What changed
The earlier co-origination model, which required joint contribution and risk-sharing at the facility level, has been replaced by the Co-Lending Model (CLM). Under CLM, banks can co-lend with any registered NBFC (including HFCs) based on a prior agreement, with NBFCs required to retain at least 20% of each loan on their books. Banks now have the option to either mandatorily take their share of loans originated by NBFCs or retain discretion to reject loans after due diligence, subject to conditions in the Annex.
What it means for you
This gives banks and NBFCs greater operational flexibility to leverage their respective strengths—banks' lower cost of funds and NBFCs' wider reach—to improve credit flow to unserved and underserved sectors. Banks can claim priority sector status for their share of loans under CLM, potentially expanding their priority sector lending portfolio. However, banks must ensure compliance with outsourcing and KYC guidelines, especially if they commit to taking loans without prior discretion.
What you must do
- Formulate a Board-approved policy for entering into CLM and place it on your website.
- Enter into a Master Agreement with partner NBFCs that includes terms, selection criteria, product lines, and responsibility segregation.
- Ensure NBFCs retain at least 20% share of individual loans on their books.
- If the agreement involves irrevocable commitment, comply with outsourcing guidelines and conduct ex-ante due diligence as credit sanction cannot be outsourced.
- Review and update existing co-origination arrangements to align with CLM, as the old circular is superseded.
Who it affects
All Scheduled Commercial Banks (excluding SFBs, RRBs, UCBs, and LABs), All registered NBFCs (including Housing Finance Companies), Foreign banks with 20 or more branches
Can banks reject loans under the CLM after NBFCs originate them?
Yes, if the Master Agreement allows discretion. The bank can reject certain loans after its due diligence, but if the agreement involves an irrevocable commitment, the bank must comply with outsourcing guidelines and cannot outsource the credit sanction process.
What is the minimum share NBFCs must retain under CLM?
NBFCs are required to retain a minimum of 20% share of the individual loans on their books.
Does the CLM apply to foreign banks with less than 20 branches?
No, the CLM is not applicable to foreign banks (including WOS) with less than 20 branches.