The Reserve Bank of India (RBI) logo is displayed outside of the bank’s headquarters in Mumbai, India. (Photographer: Kainaz Amaria/Bloomberg)

RBI Encourages Banks, Large NBFCs To Jointly Originate Priority Sector Loans

The Reserve Bank of India has asked banks to consider associating with large non-banking finance companies to provide priority sector loans. As part of its statement on developmental and regulatory policies released on Wednesday, the banking regulator said that banks may tie up with non-deposit taking systemically important NBFCs for such loans.

In its statement, the regulator pointed out that both lenders will have to participate in providing the credit facilities to the borrowers. The agreement between both lenders should also involve sharing of risks and rewards to ensure that both parties have ‘skin-in-the-game,’ said RBI Deputy Governor MK Jain.

Bankers believe the option will help both banks and NBFCs.

NBFCs have considerable strength in originating loans. But due to their non-deposit taking nature, they are not in a position to expand their loan book beyond a certain point. Through this arrangement, they can do that. The loans will be priced better since the risk is divided between the two lenders. 
Rajkiran Rai G, MD and CEO, Union Bank of India

Bindu Ananth, co-founder and chair at Dvara Trust, which works in the area of financial inclusion, sees this as a good opportunity for smaller lenders to leverage the balancesheet strength of larger banks. According to Ananth, this arrangement would help improve access to funding for borrowers classified as priority sector.

“All of this only works if the risk is adequately priced. We have to ensure banks are not blindly co-originating and that NBFCs have sufficient understanding and knowledge of risk involved,” Ananth said. She, however, added that coordination should not be a problem. “The underlying exposures (in priority sector loans) are more granular and most of it depends on the kind of agreements that the lenders sign,” Ananth said.

According to bankers, NBFCs used to sell loan portfolios to banks, so that they may meet their priority sector limits. Under the new arrangement, this selling can happen even at the level of an individual loan facility.

Banks are required to ensure that 40 percent of all their loans are go towards segments deemed as priority sector. This includes loans to agriculture, micro small and medium enterprises, affordable housing and small education loans. If banks fall short on their priority sector loans, they are permitted to buy these loans or priority sector lending certificates from other lenders.

According to data available with the RBI, priority sector loans by banks stood at nearly Rs 25 lakh crore as on June 30, 2018, up 6.3 percent year-on-year. Credit to NBFCs rose 35 percent year-on-year and stood at Rs 4.6 lakh crore in the same period.