10 Things borrowers must know about Co-Lending models between Banks and NBFCs
Indiabulls recently announced an enhanced agreement with HDFC to provide homebuyers with affordable housing loans. Indiabulls Housing Finance will originate retail home loans based on a jointly developed credit policy and keep 20% of the loan on its books, according to a notification to stock exchanges. The remaining 80% will be on HDFC’s books. The loan account will be serviced by IBH during the loan’s lifecycle.
Co-lending opportunities have become increasingly attractive to banks and NBFCs. PNB Housing Finance and Yes Bank partnered for co-lending in March. The Bank of Maharashtra partnered with LoanTap Credit in February to lend jointly. Top officials at the State Bank of India have confirmed that the bank is actively pursuing co-lending opportunities with NBFCs. Two lenders join forces to make business loans in the co-lending model. In November 2020, the RBI released co-lending guidelines. Let’s take a look at ten main aspects of co-lending.
- The co-lending scheme for banks and NBFCs was approved by the RBI. The model aims to increase credit flow to underserved and unserved areas of the economy, as well as make funds available to borrowers at a reasonable rate. The aim is to provide the borrower with the best of both worlds. Banks have kept 80 percent of the loan on their books in most partnerships, while NBFCs have kept the remaining 20% on their books.
- Before banks and NBFCs may start co-lending, they must first sign a master agreement. The terms and conditions of the agreement should include the arrangement’s terms and conditions, the requirements for selecting partner organisations, the relevant product lines and areas of service, segregation of duties clauses, and customer experience and security issues.
- Customers would have a single point of contact with the NBFC. It will enter into a loan agreement with the borrower, outlining the terms of the deal as well as the NBFCs’ and banks’ positions and responsibilities.
- Lenders must inform consumers of all terms of the agreement up front and obtain their express consent.
- Lenders can charge an all-inclusive rate that has been settled upon by both NBFCs and banks. For loans provided under the agreemet, both banks and NBFCs must follow the fair practises code.
- Via appropriate information-sharing agreements with the bank, the NBFC should create a single cohesive customer statement.
- For grievance resolution, the co-lenders must make appropriate arrangements to settle any complaint filed by a borrower with the NBFC within 30 days.
- If financial institutions fail to answer borrowers’ complaints, they may file a complaint with the banking ombudsman, the ombudsman for NBFCs, or the RBI’s consumer education and security cell.
- To avoid intermingling of funds, all transactions (disbursements/ repayments) among banks and non-banking institutions for co-lending must be routed via an escrow account maintained with the bank.
- In the event that the relationship is terminated, both parties must adopt a business continuity plan to ensure that their borrowers receive continuous service before the loans are repaid.
Different Types of Working Capital Loans
- Short-term Loans
The short-term loan has a set repayment period and interest rate. This is a loan that is backed by collateral. However, depending on the strength of your credit history and your relationship with the lender, you might be able to get this loan without putting up any collateral.
- Bank Overdraft Facility
The most adaptable type of working capital loan is this one. The lender gives the borrower a specific sum that he can use. The borrower must be cautious not to surpass the cash cap set by the lender. Furthermore, the creditor only pays interest on the amount withheld, not the amount accepted. This induces the borrower to deposit the borrowed funds in order to avoid paying interest.
- Trade Credit
This working capital loan is provided by potential or current suppliers. When you place a large order with a supplier, they will give you a trade credit. However, the supplier can only issue you this loan after a thorough examination of your creditworthiness, earnings, and credit history.
- Letter of Credit
A letter of credit may be purchased from a lender by the consumer. The buyer would then give the seller a letter of credit. The lender will pay the seller the expense of the order after the sender has submitted the agreed-upon order. After that, the bank receives the money from the customer at the agreed-upon period.
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