Policy on Co-lending Model (CLM) with NBFCs/HFCs for PSL

1. Selection of Partner (NBFCs/HFCs)

The Bank shall engage with the registered NBFCs/HFCs to co-lend for PSL loans. An assessment shall be done to determine the capability of the potential partner to carry out its obligations and its ability in respect of sourcing, credit underwriting, collection, servicing, monitoring, etc.

The potential partners shall be assessed and evaluated based on the following criteria:

  • Analysis of the financial statements of the Partner for profitability and other financial parameters.
  • Assessment of the performance of the Partner’s loan portfolio to ascertain the efficiency of its sourcing quality and collection processes. For this purpose, data pertaining to product mix, delinquency trends and credit loss trends of the portfolio of the Partner shall be evaluated by the Bank. In addition, the Bank may rely on reports from the credit rating agency.
  • Assessment of qualitative factors such as market standing and reputation of the promoters and historical performance of the portfolio originated.
  • Vintage of the Partner in the business.
  • The Partner NBFCs/HFC should be registered with RBI/National Housing Bank (NHB) and governed by extant regulations of RBI/NHB.
  • The Bank shall not enter into co-lending arrangement with its group company / promoted entity.
  • A detailed note, post assessment and evaluation of the potential partner, would be put up to the COED/COSM for its approval to enter into an arrangement. The note shall reference the assessment based on the above criteria along with internal entity ratings (where available), the quantum of the arrangement, any other relevant information. It will be ensured that the arrangement meets the provisions of the extant RBI guidelines and clarifications thereon.
  • A Master Agreement (also referred to as “Agreement”) shall be entered with the Partner, which will include terms and conditions of the arrangement, the criteria for selection of partners, the framework for the partnership, the credit screens that would be applied for the arrangement, the specific product lines and areas of operation, provisions related to segregation of responsibilities, customer interface and protection of customers rights.

2. Selection of product

  • Specific selection criteria for loans/credit facilities, which meets the eligibility criteria under priority sector lending, shall be laid down for each product / asset class from time to time. The priority sector lending (PSL) eligibility shall be in accordance with the extant RBI guidelines.

3. Credit screening parameters and Master agreement

  • The Partner and the Bank shall mutually agree on parameters to source loans based on a prior agreement.
  • The Master Agreement may provide for the Bank to either mandatorily take their share of the individual loans originated by the Partner in their books as per the terms of the agreement or to retain the discretion to reject certain loans after their due diligence prior to taking in their books.
    • If the Agreement entails a prior, irrevocable commitment on the part of the bank to take into its books its share of the individual loans as originated by the NBFC/HFC, the arrangement must comply with the extant guidelines on Managing Risks and Code of Conduct in Outsourcing of Financial Services by Banks vide circular dated March 11, 2015 and updated from time to time. In particular, the partner bank and NBFC/HFC shall have to put in place suitable mechanisms for ex-ante due diligence by the bank as the credit sanction process cannot be outsourced under the extant guidelines.
    • The Bank shall also be required to comply with the KYC guidelines as updated, amended and modified from time to time, which permit regulated entities, at their option, to rely on customer due diligence done by a third party, subject to specified conditions.
    • In the event the Bank retains a right to reject a loan sourced by the Partner from taking into its books, the arrangement in such an event, will be akin to direct assignment transaction. Accordingly, the Bank would need to comply with all the requirements in terms of Guidelines on Transactions Involving Transfer of Assets through Direct Assignment of Cash Flows and the Underlying Securities dated May 07, 2012 as updated, amended or modified from time to time, with the exception of Minimum Holding Period (MHP) which shall not be applicable in such transactions undertaken in terms of this CLM.
    • The MHP exemption shall be available only in cases where the prior agreement between the banks and NBFCs/HFCs contains a back-to-back basis clause and complies with all other conditions stipulated in the guidelines for direct assignment.
  • The Partner shall source loans that meets the parameters stated in the Master Agreement.
  • The sourcing parameters and credit screens and Master Agreement shall be approved by the COED/COSM.

4. Sanction amount/exposure

  • The Partner shall be required to retain a minimum of 20% share of the individual loans on their books. Accordingly, a minimum 20% of the total loan proposed to be availed by the borrower shall be on the Partner’s books and the balance will be on the Bank’s books.
  • The Bank may take its share of the individual loans on a back-to-back basis in its books.

