Banks prefer direct assignment with NBFCs despite colending relaxations

Despite the recent relaxation in colending norms, banks are likely to maintain their preference for direct assignment with non-banking financial companies (NBFCs) rather than colending arrangements.

 

Industry experts suggest that while colending volumes among NBFCs are expected to grow, driven by operational synergies and flexible structures, banks will continue to favour direct assignment, said industry experts.

 

“I think we will see a lot more business move to direct assignment rather than colending in the current environment,” said Jairam Sridharan, managing director and chief executive officer (CEO), Piramal Enterprises, in the post-earnings call.

 

“But one area in which you will see some development and growth is NBFC-to-NBFC colending but in NBFC-to-bank colending you might see a decline,” he added.

 

Piramal Enterprises has a colending business from banking partnership of around ₹600 crore as of September 30.

 

Direct assignment is a method by which a financial institution, like a bank, buys a pool of loans directly from another entity, such as an NBFC, without a special purpose vehicle (SPV). This process allows the selling institution to offload loans to free up capital, while the buying institution expands its loan portfolio and earns interest. Under this method, the buying bank directly acquires the ownership of the loan and the right to receive payments from borrowers.

 

Banks may still prefer direct assignment over colending because they can have greater control of due diligence and risk, a familiarity with its structure, and a preference for retaining higher-margin loans, said senior banking officials.

 

The new rules of the Reserve Bank of India, with their 15-day assignment window and technology integration requirements, can make the colending model administratively complex and less flexible than direct assignment for banks that have strong risk management.

 

Industry experts say this “clean transfer” of risk is a key reason for banks’ continued preference for direct assignment.

 

“Banks can cherry-pick high-quality loan pools under direct assignment, get an immediate exposure, and meet their priority-sector lending targets in one go,” said a senior official at a public-sector bank.

 

“In colending, we need to stay engaged throughout the life of the loan, which adds complexity.”

 

While the colending guidelines — first issued by the RBI in November 2020 and relaxed in subsequent years — are still being finetuned, direct-assignment transactions are governed by long-established securitisation and transfer of loan-exposure norms, leaving less room for interpretation, said industry experts.

 

“We don’t do much colending. We are happy with direct assignment. If anybody wants to do direct assignment with us, they can always reach us,” said V Vaidyanathan, managing director and CEO, IDFC First Bank.

 

Moreover, colending yields lower margins for banks since income is shared with the NBFC partner. In direct assignment, banks have full control over pricing and returns once the pool is purchased.

 

In the near term, the familiarity and simplicity of direct assignment may continue to dominate the bank-NBFC partnership landscape, said industry experts.