In a major shift for India's financial industry, the Federation of Indian Chambers of Commerce and Industry (FICCI) has officially called on Reserve Bank of India (RBI) to maintain the existing co-lending framework revolving around non-banking financial companies (NBFCs). FICCI’s appeal comes in response to a recent RBI draft circular proposing a shift to a joint lending model, where both banks and NBFCs would disburse loans simultaneously, replacing the existing framework that allows NBFCs to originate loans and later sell up to 80% of those to banks.
Key Highlights
FICCI’s Letter: FICCI has written to the RBI warning that abolishing the current NBFC-centric co-lending structure, known as ‘track 2’, could disrupt credit flow to crucial customer segments and industry sectors. The industry body cautioned that such a move would force NBFCs to scale back operations, resulting in job losses and undermining co-lending partnerships.
Success of Current Model: In the 'track 2' model, NBFCs advance loans under a mutual credit policy and advance a bulk portion to partner banks. The model waiving the minimum holding period for NBFCs has been successful in fostering growth-co-lending assets under management have crossed ₹80,000 crore by March 2024, as per ICRA.
Concerns Over Proposed Changes: FICCI argued that the RBI’s proposed shift to a joint origination and disbursal model would increase operational risks, strain liquidity, and introduce inefficiencies. The industry body stressed that the repeal of the November 2020 circular would be highly disruptive, constraining credit availability and threatening jobs in the sector.
Sectoral Impact: The suggested amendments would more specifically impact MSMEs, informal sector borrowers, and rural borrowers, depending on last-mile credit delivery by NBFCs. FICCI highlighted that the existing model of financial inclusion and operational flexibility would be adversely affected by the new regulations.
Industry Growth at Risk: With co-lending assets increasing from ₹20,000 crore to almost ₹1 lakh crore in recent years, the model has been successful in deepening credit access. Commentators caution that curbing the dominant CLM-2 (track 2) model would entail big changes and curtail the pace of credit democratization and financial innovation.
Regulatory Context: The draft guidelines issued by the RBI seek to mainstream and liberalize co-lending by enabling all regulated entities to join in and broadening the scope to cover beyond the priority sector lending. This widening is viewed as a welcome move, but the limitation on the NBFC-led model has been severely criticized by industry players.
FICCI’s intervention highlights the delicate balance regulators must strike between fostering innovation and ensuring stability in India’s evolving credit landscape. The RBI’s final decision on the co-lending framework will have far-reaching implications for credit delivery, job creation, and financial inclusion across the country.
Sources: The Economic Times, The Hindu Business Line, LinkedIn (industry analysis)
