SBI-led panel against 18% GST on co-lending; submits report to FinMin

Says co-lending should be restricted to priority sector lending and not extended to other areas

A State Bank of India (SBI)-led committee to encourage co-lending between commercial banks and non-banking financial companies (NBFCs) has recommended doing away with the goods and services tax (GST) of 18 per cent. 

“The SBI-led co-lending committee has submitted the report to the finance ministry, recommending that no GST should be imposed on co-lending-related activities. The report also recommends that co-lending should be restricted to priority sector lending, not extended to other areas, due to the larger associated risks,” said a person familiar with the matter.
 

In May 2024, the Department of Financial Services (DFS), a division of the finance ministry, asked SBI to establish a co-lending committee to address issues related to its business model. 

Co-lending has not picked up though the Reserve Bank of India (RBI) has allowed it since 2018. Co-lending is expected to enhance credit flow to unserved and underserved sections of the economy, such as agriculture, micro, small, and medium enterprises (MSMEs), and housing.
 

By allowing banks and NBFCs to collaborate, the RBI aimed to make loans more affordable to end-borrowers. Earlier, a senior finance ministry official had said that the committee would also examine why banks are hesitant to enter the co-lending space.

The committee was led by SBI’s deputy managing director Surender Rana. It had representation from Punjab National Bank, Union Bank of India, and Central Bank of India from the banking sector. Additionally, three NBFCs have representation on the panel, including the Finance Industry Development Council (FIDC).

The DFS is expected to come out with guidelines based on the report to boost the co-lending space.
 

FIDC, the representative body of NBFCs, in a letter to the Central Board of Indirect Taxes and Customs (CBIC) chairman, in November last year, had also argued against imposition of GST. “No specific service is being provided by one co-lender to the other within this arrangement. Instead, they collectively provide credit to the borrower. And, the interest rate differential is a reflection of their respective roles and risks within this joint operation. Accordingly, the excess interest charged by the NBFC in the context of the co-lending arrangement should not be considered a servicing fee, subject to GST,” it said.
 

According to the source, the report also suggests that each bank should have a dedicated department for co-lending. The report has also recommended establishing a common channel between banks and NBFCs.

Additionally, separate appraisal and risk assessment processes should be established so that the burden is not placed on one party.
 

“Each operation will have its strengths. They should collaborate for co-lending. One party should conduct the assessment, while the other should accept it. This is what we have agreed on,” another official said.
 

An email sent to the finance ministry remained unanswered till the time of publication.
 

According to the norms, NBFCs are required to retain a minimum of 20 per cent share of the individual loans on their books while the balance will be on the books of banks.

CRISIL Ratings predicts that the co-lending portfolios of NBFCs will likely reach Rs 1 trillion by June 2024.
 

It is set to have an annual growth rate of 35-40 per cent over the medium term.

In focus
 

- Each bank should have dedicated department for co-lending
 

- Establishing a common channel between banks and NBFCs
 

- Separate appraisal and risk assessment processes should be established
 

- Co-lending is expected to enhance credit flow to the unserved and underserved sections of the economy