FAQs on Co-lending Model (CLM)

1. What is the primary focus of the Co-lending Model (CLM)?
   The primary focus of the Co-lending Model is to improve the flow of credit to the unserved and underserved sectors of the economy and make funds available to beneficiaries at an affordable cost. It achieves this by combining the strengths of Non-Banking Financial Companies (NBFCs) in reaching a larger population segment with the strengths of Banks in providing funds at lower costs.
   
   
2. Which sectors are covered under the Co-lending of loans with NBFCs?
   The Co-lending of loans with eligible NBFCs pertains to Retail, MSME, Agriculture, and Large Corporate verticals.
   
   
3. How does the arrangement between Banks and NBFCs work in the Co-lending Model?
   The Bank engages with NBFCs registered with RBI for Co-Lending. The arrangement involves joint contribution of credit at the facility level by both lenders. It also includes sharing of risks and rewards between the bank and the NBFC, ensuring alignment of respective business objectives based on a mutually decided agreement.
   
   
4. How does the Co-lending Model benefit banks? 
   The Co-lending Model allows banks to expand their reach and cater to a larger customer base by leveraging the distribution network and customer knowledge of NBFCs. It enables banks to diversify their loan portfolios, tap into new markets, and reduce the risk associated with lending to certain sectors.
   
   
5. Can banks engage with multiple NBFCs under the Co-lending Model?
   Yes, banks have the flexibility to engage with multiple eligible NBFCs for co-lending arrangements. This allows banks to diversify their partnerships and leverage the expertise of different NBFCs based on their respective strengths and customer segments.
   
   
6. What benefits do NBFCs gain from participating in the Co-lending Model? 
   NBFCs can benefit from the Co-lending Model by gaining access to low-cost funds from banks. This enables them to offer loans at competitive interest rates to their customers. Additionally, NBFCs can leverage the expertise and infrastructure of banks to enhance their lending capabilities.
   
   
7. What are the eligible NBFCs for participating in the Co-lending Model?
   NBFCs registered with the Reserve Bank of India (RBI) and fulfilling the prescribed criteria are eligible to participate in the Co-lending Model. The RBI sets specific requirements regarding capital adequacy, asset classification, and other regulatory compliance for NBFCs to qualify for co-lending arrangements.
   
   
8. What is the distribution of credit risk between the NBFC and the Bank in the Co-lending Model?
   At least 20% of the credit risk by way of direct exposure should be on the NBFC's books until maturity, while the remaining 80% will be on the Bank's books. The NBFC provides an undertaking that its contribution towards the loan amount is not funded by borrowing from the co-lending bank or any other group company of the partner bank. The NBFC also seeks consent from the Bank before granting additional loans to the borrower outside the co-lending arrangement.
   
   
9. How are the interest rates determined in the Co-lending Model? 
   The interest rates may be under both fixed and floating rate regimes based on mutually agreed terms with the NBFC on a case-by-case basis. The ultimate borrower may be charged an all-inclusive interest rate as agreed upon with the NBFC, conforming to the applicable guidelines. For fixed rate loans, a single blended interest rate is offered based on the respective interest rates and proportion of risk sharing. In the case of floating interest rates, a weighted average of the benchmark interest rates is offered in proportion to the respective loan contribution.
   
   
10. How does the Co-lending Model benefit the ultimate beneficiary? 
    The Co-lending Model aims to pass on the benefits of low-cost funds from banks and the lower cost of operations of NBFCs to the ultimate beneficiary through the blended or weighted average interest rate. This ensures that the borrower receives the advantages of the collaboration between the bank and the NBFC. Banks and NBFCs are required to provide all relevant information, including loan details, interest rates, risk-sharing arrangement, etc., as requested by the Reserve Bank of India.
    
    
11. What are the reporting requirements for banks and NBFCs participating in the Co-lending Model?
    Banks and NBFCs are required to submit regular reports to the RBI, providing details of co-lending transactions, loan performance, risk-sharing arrangements, interest rates, and other relevant information. These reporting requirements ensure transparency and help monitor the effectiveness of the Co-lending Model.
    
    
12. How does the Co-lending Model contribute to financial inclusion? 
    The Co-lending Model aims to promote financial inclusion by increasing credit availability to underserved segments of the population. By leveraging the combined strengths of banks and NBFCs, it helps in reaching out to unbanked or underbanked individuals and businesses, enabling them to access formal credit and contribute to economic growth.