Page 48 - Banking Finance July 2019

ARTICLE

While engaging in co-origination arrangements, inter-alia, sector assets shall at time be without any recourse to NBFC.
the bank/NBFC is required to adhere to extant guidelines Further NBFC have been mandated for a 20% share in credit
on outsourcing of financial services. Accordingly, though the on the minimum side. Non- Recourse to one party of credit
NBFC is expected to source loans as per the mutually agreed co-origination limits the ways to sharing the credit risk.
parameters between the bank and the NBFC, bank shall not Suppose the model of co-origination is such that NBFC has
outsource its part of credit sanction component to the NBFC. to source various loans, complete the KYC process, obtaining
preliminary documents, and conducting inspection and pass
With regard to grievance redressal, any complaint registered on the lead to bank for assessment and sanction. Banks
by a borrower with the NBFC/ bank shall also be shared with sanctions the portfolio on 20/80 sharing model.
the bank/NBFC; in case the complaint is not resolved within
30 days, the borrower would have the option to escalate The documentation part is completed by NBFC with the
the same with the concerned Banking Ombudsman/ borrower. Later on the portfolio faces delinquencies by
Ombudsman for NBFCs. various borrowers. In such a scenario the provisioning shall
be done in same ratio as 20/80 but bank has found various
The bank and NBFC shall open an escrow type common anomalies in the customer due diligence esp customer
account for pooling of respective loans contributions for identification stages. The Non recourse model does-not
disbursement and loan repayments from borrowers. permit bank to claim its credit losses from NBFC even though
an anomaly is identified with a process conducted by NBFC.
Under the new guidelines, NBFCs will take minimum 20% of
the credit risk by way of direct exposure, with the balance However there is no restriction to take any additional credit
being taken by banks. RBI says the NBFC will have to give enhancements such as guarantee from NBFC in case of any
an undertaking to the bank that its contribution towards the process/guideline failure. Hence, co-origination being in
loan amount is not funded out of borrowing from the co- nascent stage in India, only time will tell how various banks
originating bank or any other group company of the partner are going to handle the non-recourse element in their
bank. individual co-lending agreements.

Inherent Elements of Co-origination Escrow Arrangements
An escrow or similar prototype account may be open under
Model Approved by RBI :-
each co-lending arrangement for pooling respective loan
KYC Checks
contributions for end disbursements and also to take
Even if primary customer due diligence components can by respective repayments. Although each of the co-lender shall
outsourc either by bank or by NBFC, the same can be relied have to maintain lenders of each individual borrower and
upon only after a verification. It is to be remembered that also agree to appropriate arrangement for sharing of
the ultimate responsibility for customer due diligence and information, to be able to generate and share a single
undertaking due diligence measures, as applicable, will be
of respective co-lender. This means that even if the NBFC is
carrying out the KYC compliances for verifying the identity
of customers at the inception, the bank must ensure that
the ultimate responsibility of processing, sanction and other
similar decision-making functions of determining compliance
with KYC norms are not outsourced.

No Recourse to NBFC
RBI in its guidelines has mentioned that banks shall be
getting the advantage of claiming priority sector status in
respect of its share of credit, but at the same time priority

48 | 2019 | JULY | BANKING FINANCE