Banks, NBFCs may need IT overhaul to meet RBI co-lending norms: Bankers | Banking – Business Standard

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Bankers say RBI’s co-lending draft norms may require significant IT upgrades and clarification on the CLM 2 model to ensure compliance and operational readiness

NBFCs have submitted their feedback to the industry body, the Finance Industry Development Council (FIDC). | Illustration: Ajaya mohanty

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Banks and non-banking financial companies (NBFCs) said that draft guidelines on co-lending arrangements, if implemented in the current form, will require both entities to step up their IT systems.

The Reserve Bank of India had issued draft guidelines on co-lending arrangements in April. The regulator expanded the scope of co-lending arrangements to all regulated entities and to non-priority sector lending segments. The move aims to enhance regulatory clarity, improve credit flow, and ensure real-time access to borrower information as co-lending practices evolve beyond traditional models. The co-lending model initiated by the RBI seeks to improve credit flow to underserved sectors of the economy by facilitating co-lending arrangements between lenders.

“As per the guidelines, origination and disbursement of a loan should happen at the same time. Therefore, as an NBFC, we have to update our system to provide this real-time information. It will take a better part of this financial year to completely integrate the systems both ways,” said a senior official at an NBFC.

One of the concerns with the draft guidelines is that they are silent on the co-lending model 2 (CLM 2), which would require banks and NBFCs to make significant changes to current co-lending pacts, said bankers and NBFC officials.

In the CLM 2 model, banks and NBFCs share credit risk in an 80:20 ratio, with a minimum of 20 per cent of the loan retained by the NBFC until maturity. In the CLM 1 model, both parties originate and disburse loans simultaneously.

“Usually banks and NBFCs operate on a CLM 2 model, and these draft guidelines do not talk about CLM 2. The focus is more on CLM 1. This will cause banks and NBFCs to undergo major technological changes. So there should be some clarification on the same in the new guidelines,” said a senior official with a state-owned bank.

Operational challenges in terms of integrating IT systems may slow the pace of co-lending pacts, said senior banking and NBFC officials.

NBFCs have submitted their feedback to the industry body, the Finance Industry Development Council (FIDC). It will present those suggestions to the RBI shortly, said a person aware of the developments.

Banks are also in talks with the regulator to minimise operational hurdles. “A minimum of six months is required to upgrade the technology. So far, banks and NBFCs are trying to fix tech-related challenges regarding co-lending pacts,” said a senior official with a large state-owned bank. He added that feedback will be submitted to the regulator soon.

Bankers also said that despite expanding the scope of co-lending arrangements to all regulated entities, banks prefer to concentrate on top-rated NBFCs. They remain cautious about entering into co-lending pacts with fintechs or lower-rated NBFCs, as they do not want to compromise their underwriting standards.

Some NBFCs such as Piramal Enterprises, UGRO Capital, and Shriram Finance, among others, are active players in the co-lending business. Most banks — both private and public sector — have also been active in the co-lending space.