Co-lending Policy

Background

Reserve Bank of India (RBI) had issued guidelines on Co-Lending by Banks and NBFCs to Priority Sector vide circular FIDD.CO.Plan.BC.No.8/04.09.01/2020-21 dated November 15, 2020. As per these guidelines, the primary focus is to improve the flow of credit to the unserved and underserved sectors of the economy and make available funds to the ultimate beneficiary at an affordable cost, considering the lower cost of funds from banks and greater reach of Non Banking Finance Companies (NBFC). The new scheme is christened as “Co-Lending Model” (CLM) under which, banks are permitted to co-lend with all RBI registered NBFCs including Housing Finance Companies (HFC) based on a prior agreement.

As per the RBI guidelines, banks and NBFCs are required to formulate Board approved policies for entering into the CLM and place the approved policies on their websites. The term ‘NBFC’ for the purpose of this note includes NBFCs (Partner Financial Institute (FI)) and Housing Finance Companies (HFCs)).

Terms of Arrangement: Co-Lending Model between Banks and NBFCs

With the primary objective of improving credit flow to the hitherto unserved or underserved sectors of the economy (including semi urban, rural markets and the small business and self-employed segments), the Bank would engage with multiple NBFCs and across varying products and customers segments as part of co-lending arrangements.

Product	Co-Lending Model for loans with NBFCs (Loans sourced by NBFCs).
Eligible Counterparties	All Registered NBFCs
Eligible Asset Classes	All Loans qualifying for Priority Sector Advances as per the extant Master Circular/Directions on Priority Sector issued by RBI Non Priority Sector Loans
Bank’s Contribution	Minimum 20% by way of direct exposure to be retained by the NBFC. i.e. the Bank can have a direct exposure of maximum 80%.
Originator Cap/Selection Criteria	NBFCs with proven track record, geographical reach, robust credit and collections processes, compatible system capabilities, competent manpower, etc.
Yield	Pricing of the underlying loans for the portion on Bank’s contribution to be in line with the applicable regulatory directions on interest rate on advances

Essential Features of Co-Lending model between Bank and NBFCs:

The following essential features are as per the aforementioned RBI guidelines:

I. Scope

1. The Master Agreement entered into by the Bank and NBFCs for implementing the CLM may provide either for the bank to mandatorily take its share of the individual loans as originated by the NBFC in its books or retain the discretion to reject certain loans subject to its due diligence.

a. If the Agreement entails a prior, irrevocable commitment on the part of the Bank to take into its books its share of the individual loans as originated by the NBFC, the arrangement must comply with the extant guidelines on Managing Risks and Code of Conduct in Outsourcing of Financial Services by Banks issued by vide circular no.RBI/2014-15/497/DBR.No.BP.BC.76/21.04.158/2014-15 dated March 11, 2015 and updated from time to time. In particular, the Bank and NBFC shall have to put in place suitable mechanisms for ex-ante due diligence by the bank as the credit sanction process cannot be outsourced under extant guidelines.

b. The Bank shall also be required to comply with the Master Directions - Know Your Customer (KYC) Direction, 016, issued by RBI vide RBI/DBR/2015-16/18 Master Direction DBR.AML.BC. No.81/14.01.001/2015-16 dated February 25, 2016 and updated from time to time, which already permit regulated entities, at their option, to rely on customer due diligence done by a third party, subject to specified conditions.

c. However, if the Bank can exercise its discretion regarding taking into its books the loans originated by NBFC as per the Agreement, the arrangement will be akin to a direct assignment transaction. Accordingly, the bank shall ensure compliance with all the requirements in terms of Guidelines on Transactions Involving Transfer of Assets through Direct Assignment of Cash Flows and the Underlying Securities issued by RBI vide RBI/2011-12/540 DBOD.No.BP.BC-103/21.04.177/2011-12 dated May 07, 2012 and RBI//2012-13/170 DNBS. PD. No. 301/3.10.01/2012-13 August 21, 2012 respectively, as updated from time to time, with the exception of Minimum Holding Period (MHP) which shall not be applicable in such transactions undertaken in terms of this CLM as well as the Bank’s board approved policies for assignment transactions and as may be updated from time to time.

d. The MHP exemption shall be available only in cases where the prior agreement between the Bank and NBFCs contains a back-to-back clause and complies with all other conditions stipulated in the guidelines for direct assignment. Exemption of MHP requirements stipulated in the above directions shall not apply to loans not qualifying for Priority Sector classification.

