Co-origination of priority sector loans may boost book in the long run

During Wednesday’s monetary policy meet, the Reserve Bank of India (RBI) permitted all scheduled commercial banks to co-originate priority sector loans with non-deposit-taking systematically important non-banking financial companies (NBFCs).

Experts believe co-origination would be a win-win for both banks and NBFCs, providing scope to boost the latter's performance in the long term. Though securitisation, or business correspondence mechanism, is currently in place where NBFCs or microfinance firms source loans and pass them on to banks’ books against a fee, the sourcing of loans itself is constrained by the limited risk appetite of NBFCs.

The latest nod by RBI can change this, and provide an upward thrust to sourcing, thereby pushing loan growth of NBFCs (and subsequently of banks) — as co-originated loans will be on the books of banks and NBFCs proportionately.

“Co-origination will enhance credit flow to the priority sector by marrying the reach of NBFCs with the fund base of banks. This will also enable NBFCs to increase their revenue with a rise in their loan book, as now NBFCs can source beyond their risk appetite under an agreement with banks,” says K V Srinivasan, co-chairman of Finance Industry Development Council (FIDC).

While growth opportunity is high, some experts are also cautious about a possible increase in the cost of funds for NBFCs. “In the medium term, if banks are able to meet their priority sector lending requirements through co-origination, it may drag down securitisation volumes, which helps NBFCs to secure funds at a lower cost in the form of sale/passing on of loans to banks. In that case, NBFCs will need to incrementally borrow at market rate, which is higher than the cost under securitisation," says Anil Gupta, head (financial sector ratings) at ICRA. Some impact could also be seen on their fee-incomes generated from securitisation.

Yet, experts believe the gains could be larger, as any increase in costs should get compensated by higher revenue and pricing power. "NBFCs will also be encouraged to source cases of a better quality than the securitisation/business correspondent model since they have to participate in the risk also,” Srinivasan adds.

Thus, how NBFCs manage their asset quality will be equally crucial. For now, the street is awaiting detailed guidelines on the co-origination mechanism, which will be available by September.