Growth of factoring services in India

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-An analysis of the current scenario

By Simran Jalan (finserv@vinodkothari.com)

What is factoring?

Receivables form a major part of the current assets of a company and management of such receivables is the most important concern for the company. Factoring is a financial option for the management of receivables. It is a tool to obtain quick access to short-term financing and mitigate risks related to payment delays and defaults by buyers. In the process of factoring, the seller sells its receivables to a financial institution (“Factor”) at a discount. After the sale, there is an immediate transfer of ownership of the receivables to the factor. In the due course of time, either the factor or the company, depending upon the type of factoring, collects payments from the debtors. Factoring helps the company to improve the cash flows and cover the credit risk of the company. The following chart depicts the factoring process: Read more →

Delving into Asset Finance Companies

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By Anita Baid (finserv@vinodkothari.com)

Introduction

For an economy as diversified as India, even the financial sector consists of several intermediaries. Apart from banking entities, there are several other entities that offer financial services and may be broadly classified as non-banking financial institutions. In India, the term ‘non-banking financial companies (NBFCs)’ generally refer to such entities which are not banks, and yet carry lending activities almost at par with banks. Some of them may also accept deposits, however, these are term deposits and not demand deposits.

The significance of NBFCs in India lies in the massive capabilities of NBFCs. Apart from the disability of not accepting demand deposits and undertaking remittance function, the ease of entry and lightness of regulation applicable to NBFCs makes it a tremendous focus of interest, particularly for foreign investors wanting to enter India’s financial sector.

NBFCs are broadly classified in terms of the type of liabilities- deposit and non-deposit accepting NBFCs and by the kind of activity they conduct- such as Asset Finance Company (AFC), Investment Company (IC), Loan Company (LC), Infrastructure Finance Company (IFC), Systemically Important Core Investment Company (CIC-ND-SI), Infrastructure Debt Fund, Micro Finance Institution (NBFC-MFI), Non-Banking Financial Company – Factors (NBFC-Factors) and others.

The Mid-term Review of Annual Policy for the Year 2006-07[1], was the first document that stated that RBI shall be introducing guidelines for the re-classification of NBFCs, to provide a separate classification for NBFCs engaged in financing tangible assets, as a consequence of requests received from representatives of NBFCs. Earlier to 2007, NBFCs were classified into four different groups for the purpose of acceptance of deposits by NBFCs, namely:

  • Equipment Leasing (EL) company that carried on as its principal business, the activity of leasing of equipment;
  • Hire-Purchase (HP) company that carried on as its principal business, the activity of hire purchase transactions;
  • Investment Companies (IC) company that carried on as its principal business, the acquisition of securities; and
  • Loan Companies (LC) company that carried on as its principal business the providing of finance whether by making loans or advances or otherwise for any activity other than its own but did not include an equipment leasing company or a hire-purchase finance company

Subsequently, it was proposed to re-group such NBFCs as asset financing companies and RBI came up with its notification no RBI / 2006-07/200 DNBS.PD. CC No. 85 / 03.02.089 /2006-07[2] dated December 06, 2006. Upon re-classification of NBFCs, companies financing real/physical assets for productive / economic activity were classified as Asset Finance Company (AFC) as per the prescribed criteria. The remaining companies continued to be classified as loan/investment companies. Accordingly, the following categories of NBFCs emerged:

  • Asset Finance Company
  • Investment Company
  • Loan Company

Asset Finance Company- Eligibility Criteria

As per the aforesaid notification, the then existing classification in the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998 was modified as follows:

     AFC would be defined as any company which is a financial institution carrying on as its principal business the financing of physical assets supporting       productive / economic activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipments,                   moving on own power and general purpose industrial machines. Principal business for this purpose is defined as aggregate of financing                               real/physical  assets supporting economic activity and income arising therefrom is not less than 60% of its total assets and total income respectively.

Currently, the Master Direction – Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016 (updated till May 31, 2018)[3], (“Master Directions for NBFC-D”) continues to use the same definition for “Asset Finance Company” as mentioned above in the erstwhile directions.

Relevance of classification

The category of AFCs was created by merging leasing/hire purchase companies into a common category. The intent of the AFC category is clearly to distinguish AFCs from loan companies. Loan companies give monetary loans, whereas AFCs assist borrowers by providing funds directly linked with physical assets used in economic/productive activity. Therefore, the critical element in categorization as an AFC is not the physical asset, but the use of the physical asset acquired by the borrower, into a manufacturing/productive/economic activity, as opposed to consumer assets.