2. In accordance with the guidelines, the Bank will not enter into co-lending arrangement with an NBFC belonging to the promoter Group.

II. Customer related issues

1. The NBFC shall be the single point of interface for the customers and shall enter into a loan agreement with the borrower, which shall clearly contain the features of the Co-lending arrangement and the roles and responsibilities of the NBFC and bank. The agreement may also capture the possibility of a future change in servicer.

2. All the details of the arrangement shall be disclosed to the customers upfront and their explicit consent shall be taken.

3 The ultimate borrower may be charged a single blended/an all-inclusive interest rate as may be agreed upon by both the lenders conforming to the extant guidelines applicable to both.

4. The extant guidelines relating to customer service and fair practices code and the obligations enjoined upon the Bank and NBFCs therein shall be applicable mutatis mutandis in respect of loans given under the arrangement.

5. The NBFC should be able to generate a single unified statement of the customer, through appropriate information sharing arrangements with the Bank.

6. With regard to grievance redressal, suitable arrangement will be put in place by the co-lenders to resolve any complaint registered by a borrower with the NBFC within 30 days, failing which the borrower would have the option to escalate the same with the concerned Banking Ombudsman/Ombudsman for NBFCs or the Customer Education and Protection Cell (CEPC) in RBI.

III. Other Operational Aspects

1. The Bank and the co-lending NBFCs shall maintain each individual borrower’s account for their respective exposures. However, all transactions (disbursements/ repayments) between the Bank and the NBFCs relating to CLM shall be routed through an escrow account maintained with the Bank, in order to avoid inter-mingling of funds. The Master Agreement shall clearly specify the manner of appropriation between the co-lenders.

2. The Master Agreement may contain necessary clauses on representations and warranties which the originating NBFC shall be liable for in respect of the share of the loans taken into its books by the Bank.

3. The Bank along with the NBFC will establish a framework for monitoring and recovery of the loan, as mutually agreed upon.

4. The Bank along with the NBFC will arrange for creation of security and charge as per mutually agreeable terms.

5.. Each lender shall adhere to the asset classification and provisioning requirement, as per the respective regulatory guidelines applicable to each of them including reporting to Credit Information Companies, under the applicable regulations for its share of the loan account. Accordingly, the Bank will treat these loans at par with loans originated by the Bank through normal course of business.

6. The loans under the CLM shall be included in the scope of internal/statutory audit within the Bank and NBFCs to ensure adherence to their respective internal guidelines, terms of the agreement and extant regulatory requirements.

7. Any assignment of a loan by a co-lender to a third party can be done only with the consent of the other lender.

8. Both, the Bank and the NBFCs, shall implement a business continuity plan to ensure uninterrupted service to their borrowers till repayment of the loans under the co-lending agreement, in the event of termination of co-lending arrangement between the co-lenders.

Approach:

1. Bank shall co-lend with all registered NBFCs based on a prior agreement. Bank may take upto 80 percent share of the individual loans on a back-to-back basis in its books.

2. Discretionary arrangement on part of the Bank to take portion of the loans originated by NBFCs. This shall be done in compliance with the RBI guidelines on Transfer of Assets through Direct Assignment. As part of each arrangement, the Bank will reserve the right to select loans which meet the internal credit criteria applicable for such loans.

