NBFCs raise concerns over planned co-lending rules

Mumbai: Non-bank lenders are planning to raise their concerns with the Reserve Bank of India over the changes proposed to co-lending rules. The proposed model suggests that both banks and non-bank financial companies (NBFCs) disburse loans together, replacing the current practice where NBFCs assign loans to banks.

NBFCs are looking to write to the RBI through their lobby group, Finance Industry Development Council, where industry insiders said they would likely argue that under the proposed structure, they would be required to hold loans for longer periods, increasing their risk and straining liquidity. The RBI early last month published the draft rules seeking stakeholder comment.

Banks too are concerned about the reporting of defaults in the new rules. If a borrower defaults, both the bank and the NBFC will need to report the default to credit bureaus, even if the borrower continues to repay one of the creditors. The draft guideline proposes simultaneous NPA tagging across partners, which means if one lender marks a loan as non-performing, the same classification applies to the other regardless of their internal collections, servicing or delinquencies. Lenders fear this could harm borrower trust, as it would lead to dual reporting of defaults and NPA.

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"Under the previous (assignment) model, NBFCs could provide the loan and quickly receive funds back from the bank," the chief executive of an NBFC said on the condition of anonymity. "This gave them the flexibility they needed. In the new model, they must hold onto the loan for a longer period, tying up their capital and increasing risk."

This measure is likely to hurt smaller NBFCs the most, he said. "They won't be able to issue as many loans and might even reduce or halt operations in rural and semi-urban areas where banks have a less presence."

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NBFCs also fear the enforcement of loan recovery in cases of default. "When a loan is shared between a bank and an NBFC, who owns the property if the borrower defaults? We need clarity from the RBI on this," said another NBFC executive. Currently, NBFCs and banks co-lend loans using the more commonly used assignment model, which involves NBFCs originating loans from their books and later assigning part of the loan to the bank. This model helps NBFCs maintain liquidity and continue to explore new lending opportunities. However, the RBI now wants to shift to a new model where both the bank and the NBFC disburse the loan jointly from the outset.

NBFCs are also expressing concerns over the collection and repayment process under the new rules, which require all payments to flow through a single escrow account.