Loan Company and AFC

Categorisation of a company as an NBFC depends on the principal business of the company. The principality of business is defined by the RBI. Where the financial assets of the company are more than 50% of the total assets and the financial income generated by the company is more than 50% of the its total income, then the company is required to register itself as an NBFC. Where the principal business of any company is to carry out financial activity, the company shall be deemed to be an NBFC and shall require registration with RBI.

Further, based on the type of activity conducted, there is a difference between a Loan Company (LC) and an AFC. A LC means any company which is a financial institution carrying on as its principal business the providing of finance whether by making loans or advances or otherwise for any activity other than its own but does not include an AFC. On the other hand, any NBFC carrying out asset-backed lending business is categorised as asset finance company or NBFC-AFC.

However, the principality in case of NBFC-AFC is different from that of a LC. In case of an AFC the aggregate of financing real/physical assets supporting economic activity and income arising therefrom shall not be less than 60% of its total assets and total income respectively. Further, an NBFC-AFC can either be registered as a deposit taking NBFC or a non-deposit taking NBFC. Accordingly, the classification would be incorporated in the Certificate of Registration issued by the Bank as NBFC-Asset Finance Company; NBFC-D-AFC if accepting deposits and NBFC-ND-AFC, if not accepting deposits. List of AFCs registered with RBI is available at RBI official site. As on June 30, 2018, there were a total of 362 Asset Finance Companies (AFCs) in India registered with RBI.

RBI guidelines

Master Directions for NBFC-D prescribes the ceiling on quantum of deposit and restrictions on investments in land and building and unquoted shares for an NBFC-AFC:

1.An AFC having minimum Net Owned Fund (NOF) as stipulated by the Bank, and complying with all the prudential norms, shall accept or renew public deposit, together with the amounts remaining outstanding in the books of the company as on the date of acceptance or renewal of such deposit, not exceeding one and one-half times of its Net Owned Fund (NOF).

2.An AFC, which is accepting public deposit, cannot invest in land or building, except for its own use, an amount exceeding ten per cent of its owned fund; and in unquoted shares of another company, which is not a subsidiary company or a company in the same group of the non-banking financial company (excluding the permitted limit in equity capital of an insurance company), an amount exceeding ten per cent of its owned fund.

However, Master Direction – Non-Banking Financial Company – Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016[4] (“Master Directions for NBFC-SI”) do not lay down any specific guidelines for NBFC-AFCs. The regulations as applicable on an NBFC-ND-SI are as a whole applicable on NBFC-AFCs as well.

Benefits of Classification

Acceptance of External Commercial Borrowings (ECBs)

Earlier, AFCs were permitted to avail ECBs for financing the import of infrastructure equipment for leasing to infrastructure projects, however, LCs were not allowed to avail ECBs. Subsequently, NBFCs categorized as AFCs, along with NBFC-IC and CICs, have been allowed to avail of ECB under the three tracks, i.e. Tack I, Track II and Track III, whereas all other remaining NBFCs coming under the regulatory purview of the RBI, fall under Track III. The end-use prescriptions for ECB raised under the respective track has also been prescribed.

Further, the individual limits of ECB that can be raised by eligible entities under the automatic route per financial year is up to USD 750 million or equivalent for NBFC-AFCs under Track I, however, for remaining NBFCs falling under Track III, the limit is up to USD 500 million or equivalent.

Bank’s finance

As per the Basel III framework, commercial banks are required to assign risk weights on their investments in NBFCs for the purpose of determining capital adequacy. The risk weighting of the investments made by the banks in AFCs, is done on the basis of the credit rating of the Company. Thus, investments in an AFC with higher rating will attract lower risk weight and is more favoured by the banks to make investments. On the other hand, any exposure of the banks in NBFCs other than IFC and AFC are subject to a risk weighting of 100%. This is a very significant advantage enjoyed by deposit taking NBFC-AFCs over other NBFCs, for availing bank finance.

