sectors
Although the RBI has so far required SFBs to only make direct lending, it is believed to be weighing industry demands to allow co-lending in areas where these banks do not have a role. expertise. “Co-lending could specifically be allowed in cases where we can get expertise. For example, if an SFB wants to get into commercial vehicle (CV) financing, it makes more sense for them to partner with a specialist CV reader (NBFC) rather than do it all on their own,” said a senior SFB official.
Industry watchers say the banking regulator appears to be open to requesting co-loans from SFBs. If these banks and NBFC join forces, it will increase Priority Sector Lending (PSL), which is a priority area for the government and the RBI. PSL is productive and generates income for borrowers.
“In the case of microfinance, SFBs don’t want to hold all the exposure on their books. If co-lending is allowed with another NBFC or traditional bank, this will help SFBs manage their risk. Probably, RBI is waiting for all SFBs to be listed before liberalizing this rule,” the experts say.
According to RBI, the “Co-Lending Model” (CLM) aims to improve the flow of credit to the unserved and underserved sector of the economy and to make funds available to the end beneficiary at an affordable cost, considering given the lower cost of funds. banks and greater reach of NBFCs.
Under the terms of the CLM, banks are permitted to lend jointly with all registered NBFCs (including HFCs) based on prior agreement. Co-lending banks will take their share of individual loans on a back-to-back basis on their books, in accordance with the central bank’s circular. However, NBFCs will be required to maintain a minimum 20% share of individual loans on their books.
RBI, in its December 2019 guidelines for “on-demand” licensing of SFBs in the private sector, had clearly mentioned that after the initial stabilization period of five years, and after a review, it could liberalize the field of activity of the SFBs. Thus, making SFBs eligible for the Category I AD license, so that they have more flexibility to meet their clients’ foreign exchange business needs, fits into this context.
A Category I AD bank can carry out all authorized current account and capital transactions. Until now, SFBs could only obtain a Category II AD license, which allowed them to perform specified non-trade related current account operations and all activities permitted to full-fledged money changers .
Of the 10 applicants who obtained approval in principle in 2015 to establish SFBs, nine have already completed five years of operation and Jana SFB will complete it in March 2023. Two other entities (Shivalik SFB and Unity SFB) have started their activities only in 2021.
August 21, 2022