Rating agency ICRA believes domestic borrowers will benefit from the RBI’s proposed introduction of ‘blended interest rates’ in co-lending loans. On April 9, RBI has shared a draft framework to specify the regulatory norms and guidance for all co-lending arrangements, in general, besides for addressing certain prudential issues.
According to ICRA, as per the existing practice, borrowers are charged an all-inclusive interest rate as agreed upon by the lending partners. The draft directions propose to shift to a blended interest rate, which is calculated as an average rate of interest derived from the interest rates charged by respective funding entities, weighted by their proportionate funding shares.
“If the same is implemented, borrowers could see some reduction in interest rates from the prevalent levels,” ICRA asserted. Current regulations for co-lending do not cover the entire gamut of lending and sourcing arrangements, especially NBFC-to-NBFC arrangements, and neither do they cover non-priority sector lending (PSL) funding.
The draft framework also offered enhanced coverage of all asset segments vis-a-vis only priority sector lending in the past. “This draft framework gains prominence given that the size of co-lending transactions have been witnessing robust growth over the past few years,” ICRA said.
Further, the RBI draft proposed that the loan agreement signed by borrower with lenders shall make an upfront disclosure regarding the segregation of the roles and responsibilities (such as sourcing, funding, and servicing) of concerned partners, including entity having customer interface. Any subsequent change in customer interface shall only be done after taking explicit consent from the borrower. Also, the RBI draft proposals indicate stricter disclosure norms for the co-lending business.
The co-lenders have to make certain disclosures on their websites. Those disclosures include list of co-lending partners, indicative range of blended interest rates and fees/charges charged to the borrowers, among others. Currently, banks and NBFCs formulate board-approved policies for entering into co-lending and place the same on their websites. Under the digital lending guidelines, entities follow enhanced disclosure requirements, including details of partnerships on their websites.
Under the proposed co-lending arrangements, asset classification shall be applicable at the borrower level. This implies that if any of the lending entity classifies their exposure as SMA/NPA (special mentioned account or non-performing asset), the same classification shall be applicable to the exposure of other regulating entities as well. As per the current practice, asset classification is handled separately by both the lending partners in co-lending arrangements.
This, according to ICRA, could result in situations where a loan to a single borrower is recognised as a standard account by one of the partners and as an SMA/NPA by the other partner. Against all these backdrops, ICRA overall expects a significant improvement in transparency in the co-lending space, going forward.