Qualifying Assets under AFC- Treatment of various financing transactions

Asset finance by NBFCs predominantly takes the form of secured loan or leasing. Asset financing has a wide coverage from cars to healthcare, education, IT equipments, commercial vehicles, used vehicles, construction equipment, air-planes, windmills, solar panels, etc. However, it is significant to examine whether such financing is directly linked with physical assets used in economic/productive activity

Though the category of AFCs was created by merging leasing/hire purchase companies, however, the criteria for an asset to qualify under AFC, as mentioned earlier, suggests that the physical assets must support productive/economic activity. By applying the rule of interpretation, i.e. ejusdem generis, it can be inferred that the term ‘physical asset supporting productive/economic activity’ is describing asset such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipments, moving on own power and general purpose industrial machines. The assets that support productive or economic activity have a multiplier effect on the economy by generating incomes, employment, etc. On the contrary, general purpose lending or pure consumer credit may lead to expansion of credit, without any direct consequential economic benefits. In addition, the use of the asset should be directly into economic or productive activity; indirect or consequential economic benefit may arguably appear in every case, however, that is not the intent of the AFC classification.

Based on the above rationale, various asset types that are usually funded by an NBFC can be evaluated for consideration as an eligible asset under AFC:

Infrastructure Sector

As the market is holding a very bullish view on the development of the infrastructure being a sine quo non to the development of the economy, the sector offers huge demand. Assets like dumpers, excavators, crushers, utility assets like cranes etc are being leased out. Since mining activity is looking to revive demand for earth moving mining equipment is on a rise as well. All such asset are eligible to be considered under AFC classification.

Office Infrastructure/Furniture and Fittings

The financing towards office equipment is not to acquire an asset supporting productive/economic activity. Even if the property is used for commercial purpose but is not supporting any productive or economic activity. Hence, financing towards such furniture and fixtures cannot be regarded as an eligible asset for AFC classification.

Automobile Financing

Passenger Vehicle (Auto lease)

Most of the larger corporates enable acquisition of vehicles by their employees through the leasing route. At the end of lease term the asset gets transferred to the employee. This is being used as a device to encourage employees to own up their cars. These cars used by employees are not supporting any economic activity. It is a means of communication used for convenience of the employees and is not directly or indirectly linked with any productive/economic activity and seeming is merely a facility provided to the employees by the employer. The same cannot be considered as an eligible asset under AFC.​

Commercial Vehicle (finance/refinance)

Commercial vehicle such as those used by small contractors, taxi operators and small road transport operators, are also financed by NBFCs. The owner of such asset earns revenue by plying these vehicles. Funding is given usually for the acquisition of such commercial vehicle, including used cars, and refinance is towards upgrading the quality of such vehicles. Here, the fact whether it is a new or second hand asset does not make a difference. The intent of the financing facility should be to provide financing for commercial vehicle supporting the economic activity of such transport operators. If the user in these cases have an existing asset (say a truck), and he acquires funding against the same, the financier is anyways releasing the money that went directly into the acquisition or holding of the asset which otherwise would qualify as productive asset.

Repossessed Assets

Repossessed assets get either released back to the customers, who continues to use the asset, on payment of due amount or are sold to a third party and the asset automatically moves out of the book. While on the books, it can be considered as an eligible asset in case the original financing was towards an asset supporting productive/economic activity. Only such repossessed assets can be considered as supporting a productive/economic activity and hence, shall be an eligible asset under AFC.

Office IT Equipment

Nowadays, IT equipments both hardwares and softwares and other technical equipment are very commonly taken on lease. IT equipments used in the IT Industry, Business Processing Outsourcing (BPO) or Knowledge Process Outsourcing (KPO) sector forms an integral part of their business. Any funding or financial facility towards the acquisition of such IT equipments shall qualify as an eligible asset since they are supporting the economic activity of such BPO/KPO. In such cases the asset qualifies as productive asset.

Finance towards softwares & licenses

Looking at the examples set out in definition of asset finance business, wherein it states that the principal business should be of financing of real/ physical assets supporting productive/ economic activity such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipments, moving on own power and general purpose industrial machines – it will be difficult to establish that financing of software & licenses will be included in the calculation, for the purpose of asset finance classification. The fact that financing of an asset should lead to income generation, may be directly or indirectly. Financing of software & licenses in this regard will fail this test, is not in lines with the examples cited above and may not meet the test of being physical asset as well.

Medical Equipment Finance

Generally assets in this segment are highly capital intensive and have huge cost implications. Further, most of the equipment required are imported. Financing the acquisition of such medical equipments for hospitals, diagnostic centers and clinics can be done by way of leasing as well as secured loans. It is to be noted that these assets or machines are the backbone of the medical industry and support economic activity of the medical institutions. Hence, they shall also qualify as an eligible asset under AFC.