3. The Bank will work out the nature of arrangement with each NBFC as well as the mode of loan booking.

4. The Bank can claim priority sector status in accordance with Master Directions – Priority Sector Lending (PSL) – Targets and Classification in respect of its share of credit while engaging in the CLM.

Process :

1. Due Diligence of Co-lending NBFC: Prior to on-boarding any NBFC as co-lending partner, the necessary due diligence will be carried out by the Bank and only subject to satisfactory due diligence will the NBFC be on-boarded.

2. In co-lending, the below process will be followed by the Bank:

a. Servicing of Loans:

In the normal course of business, the servicing of the underlying loan, including collections, will be handled by the NBFCs. All the Loan agreements, security creation documents etc would be in custody of HDFC Bank or 3rd Party appointed by HDFC Bank. Moreover, NBFCs shall agree in the Master agreement to have executed all required documents under the compliance of applicable laws. HDFC bank has the rights, title, benefits or interest of the underlying documents to the extent of HDFC Bank's share.

b. Credit Approval Process:

The Bank will evaluate and choose partner NBFC for Co-lending based on its profile, sourcing capabilities, portfolio behavior and its collection mechanism/recovery record.

The Bank will provide identified NBFCs key parameters for various modes of sourcing of the loans as per extant RBI guidelines

Basis the parameters, the NBFC will send selected cases for approval to the Bank.

The Bank will put in place credit sanction mechanism, similar to that followed in the Bank, for similar products.

The Bank will evaluate all underlying loans sanctioned under the arrangement in line with the Bank’s credit processes, policies and product program followed by the Bank. The Bank will, evaluate proposals basis a combination of factors such as the Ticket size, Age of the Borrower, Income, LTV, DSCR/FOIR, Banking Norms, Stability Norms, Verification Norms, Geography, Internal and External Bureau Checks, Fleet Information (for Commercial Transportation Group), Land Holdings, Crop Pattern, Scale of Finance etc. depending on the products and the internal credit appraisal norms followed by the bank for the specific products being evaluated for co-lending.

c. Interest Rate to End Borrower:

Based on the respective interest rates and proportion of risk sharing between the Bank and the NBFC, a single blended/all-inclusive interest rate to be offered to the ultimate borrower in case of fixed rate loans. In the scenario of floating interest rates, a weighted average of the benchmark interest rates in proportion to the respective loan contribution will be offered. The repayment/ recovery of interest will be shared between the Bank and the NBFC in proportion to their share of credit and interest on mutually agreed terms

d. Accounting:

The loans would be recorded under Advances. Interest on these loans would be recorded under Interest Income.

e. Payout Distribution:

The Bank and NBFC will open an escrow type common account for pooling respective loan contributions for disbursal as well as to appropriate loan repayments from borrowers, without holding the funds for usage of float. This account will be opened with HDFC Bank only. With regard to loan outstandings, the Bank will maintain individual borrower’s accounts as per its own outstanding and will share data with the NBFC so as to generate and share a single unified statement to the end customer. The Bank and NBFC will mutually agree on waterfall mechanism for distribution of payouts with respect to the collections. The manner of appropriation will be agreed and be consistent with the Bank’s practice and transfer to the Bank’s account will be made on the same day by the NBFC from the escrow account where the collections are deposited. The distribution made will be in line with the pari-passu and proportionate sharing of collections done with respect to the principal and interest. The Bank will monitor and operate the escrow account.

f. Monitoring:

The Bank will put in place an on-going monitoring mechanism of the portfolio originated through the Co-lending arrangement.

g. Approval Authority

The agreement and the included processes would be as guided by the extant Board policy on co-lending. In order to ensure management authorization for every engagement, the delegation of authority to approve an agreement describing the specific processes of an engagement with an NBFC would lie with personnel authorized by the Board including Chief Credit Officer or Head -Retail Credit Strategy & Control Unit (RCSC)

h. Documentation:

The NBFC shall be the single point of interface for the customers and shall enter into a loan agreement with the borrower, which shall clearly contain the features of the arrangement and the roles and responsibilities of both parties.

