RBI proposes framework to expand co-lending

The Reserve Bank of India (RBI) proposed a draft framework for co-lending arrangements between all regulated entities, as the current regulation deals only with co-lending between banks and non-banking financial companies.

“The extant guidelines on co-lending are presently applicable only to arrangements between banks and NBFCs. Moreover, they are restricted to priority sector loans. To exploit the huge potential of such lending arrangements, it is proposed to extend them to all regulated entities and to all loans – priority sector or otherwise,” said RBI Governor Sanjay Mahotra as part of additional regulatory measures on April 9.

Co-lending Arrangement (CLA)  involves the act of two financial institutions that are eligible under the RBI directions, issuing loans based on a pre-determined proportion of lending. Banks that co-lend to priority sector can claim priority sector status. 

The guidelines will now be applicable for all commercial banks, NBFCs and will exclude RRBs,  SFBs and Local Area Banks. The RBI proposed that the credit policy of the banks that indulge in co-lending will have to disclose customer segment targetted,  terms and conditions of loan, internal limit on borrower portfolio among others. 

Unrealised profits from CLA will have an effect on the capital adequacy requirements. After feedback from stakeholders, RBI will announce the policy.