Mumbai: The Reserve Bank of India (RBI) on Wednesday said it will soon release guidelines on what it called co-origination of loans by banks and non-bank finance companies (NBFCs) for the priority sector. Bankers said the move could help banks meet priority sector lending targets in a more convenient and organized manner, leveraging the reach of NBFCs.

The central bank did not define co-origination, it said co-origination arrangements “should entail joint contribution of credit by both lenders."

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“To provide the much-needed competitive edge for credit to the priority sector, it has been decided that all scheduled commercial banks (excluding regional rural banks and small finance banks) may co-originate loans with non-banking financial companies - non-deposit taking- systemically important (NBFC-ND-SIs), for the creation of eligible priority sector assets," RBI said in a statement. The guidelines will issued by end of September 2018.

Priority sector lending includes loans to agriculture, micro enterprises, social infrastructure, education and renewable energy, among others.

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“Banks have been facing challenges on the priority sector loans which are small-ticket loans. Their origination and recovery turns out to be very costly for the banks. It is very difficult for banks to compete with NBFCs and microfinance institutions (MFIs) which operate on low-cost structures. The new guidelines should enable banks to meet their PSL requirements with ease by using the low cost structures of NBFCs and MFIs," said P.K. Gupta, managing director—retail and digital banking at State Bank of India. Gupta added that guidelines will also help in regulating the co-lending market and foster standardization.

Banks in India have been facing headwinds on account of the rising pile of non-performing assets and financial frauds that have come to the fore recently. Consequently, most banks, especially the public sector lenders, have gone slow on lending, with NBFCs cannibalizing into their market share.

India Ratings and Research said in its report that it expects large NBFCs to grow 18% year-on-year in FY2019.

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The regulator also said that under co-origination, there should be sharing of “risks and rewards" between banks and NBFCs as per their mutual agreement.

Karthik Srinivasan, group head of financial sector ratings at ICRA said that while there is need for a clear definition of co-origination, the framework will allow banks to grow their priority sector book directly. “With the guidelines coming in, we are likely to see some drop in bank lending to NBFCs and also the liquidity pressure on NBFCs reducing. The banks are currently more focused on recoveries and consequently, there is limited focus on lending right now. The new guidelines will help the banks in growing their priority sector book," he said.

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