Small finance banks may be allowed to co-lend with NBFCs soon

After making Small Finance Banks (SFBs) eligible for Authorised Dealer (AD) Category-I license, the Reserve Bank of India (RBI) may take the next step in liberalising their scope of activities. It could allow these banks to co-lend with non-banking finance companies (NBFCs).

Currently, SFBs are not permitted to co-lend with another lender. Only scheduled commercial banks and NBFCs are allowed to co-lend to the priority sectors like agriculture; micro, small and medium enterprises (MSMEs), education, housing, among others.

Though RBI has so far mandated that SFBs do only direct lending, it is believed to be weighing industry requests to allow co-lending in areas where these Banks don’t have expertise.

“Co-lending could specifically be allowed in cases where we can get expertise. For example, if an SFB wants to enter commercial vehicle (CV) funding, it makes more sense for it to tie up with a specialised CV player (NBFC) rather than doing it all by themselves,” said a senior SFB official.

Industry watchers say the banking regulator seems to be open to SFBs’ co-lending demand. If these banks and NBFCs join forces, it will increase priority sector lending (PSL), which is a focus area for both the Government and RBI. PSL is productive and generates income for borrowers.

“In the case of microfinance, SFBs don’t want to hold all the exposure in their books. If co-lending is allowed with another NBFC or another mainstream Bank, it will help SFBs manage their risks. Probably, RBI is waiting for all SFBs to list before liberalising this rule,” say experts.