NBFCs’ contribution to the financial sector has remained unparalleled. They walk in tandem with traditional banks (although they are not supposed to act like a bank) to serve the unbanked section of the economy. With over 9000 NBFCs pan-India and counting, the future of private lending seems potentially bright. But challenges are inherent and can’t be avoided. That’s where the NBFC co-lending agreement comes into play. Let’s discover why this agreement has emerged as a boon for struggling NBFCs, its basics, perks, and everything in between.
What Are NBFC Co-Lending Agreements?
The NBFC Co-Lending Agreement[1] is a legal arrangement between the NBFC and a bank to facilitate loans to borrowers through mutual contribution. Depending on the term of the agreement, the contribution can be like a bank disbursing 80% of the loan and the NBFC handling the rest (i.e., 20%).
This is the standard equation for both lenders, but it may be subject to changes if both parties agree. Typically, in the NBFC lending partnership agreement, it is the bank that steps forward and takes the major blow. While NBFC plays its part, making a 20% contribution, and abides by the agreement’s rules. Speaking of rules, the next section sheds light on the same in detail.
What are the Co-lending Agreement Clauses?
Co-lending agreement clauses are the set of rules that govern the entire collaborative framework between the bank and the NBFCs. It contains clauses that govern
- Who will pay what percentage of the loan to the borrower?
- Escrow account where the future EMIs will be deposited
- Interest rate. Since banks usually have low interest rates, both parties agreed upon a best rate—something that aligns with their operations and is in their interest.
- Who will handle borrowers’ complaints? Typically, it is the onus of the NBFC to perform such tasks.
- How will the loss arising from the non-payment be addressed
- Who will verify borrowers before disbursing the loan
Understanding the Co-lending Models (CLM)
The co-lending model is what drives the agreement forward initially. There are two types of models that NBFCs and Banks can take advantage of. These includes
CLM Model 1 (Prior Joint Approval)—This model requires the bank and the NBFC to conduct borrowers’ due diligence before the credit disbursement
CLM Model 2: Under this model, the NBFC agrees to pay the entire loan amount. Once the loan is disbursed, the bank steps forward and buys 80% of the loan shares.
Why Do Banks Enter into NBFCs’ Co-lending Agreements?
If banks are more financially stable than NBFCs, then why do they enter into such agreements? This question might have struck many of you by now. Here’s the breakdown of reasons why banks do that sometimes:
- They often struggle to access the unbanked section of the economy
- Serving a large pool of financially aggrieved borrowers can lead to non-payment, causing their loans to turn into non-performing assets.
- They may have access to a higher interest rate, which they do not usually apply.
- NBFCs take the maximum blow when it comes to managing borrowers and post-loan support.
- Minimal risk of payment default, enabling the bank to receive consistent EMI in the escrow account
Steps for Entering into an NBFC Co-Lending Agreement
From the NBFC’s standpoint, a co-lending agreement is a big event, especially if the loan amount is massive. They usually follow the given steps before bringing the agreement to life.
- NBFCs get in touch with a bank and propose what they want.
- The bank formally agrees, subject to institutional due diligence and underwriting alignment.
- The directors convene the general meeting
- The resolution is passed, demonstrating that stakeholders are good to go with the agreement.
- The co-lending is created, reviewed, and then signed by both parties.
There is no denying that the co-lending agreement offers a win-win proposition to both banks and NBFCs. While it enables the later deal with financial hassle, it allows the former to increase its reach and solidify its clientele. But as with other areas, the NBFC co-lending agreement is subject to legal nitty-gritty, which can be difficult to navigate.
The experienced team of Advisou can help you overcome the legal clutter through end-to-end and compliant support. We help clients secure NBFC licenses, meet post-registration compliance, and oversee everything in between seamlessly. Contact us now for a seamless compliance experience.
FAQs
Q1: What is the role of co-lending risk management
It contains the risk for both parties through mutually agreed terms in the agreement.
Q2: Can a bank or NBFC step back once the agreement is in force?
No, doing so can be legally cumbersome for both parties
Q3: How does a co-lending agreement benefit NBFCs?
It helps them maintain capital adequacy and overcome operational hiccups arising from a fund shortage.
Q4: Is co-lending agreement always beneficial?
No, it can turn into a significant challenge for both parties in case of non-payment of loans
Q5: Can NBFCs enter into such an agreement with stakeholders’ permission?
No, since it is a significant event, stakeholders’ consent through a special resolution is essential.
