After making Small Finance Banks (SFBs) eligible for Authorised Dealer (AD) Category-I license, the Reserve Bank of India (RBI) may take the next step in liberalising their scope of activities. It could allow these banks to co-lend with non-banking finance companies (NBFCs).
Currently, SFBs are not permitted to co-lend with another lender. Only scheduled commercial banks and NBFCs are allowed to co-lend to the priority sectors like agriculture; micro, small and medium enterprises (MSMEs), education, housing, among others.
Push for priority sector lending
Though RBI has so far mandated that SFBs do only direct lending, it is believed to be weighing industry requests to allow co-lending in areas where these Banks don’t have expertise. “Co-lending could specifically be allowed in cases where we can get expertise. For example, if an SFB wants to enter commercial vehicle (CV) funding, it makes more sense for it to tie up with a specialised CV player (NBFC) rather than doing it all by themselves,” said a senior SFB official.
Industry watchers say the banking regulator seems to be open to SFBs’ co-lending demand. If these banks and NBFCs join forces, it will increase priority sector lending (PSL), which is a focus area for both the Government and RBI. PSL is productive and generates income for borrowers.
“In the case of microfinance, SFBs don’t want to hold all the exposure in their books. If co-lending is allowed with another NBFC or another mainstream Bank, it will help SFBs manage their risks. Probably, RBI is waiting for all SFBs to list before liberalising this rule,” say experts.
The rules
According to RBI, the “Co-Lending Model” (CLM) is aimed at improving the flow of credit to the unserved and underserved sector of the economy and make available funds to the ultimate beneficiary at an affordable cost, considering the lower cost of funds from banks and greater reach of the NBFCs.
In terms of the CLM, banks are permitted to co-lend with all registered NBFCs (including HFCs) based on a prior agreement. The co-lending banks will take their share of the individual loans on a back-to-back basis in their books, per the central bank’s circular. However, NBFCs shall be required to retain a minimum of 20 per cent share of the individual loans on their books.
RBI, in its December 2019 guidelines for ‘on tap’ licensing of SFBs in the private sector, had clearly mentioned that after the initial stabilisation period of five years, and after a review, it may liberalise the scope of activities of SFBs. So, making SFBs eligible for AD category-I licence, so that they have more flexibility to meet their customers’ foreign exchange business requirements, comes in this backdrop..
An AD Category-I Bank can carry out all permissible current and capital account transactions. Until now, SFBs could only get AD Category-II licence, which allowed them to carry out specified non-trade related current account transactions and all activities permitted to Full Fledged Money Changers.
Of the 10 applicants who were granted in-principle approval in 2015 to set up SFBs, nine have already completed five years of operations and Jana SFB will be completing it in March 2023. Two other entities (Shivalik SFB and Unity SFB) commenced operations only in 2021.