The Reserve Bank of India (RBI) warns four banks about co-lending partnerships. RBI’s concerns are focused on poor loan approval standards and potential issues with loan quality in some cases.
Co-lending is when two lenders, usually a bank and a non-bank, team up to offer loans to various customers. None of the banks wanted to be named due to the sensitive nature of the issue. The RBI did not respond to emails asking for comments by the time this report was written.
RBI Warns Four Banks About Co-Lending Partnerships
The Reserve Bank of India (RBI) has warned some banks to carefully monitor their co-lending partnerships, according to four bankers who spoke to Moneycontrol. The RBI is concerned about poor loan approval standards and potential problems with loan quality in these partnerships. Due to the sensitivity of the issue, none of the banks wished to be identified. The RBI did not respond to emails asking for comments by the time this report was written.
“The RBI wants some banks to closely watch their co-lending deals, pointing out issues with the quality of these loans,” one bank official said. Another banker added that the RBI is worried about poor underwriting standards in some co-lending arrangements.
RBI Governor Shaktikanta Das Urges Banks to Be Cautious
In February 2024, RBI Governor Shaktikanta Das met with top bank leaders in Mumbai and emphasized the importance of staying alert to any emerging risks. He stressed that there’s no room for complacency and discussed various concerns such as business model sustainability, rapid growth in personal loans, adherence to co-lending rules, bank exposure to the NBFC sector, liquidity risk management, IT and cyber security readiness, operational resilience, digital fraud, and enhancing internal rating systems.
In October 2023, Das also warned both banks and non-banking finance companies (NBFCs) about the significant increase in personal loans and indicated that the RBI was closely monitoring this sector for signs of strain. He advised institutions to strengthen their internal monitoring mechanisms, address any growing risks, and implement necessary safeguards for their own benefit. He emphasized the importance of robust risk management practices and stricter underwriting standards.
The RBI issued a notification about changes to the rules for co-branded credit and debit cards. It states that co-branded cards must clearly show the card issuer’s name and cannot be advertised or marketed by the co-branding partner as its own product.
Recent Co-Lending Partnerships in India
In January 2024, Karnataka Bank and Clix Capital teamed up through Yubi Co’s digital lending platform to offer loans to Indian MSMEs. Similarly, IREDA and the Indian Overseas Bank also formed a co-lending partnership for renewable energy projects.
CRISIL says co-lending activities across lenders will experience varied growth due to regulatory changes. While co-lending portfolios for all types of loans are expected to expand, the growth rate for personal loans may slow down. This is because the risk weight for unsecured consumer credit has been increased from 100 percent to 125 percent, leading to a possible slowdown in unsecured loan growth.
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