RBI announces norms for co-origination of priority sector loans by banks, NBFCs

RBI announces norms for co-origination of priority sector loans by banks, NBFCs

News

1. RBI announced the co-origination model between banks and NBFCs.

What is co-origination of loans?

2. It is a proposal for joint lending by banks and NBFCs.

• NBFC-A Non Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 of India, engaged in the business of loans and advances, acquisition of shares, stock, bonds, hire-purchase insurance business or chit-fund business.

3. All scheduled commercial banks (excluding regional rural banks and small finance banks) may engage with non-banking financial companies to co-originate loans for the creation of priority sector assets.

• Priority sectors examples- agriculture loans, affordable housing, renewable energy projects, etc.

Important Facts:

• The arrangement should entail joint contribution of credit at the facility level by both lenders.
• The risks and rewards will be shared between the banks and NBFCs.
• At least 20% of the credit risk will be on the NBFC’s books and the balance will be on the bank’s book till maturity.
• For fixed rate loan, single blended interest rate will be offered (A blended rate is an interest rate charged on a loan that represents the combination of a previous rate and a new rate)
• For floating interest loan, weighted average of benchmark interest rates of both bank and NBFC will be offered
• Tripartite agreement will be signed between bank, NBFC and customer
• The bank and NBFC will open a common account to pool loan contributions for disbursal and repayments

Benefits of co-origination of loans

4. Low-cost funds from banks and lower cost of operations from NBFC will be passed on to the beneficiary through weighted average rate.