Page 50 - Banking Finance March 2025

ARTICLE

toward monthly debt service. A lower DTI indicates a try of Finance have issued guidelines to regulate these ar-
better ability to take on additional debt. rangements, ensuring compliance with regulatory require-
Collateral: For secured loans, lenders may require col- ments and establishing a framework for seamless collabo-
lateral, such as real estate or other valuable assets. ration.
Age Limit: For certain loans like home loans, there The agreement outlines the roles, responsibilities and liabili-
might be an age limit for co-applicants, typically be- ties of both the bank and the NBFC, creating a clear under-
tween 18 and 65 years. standing of their respective contributions. This tripartite
Relationship: Some banks prefer couples as co-appli- agreement is crucial in facilitating co-lending, allowing banks
cants for home loans, assessing the combined income and NBFCs to jointly contribute credit and provide financial
for loan eligibility. services to underserved customers at an affordable cost.
In a co-lending arrangement, banks and NBFCs collaborate
These criteria can vary depending on the lender and the
to decide on loan terms through a structured process. Here
type of loan. It's important for potential co-borrowers to
understand the specific requirements set by the lending are the key steps involved:
institutions before pursuing a joint loan application. This 1. Risk Assessment and Credit Policies: Both parties con-
knowledge ensures that both parties are prepared and duct their own risk assessments and establish credit poli-
meet the necessary criteria, leading to a smoother loan cies. They agree on the criteria for borrower eligibility,
approval process. loan amount, interest rates and repayment terms
based on their respective risk appetites and regulatory
guidelines.
Co-Lending Regulations
2. Loan Structuring: The loan is structured to leverage
Co-lending, as a rapidly emerging trend in finance, needs the strengths of both institutions. Typically, the bank
to be regulated by the Reserve Bank of India (RBI) and the provides a larger portion of the loan (e.g., 80%) while
Ministry of Finance. To serve this purpose, regulators have the NBFC contributes the remaining amount (e.g.,
issued regulations and guidelines to ensure the safety of 20%). This helps in risk-sharing and capital optimization.
borrowers and lenders alike. One such regulation issued by
the RBI in November 2020 requires banks to maintain a 3. Interest Rates and Fees: The interest rate is usually a
minimum 20% share of the individual loans co-originated blended rate, combining the rates offered by both the
by them with NBFCs to avoid direct exposure to potential bank and the NBFC. Fees and charges are also agreed
concentration risk. upon, ensuring they are competitive and attractive to
borrowers.
This move was made to mitigate the potential concentra-
tion risk that may arise due to the involvement of a large
number of NBFCs in co-lending arrangements. Additionally,
the RBI has mandated that banks must ensure that the
NBFC partner complies with all relevant norms and regula-
tions to further minimize direct exposure to risks.

These regulations aim to create a single point of interface
between banks and NBFCs, promoting transparency and
reducing risks for both parties involved.

Terms & Conditions of Co-Lending Ar-
rangement
Co-lending arrangements operate under mutually agreed
terms and conditions, including the sharing of credit risk and
interest income. The Reserve Bank of India and the Minis-

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