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10 things borrowers should know about co-lending model between banks and NBFCs

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Recently, Indiabulls Housing Finance Ltd entered into a strategic co-lending partnership with HDFC Ltd to offer housing loans to homebuyers at competitive rates.

According to their notification to stock exchanges, Indiabulls Housing Finance (IBH) will originate retail home loans according to a jointly drawn up credit policy and retain 20% of the loan in its books. The rest, 80%, will be on HDFC’s books. IBH will service the loan account throughout the lifecycle of the loan.

Banks and non-banking financial companies (NBFCs) have been increasingly looking at co-lending opportunities. In March, PNB Housing Finance joined hands with Yes Bank, and Karur Vysya Bank (KVB) partnered with Cholamandalam Investment and Finance Company for co-lending.

In February, the Bank of Maharashtra tied up with LoanTap Credit for lending jointly. State Bank of India top officials have said that the bank is actively looking at co-lending opportunities with NBFCs.

In the co-lending model, two lenders come together to give loans. Reserve Bank of India (RBI) had issued guidelines on co-lending in November 2020. Let us look at 10 essential things about co-lending.

1. RBI had allowed the co-lending scheme for banks and NBFCs. The model aims to improve the flow of credit to unserved and underserved sections of the economy and to make funds available to borrowers at an affordable cost. Typically, banks have lower rates, whereas NBFCs have better reach. The co-lending model aims to give the borrower the best of both.

In most partnerships, banks have kept 80% of the loan on their books, and NBFCs have kept the remaining portion, 20%, on their books.

2. Banks and NBFCs must have a master agreement in place before they start co-lending. The agreement should include terms and conditions of the arrangement, the criteria for selection of partner institutions, the specific product lines and areas of operation, provisions related to segregation of responsibilities, and customer interface and protection issues.

3. The NBFC will be the single point of interface for the customers. It will enter into a loan agreement with the borrower, which will contain the features of the arrangement and the roles and responsibilities of NBFCs and banks.

4. Lenders must disclose all the details of the arrangement to customers upfront and take their explicit consent.

5. Lenders will charge an all-inclusive rate, which both NBFCs and banks have agreed upon. Both banks and NBFCs will need to adhere to the fair practices code for loans given under the arrangement.

6. The NBFC should generate a single unified customer statement through appropriate information-sharing arrangements with the bank.

7. For grievance redressal, suitable arrangements must be put in place by the co-lenders to resolve any complaint registered by a borrower with the NBFC within 30 days.

8. If the financial institutions don’t address borrowers’ grievances, the latter can escalate the same with the concerned banking ombudsman, or ombudsman for NBFCs, or with the customer education and protection cell of RBI.

9. The co-lending banks and NBFCs shall maintain each borrower’s account for their respective exposures. However, all transactions (disbursements/ repayments) between the banks and NBFCs for co-lending must be routed through an escrow account maintained with the bank to avoid intermingling of funds.

10. Both partners also need to implement a business continuity plan to ensure uninterrupted service to their borrowers till repayment of the loans, in case they decide to terminate the partnership.

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