The troubled shadow banks are not yet out of the woods and the largest lender SBI has stitched a co-origination agreement to finance small businesses--which used to be a major customer-base for the crippled financiers. Co-origination is a new system introduced by the Reserve Bank earlier the month in the wake of the liquidity crisis at non-banking finance companies to enhance the credit flow to productive sectors. Fresh credit flow can help both the troubled NBFCs & also help prop up the sagging growth. 
  1. The key issue for the troubled sector is solvency now, the way forward will be decided by how these companies do the asset liability management.
  2. It can be noted asset liability mismatches--where NBFCs borrowed short and lend long-term --has been found to be a fundamental flaw which led to the issues in the sector.
  3. It is the smaller NBFCs which need to access long-term resources, and rued that the problem gets confounded in the absence of a vibrant corporate bond market.
  4. SBI is committed to help the economy in every which way it can, including through helping the NBFCs or extending the festive offer schemes which it did earlier in the day for driving auto sales which have been hit the most.
Co-origination model  
  1. The Reserve Bank of India (RBI) in 2018 announced the co-origination model between banks and non-banking financial companies
  2. Under the new guidelines, all scheduled commercial banks (excluding regional rural banks and small finance banks) may engage with non-banking financial companies- non-deposit taking-systemically important (NBFC-ND-SIs) to co-originate loans for the creation of priority sector assets.
  3. The arrangement should entail joint contribution of credit at the facility level by both lenders. It should also involve sharing of risks and rewards between the bank and the NBFC for ensuring appropriate alignment of respective business objectives, as per the mutually decided agreement between the bank and the NBFC.
  4. The new guidelines stated that 20% of the credit risk by way of direct exposure shall be on NBFC’s books till maturity and the balance will be on bank’s books. 
  5. The NBFC shall give an undertaking to the bank that its contribution towards the loan amount is not funded out of borrowing from the co-originating bank or any other group company of the partner bank.
  6. NBFCs would have the flexibility to price their part of the exposure, while bank shall price its part of the exposure in a manner found fit as per their respective risk appetite/ assessment of the borrower and the RBI regulations issued from time to time.
  7. The guidelines also mentioned that the bank can claim priority sector status in respect of its share of credit while engaging in the co-origination arrangement. 
  8. However, the priority sector assets on the bank’s books should at all times be without recourse to the NBFC. Further, the loans extended by foreign banks under the co-origination framework shall be restricted only to loans qualifying as priority sector assets.
  9. The loans under the co-origination agreement shall be subjected to periodic verification by bank’s/ NBFC’s internal auditors to ensure adherence to its internal guidelines, terms of the agreement and extant regulatory requirements.

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