Commercial real estate

The financing is against real estate and not necessarily to acquire an asset supporting productive/economic activity. Though the property can be commercial in nature but is not supporting any productive or economic activity. Hence, the answer whether it shall be considered as an eligible asset is very clearly negative.

Loan against Property (LAP)

In case of LAP, the financing is against an existing real estate and not necessarily to acquire an asset supporting productive/economic activity. In this case the end use is not regulated by the NBFC. Further, at time even if the NBFC takes a confirmation from the borrower, the same cannot be considered as an eligible asset under AFC. If we take a contrarian approach, then by the same analogy even normal loan transaction would have been classified as eligible asset by obtaining an end use confirmation from the borrower. Since the latter is not considered as an eligible asset, LAP shall also fall out of the eligible asset criteria.​

PTCs and SRs

As per RBI guidelines on securitization transaction DNBS. PD. No. 301/3.10.01/2012-13 dated August 21, 2012[5], originating NBFCs are required to have a continuing stake in the performance of securitized asset for the entire life of securitization process by way of Minimum Retention Requirement (MRR). The guidelines make it mandatory for the securitizing NBFC to retain the minimum investment in its books. There can be instances where had the Company not securitized these assets, it would have continued to be in the books and would have been eligible towards the asset financing criteria. In case of such securitization transactions, if the loan portfolio was originally eligible as an asset under AFC, the exposure in form of PTCs shall also qualify as an eligible asset.

Further, similar analogy can be drawn in case of security receipts (SRs) issued by a securitization company or reconstruction company to any qualified institutional buyer pursuant to a scheme, evidencing the purchase or acquisition by the holder thereof, of an undivided right, title or interest in the financial asset involved in the securitization. The loan portfolio can be standard or non-performing assets (NPA), as the case may be, but must be eligible under the AFC criteria for the PTCs or SRs to qualify under asset financing criteria.

Solar power assets

Whether roof-top solar equipment or solar parks, lease of solar equipments has been doing really well in India. While the solar power industry is in its nascent stage of growth, the government though its policies has mandated usage domestically manufactured solar cells and modules and has set aggressive targets for increasing solar power generation stimulating growth in solar equipment finance. These solar asset can either be used commercial purpose or retail. Depending upon the end user, the eligibility shall be determined. Retail shall not qualify to be supporting any economic or productive activity whereas commercial may qualify as an eligible asset under AFC.

Windmills

Windmills and any specially designed devices which run on windmills installed and any special devices including electric generators and pumps running on wind energy installed, work towards generation of wind energy. The definition of asset finance business states that the principal business should be of financing of real/ physical assets supporting productive/ economic activity such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipments, moving on own power and general purpose industrial machines – generation of wind energy is also an economic activity for the purpose of asset finance classification -in line with the examples cited above.

Conclusion

The quantum of NBFC-AFCs is quite less compared to the total strength of NBFCs in the country, since the discretion lies with the RBI to classify a company which is a financial institution as a loan company or an investment company or an asset finance company. Considering the difference of opinion in the treatment of several asset eligible as qualifying under AFC criteria, the final call is taken by the RBI, having regard to the principal business of the company and other relevant factors.

[1] https://rbi.org.in/scripts/NotificationUser.aspx?Id=3142&Mode=0

[2] https://rbi.org.in/SCRIPTs/BS_NBFCNotificationView.aspx?Id=3200

[3] https://rbi.org.in/Scripts/NotificationUser.aspx?Id=10563&Mode=0

[4] https://rbidocs.rbi.org.in/rdocs/notification/PDFs/45MD01092016B52D6E12D49F411DB63F67F2344A4E09.PDF

[5] https://rbi.org.in/scripts/NotificationUser.aspx?Id=7517&Mode=0

 

Foreign Entities getting into Payment Systems in India

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By Vinita Nair, Vishes Kothari, Rajeev Jhawar & Simran Jalan

(finserv@vinodkothari.com)

India is one of the most exciting markets for fintech startups. Several overseas entities, having already established businesses overseas, want to set up mobile wallets or payments systems in India. This makes them run into two laws, first by virtue of being an overseas entity desirous of moving funds in some form or the other into India, and second because it is entering the payment and settlement systems  space. These bring complexities of foreign direct investment covered by Foreign Exchange Management Act, 1999, and nuances of skeletal, regulation-based law under Payment and Settlement Systems Act, 2007. This article intends to provide an easy-to-comprehend guide to the applicable regulations for overseas entities getting into payment systems in India. Read more →

Cryptocurrency on the path to Legalisation?

