With a view to improve the flow of credit to the unserved and underserved sectors of the economy and make available funds at an affordable cost, the RBI, on November 5, 2020, superseded its previous Circular dated September 21, 2018 on co-origination of loans by banks and NBFCs for lending to priority sector with a new ‘co-lending model’ (‘CLM’). All outstanding loans under the superseded Circular will continue to be classified under priority sector until earlier of their repayment or maturity.

Under the new scheme, foreign banks (including wholly owned subsidiaries) with less than 20 branches will not be permitted to co-lend with NBFCs. Banks may not enter into a CLM arrangement with an NBFC belonging to its promoter group. Banks and NBFCs are required to formulate board approved policies for co-lending and publish such policies on their websites. Banks are permitted to co-lend with all registered NBFCs (including housing finance companies), based on a prior agreement which clearly sets out the arrangement and the roles and responsibilities of the parties. Depending on the nature and specifics of the agreement, banks would be required to adhere to additional circulars issued by the RBI.

Co-lending banks will take their share of the individual loans on a back-to-back basis in their books. However, NBFCs are required to retain a minimum of 20% share of the individual loans on their books. Further, banks can claim priority sector status in respect of their share of credit while engaged in co-lending. The NBFC will be the single point of interface for the customers for customer related issues and shall enter into loan agreements with the borrowers demarcating the roles of the co-lenders. Co-lenders are also required to formulate a grievance redressal arrangement to resolve any complaints registered by borrowers with the NBFC, failing which it can be escalated by the borrower to the concerned Banking Ombudsman/Ombudsman for NBFCs or the Customer Education and Protection Cell in RBI.

All transactions between the lenders relating to co-lending will be routed through an escrow account maintained with the banks. Additionally, in the event of termination of the CLM between the co-lenders, the lenders are required to implement a business continuity plan to ensure uninterrupted service to the borrowers till repayment of the loans under the CLM.