5. Pricing

  • The ultimate borrower may be charged an all-inclusive interest rate as may be agreed upon by both the lenders conforming to the extant guidelines applicable to both.
  • The Bank shall price its part of the exposure through assessment of the borrower and the RBI regulations issued from time to time. The Partner shall also have the flexibility to price its part of the exposure.
  • The interest rate charged by the Bank for its portion of credit shall be subject to applicable RBI (Interest Rate on Advances) Directions, 2016. The pricing, along with other terms and conditions shall be approved by the appropriate sanctioning authority.
  • The pricing methodology for the interest rate will be as per ALCO approved framework. The range of fees that may be payable to the Partner for sourcing, collection, servicing, portfolio management or any other purpose to be approved by ALCO approved framework. Further, the same shall be paid as per mutually agreed terms and conditions as documented through the Master Agreement.
  • Any other applicable charges shall be decided mutually between the Bank and the Partner and communicated to the borrower. This amount will be negotiated on a case to case basis depending on the program and as approved by the appropriate sanctioning authority.

6. Know Your Customer (KYC)/Anti Money Laundering Norms (AML)

The Bank shall comply with requirements under Prevention of Money Laundering Act and Rules framed thereunder, RBI Master Directions on KYC and AML including name screening requirements as updated from time to time.

The detailed operational process for KYC and AML to be put up to the Product and Process Approval Committee (PAC).

7. Escrow account and loan accounts

  • The Partner and Bank shall maintain each individual borrower’s accounts for their respective exposures.
  • All transactions (disbursements/ repayments) under CLM between the Bank and Partner shall be routed through an escrow account maintained with the Bank to avoid inter-mingling of funds. The Master Agreement to specify the manner of appropriation between the co-lenders.
  • The Partner should be able to generate a single unified statement of the customer, through appropriate information sharing arrangements with the Bank.

8. Security and charge creation

  • The Bank and the Partner shall arrange for creation of security and charge as per mutually agreeable terms.

9. Provisioning/Reporting Requirement

  • Each lender shall adhere to the asset classification and provisioning requirement, as per the respective regulatory guidelines applicable to each of them including reporting to Credit Information Companies, under the applicable regulations for its share of the loan account.

10. Monitoring and recovery

  • The co-lenders shall establish a framework for monitoring and recovery of the loan, as mutually agreed upon. The Bank shall put in place framework for monitoring and recovery of the loans as may be mutually agreed with the Partner. The detailed risk and mitigation matrix is given in the Annexure A.

11. Assignment

  • Any assignment of loans by the co-lender (Bank/Partner) to a third party shall be done only with the consent of the other lender.

12. Customer Grievance Redressal

  • The Partner shall be the single point of interface for the customers and shall enter into a loan agreement with the borrower, which shall clearly contain the features of the arrangement and the roles and responsibilities of Partner and Banks.
  • The details of the arrangement shall be disclosed to the customers upfront and their explicit consent shall be taken by the Partner.
  • The extant guidelines relating to customer service and fair practices code shall be applicable mutatis mutandis in respect of loans given under the arrangement.
  • The Partner should be able to generate a single unified statement of the customer, through appropriate information sharing arrangements with the Bank.
  • The front-ending lender, Partner, will be primarily responsible for providing the required customer service and grievance redressal to the borrower.
  • With regard to grievance redressal, suitable arrangement to be put in place to resolve any complaint registered by a borrower with the Partner within 30 days, and in case the complaint is not resolved within 30 days, the borrower would have the option to escalate the same with concerned Banking Ombudsman/ Ombudsman for such Partners or the Customer Education and Protection Cell (CEPC) in RBI.
  • It shall be the responsibility of the Partner to explain to the end borrower regarding the difference between the products offered through the co-lending model as compared to its own products.

13. Business Continuity Plan (BCP)

  • Both the Bank and the Partner are required to formulate and implement a business continuity plan to ensure uninterrupted service to the borrowers till repayment of the loans under the co-lending arrangement, in the event of termination of co-lending arrangement between the co-lenders.

14. Documentation requirements

  • The documentation required under CLM shall be as advised by the Legal team and shall include suitable representations, warranties and other terms and conditions. The Master Agreement may contain necessary clauses on representations and warranties which the originating Partner would be liable for in respect of the share of the loans taken into its books by the Bank.
  • The details of the arrangement shall be disclosed to the customers upfront and their explicit consent shall be taken.

15. Sanctioning authority

  • All arrangements with the Partner shall be sanctioned by the COED / COSM or the appropriate approving authority from time to time.
  • Detailed operational aspects for co-lending process / product including the procedures to be adopted, shall be laid down separately with the approval of PAC. The Bank shall detail the operational process in note to be put up to the Product and Process Approval Committee (PAC).

16. Audit

  • The loans under the CLM shall be included in the scope of internal/statutory audit within the banks and Partner to ensure adherence to their respective internal guidelines, terms of the agreement and extant regulatory requirements
  • Notwithstanding anything contained herein, the policy shall be guided by the extant RBI guidelines and clarifications available thereof from time to time.

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