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By Vineet Ojha (finserv@vinodkothari.com)

From conservative investors to cryptocurrency enthusiasts, cryptocurrency has been the hot button issue. In the tech world, a common phrase is “that’s so crazy it just might work”, and hence, an open-source, unregulated, P2P currency has been thriving for the better part of the last decade. The Indian regulators have not taken lightly to the phenomenal increase in the transaction of cryptocurrencies including Bitcoin, in India and globally as they don’t have any intrinsic value and are not backed by any kind of assets. The price of cryptocurrencies therefore is entirely a matter of mere speculation resulting in spurt and volatility in their prices. The recent introduction of crypto tokens by the Government of India may be the first step to the legalization of cryptocurrencies.

This year saw the gradual restriction on cryptocurrency investment by the regulators. The government went all out to eliminate its use in financing illegitimate activities. RBI, on 5th April 2018, directed lenders to wind down all banking relationships with exchanges and virtual currency investors within three months. Yet, it says the feasibility of these coins is being studied and hints at launching its own digital currency. This move saw protests from various exchanges through detailed representations to the RBI on why this ban should be lifted.

It looks like the plea of the investors and exchanges might have been heard as the government is considering launching crypto tokens in India for financial transactions and is evaluating if they can replace smart cards. Unlike cryptocurrency, crypto tokens do not impact the country’s monetary policy as one will have to pay physical money to buy a token. Although, the existing ban on cryptocurrencies is said to continue, it seems like the government is working on regulations and specific actions, including a roadmap for permitting cryptocurrencies in India sometime in the future.

Scenario in India

November 2017, Indian investors made a beeline for cryptocurrencies. The price boom being irresistible, registered an increase in the costumers enrollment for the currency. The value of the cryptocurrency breached the USD 11,000 per bitcoin effectively doubling within a single month. This was despite the murmurs that RBI could potentially declare bitcoin and its kin illegal in India.

December 2017, the regulators buckled up and issued the second warning against these currencies, with the first one being issued way back in December 2013. The finance ministry compares virtual currencies to ponzi schemes.

January 2018, the government continued issuing caveats to clarify that cryptocurrencies are not legal tender. The income tax department reportedly began sending tax notices to investors. Banks suspended the withdrawal and deposit facilities of some exchanges. Some lenders disassociated with them completely.

April 2018, investors were directed to slow transactions in cryptocurrencies on RBI’s command as it considered a proposal for issuing its own digital currency. It said that the feasibility of these coins was under consideration. Exchanges drag the central bank to court in protest.

July 2018, the ban became effective. Some petitioners sought  a stay order from the Supreme Court on the ban at least till the next date of the hearing. However, their request was denied.

August 2018, the government introduced crypto tokens, assuring the exchanges that they are considering a future for cryptocurrency in the economy.

Why Crypto Tokens?

The concept of crypto tokens is different to that of cryptocurrency. Although, terms like cryptocurrency, altcoins, and crypto tokens are often erroneously used interchangeably in the cryptocurrency cosmos, they are all different terms. Cryptocurrency is the superset, and altcoins and crypto tokens are its two subset categories. A cryptocurrency is a standard currency which is used for the sole purpose of making or receiving payments on the blockchain.

The foremost reason for the introduction of crypto tokens is to replace smart cards.  In words of a  senior government official

“The committee is examining if crypto tokens can be used to replace smart cards such as metro cards in the public sector to start with. Similarly, in the private sector, it can be used in loyalty programs such as air miles where its use is limited to buying the next ticket and can’t be converted into money,”[1].

The convenience of the token is that it could be stored as a code in any basic mobile feature phone. Secondly, as stated above, tokens don’t expose the monetary policy of the economy as the transaction is basically done through physical money. Hence, the underlying currency is the Rupee. It seems that tokens are more like an experiment by the government or a method to slowly establish a regulated environment for crptocurrencies to thrive.

Conclusion

The government seems to be testing waters with the introduction of tokens. Their intentions are still unclear, either it be to bring back cryptocurrency or to introduce their own digital currency. We will have to wait and see the performance of tokens for a clearer picture.