The sanction letter to the customer will be issued by the NBFC clearly stating that the loan is being jointly sanctioned by the Bank and NBFC in the agreed proportion. Further, all the details of the arrangement shall be disclosed to the customer upfront and their explicit consent shall be taken.

The NBFC shall also give an undertaking to the Bank that its contribution towards the loan amount is not funded out of borrowing, if any, from the Bank and any of its group companies/associates.

Any other documentation as agreed upon mutually with the NBFC may be required pertaining to the transaction.

All the loan documents but not limited to Application form, Sanction letter, Facility Agreement and/or any other document communicated to the customer may be kept under the custody of HDFC Bank or a third-party repository appointed by HDFC Bank.

Appropriate enabling clauses for replacing the collecting agent will be included in the master agreement.

The extant guidelines relating to customer service and fair practices code and the obligations enjoined upon the Bank and NBFCs therein shall be applicable mutatis mutandis in respect of loans given under the arrangement

Any legal document including Master Agreement, Facility Agreement and any document having legal implication under this arrangement would be finalized in consultation with NBFCs and would be vetted by the Bank’s Legal Department and/or an external Legal counsel.

i. Reporting Requirements:

The Bank will carry out its independent provisioning including declaration of account as NPA as per the applicable regulatory guidelines and as per the Bank’s extant Retail/Wholesale credit policy. The Bank shall also follow the reporting requirements under applicable law and regulations for its respective portion of lending, including /pursuant to the following:

Credit information companies;

Default reporting under RBI Guidelines to CRILC/any other agency;

PMLA reporting and suspicious transactions reporting;

All regulatory reporting to RBI (as applicable);

NPA stamping – Will be recognized as per RBI extant norms from Banks/NBFC

Loss write off- Will be as per the Bank’s approved credit policy

Possession & re-sale – Will be in line with the Bank’s policy on possession & re-sale and documented in the master agreement to go as per bank’s policy

Any assignment/re-sale/changes in the co-lended facility will require consent of co-lending party and subject to extant RBI guidelines

The loans under the CLM shall be included in the scope of internal/statutory audit within the Bank and NBFCs to ensure adherence to their respective internal guidelines, terms of the agreement and extant regulatory requirements.

j. Capital Treatment:

The Bank will maintain Capital on the underlying Loan on its proportionate Loan Outstanding as per RBI guidelines issued from time to time.

k. Know Your Customer (KYC):

The Bank will comply with the Master Directions - Know Your Customer (KYC) Direction, 2016, issued by RBI vide RBI/DBR/2015-16/18 Master Direction DBR.AMLBC.No.81/14.01.001/2015-16 dated February 25, 2016 and updated from time to time, which already permit regulated entities, at their option, to rely on customer due diligence done by a third party, subject to specified conditions.

l. Security and Charge Creation:

The security and charge creation will be arranged on a mutual basis between both lenders.

m. Grievance Redressal

With regard to grievance redressal, suitable arrangement shall be put in place by the co-lenders to resolve any complaint registered by a borrower with the NBFC within 30 days, failing which the borrower would have the option to escalate the same with the concerned Banking Ombudsman/Ombudsman for NBFCs or the Customer Education and Protection Cell (CEPC) in RBI.

n. Business Continuity Plan (BCP):

Both the Bank and the NBFC shall implement a business continuity plan to ensure uninterrupted service to the borrowers till repayment of the loans under the co-lending agreement, in the event of termination of co-lending arrangement between the co-lenders.

o. Trigger Levels:

The Bank will review the continuation of the co-lending arrangement basis product-based triggers relating to delinquency levels, collection efficiencies, breach of covenants etc. These will be specifically mentioned in the master agreement. The trigger levels will be decided internally by the Bank.

p. Process Flow:

The Bank will formulate a Process Note covering the Standard Operating Procedures for the CLM arrangement