Please read our related articles on cryptocurrency here:

Legal Nature of Bitcoins: the encrypted digital currency by Vallari Dubey: http://vinodkothari.com/blog/legal-nature-of-bitcoins-the-encrypted-digital-currency-by-vallari-dubey/

Cracking The ‘Bitcoin’ Nut This Budget Session: http://vinodkothari.com/blog/cracking-bitcoin-nut-this-budget-session/

[1] https://www.moneycontrol.com/news/business/markets/sensex-likely-to-be-in-40000-42000-range-by-next-independence-day-2019-poll-2835741.html

Co-lending arrangement between Banks and NBFCs for PSL

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By Simran Jalan (finserv@vinodkothari.com)

Introduction

The Reserve Bank of India (RBI), in its press release on ‘Statement on Developmental and Regulatory Policies’ dated August 1, 2018[1], sets out various policy measures. One of the initiatives introduced relates to co-origination of loans by the banks and NBFCs for lending to the priority sector.

Before delving into the initiative, we shall briefly discuss the concept of priority sector and priority sector lending (PSL).

Categories of priority sector

Priority Sector category includes agriculture; micro, small and medium enterprises; export credit; education; housing; social infrastructure; renewable energy and others.

PSL target

According to the Master Circular – Priority Sector Lending- Targets and Classification[2] issued by RBI, the total priority sector lending (PSL) for domestic scheduled commercial banks (excluding Regional Rural Banks and Small Finance Banks) should be 40% of Adjusted Net Bank Credit or Credit Equivalent Amount of Off- Balance Sheet Exposure, whichever is higher. Further, there are also sub-targets specifically for agriculture, micro enterprises and weaker sections.

Existing Scenario

Commercial banks are required to meet the PSL requirement specified in the aforesaid circular. However, banks neither have the outreach nor the inclination to reach out to the communities living in geographically remote areas. The banks are even unable to perform credit evaluation or credit underwriting of the borrowers falling under the priority sector category due to lack of outreach. Consequently, apart from direct funding, banks have been exploring several options for meeting the minimum requirement:

  1. On-lending: In this structure the loan is sanctioned by banks to eligible intermediaries for onward lending only for creation of priority sector assets.
  2. Direct Assignment: Banks enter into transaction with NBFCs for assignments/ purchase of pool of assets representing loans under various categories of priority sector, as prescribed under the aforesaid circular.
  3. Business Correspondent: Commercial banks intending to increase their outreach have been engaging the services of BCs. Such NBFCs or other eligible entities provide various services such as identification of borrowers, collection, recovery, follow-up and such other ancillary services. The loans under various categories of priority sector are originated in the books of the bank through the assistance of BC.
  4. Co-lending: Both banks and NBFCs enter into a co-lending arrangement, whereby the exposure on the borrower is in a pre-decided ratio.

Though, there are existing regulations on direct assignment as well as appointment of BC, currently the co-lending arrangement is not regulated under any existing guidelines of RBI.

Co-lending regulations awaited

As per the press release, RBI shall be coming up with such guidelines wherein schedule commercial banks (excluding regional rural banks and small finance banks) may co-originate loans with systematically important non-deposit taking NBFC for fulfilling their mandatory priority sector lending requirement.

Under the co-lending arrangement, there would be joint contribution of credit by both lenders at the facility level. The said arrangement shall also involve sharing of risks and rewards between the banks and NBFCs, as per their mutual agreement. The risks and rewards could be shared equally or in a proportion which shall be predefined.

This step is taken by RBI to provide a competitive edge for credit to the priority sector and to mitigate the challenges faced by the banks on priority sector loans. The NBFCs operates on low cost infrastructures and have reach to the remote locations. Coming together with NBFCs shall definitely assist the banks to meet their PSL requirements with ease.

Conclusion

The guidelines have not yet been issued and it is expected that RBI shall come out with its regulations for governing such co-lending arrangement by the end of September 2018. In consequence, there can be a decline in the direct assignment arrangement undertaken by banks. The reason being that in co-lending there is joint origination and the risk and rewards are shared in a mutually agreed proportion, however, in case of direct assignment, the NBFC transfers the loan portfolio and has no residuary interest left. Such difference can lead to a decline in the direct assignment transactions undertaken by banks with NBFCs.

[1] https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=44637

[2] https://rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=9857