A committee led by the State Bank of India (SBI) has submitted recommendations to the finance ministry, advocating the removal of the 18 per cent Goods and Services Tax (GST) on co-lending activities between commercial banks and non-banking financial companies (NBFCs). The committee suggested that co-lending, which aims to enhance credit access to underserved sectors, should be exempt from GST to encourage wider adoption of the model.
Key Recommendations:
- Removal of GST on Co-Lending:
The committee recommended that GST should not apply to co-lending activities, as the arrangement involves collective lending to borrowers rather than a service being provided by one party to another. The interest rate differential in co-lending reflects the respective roles and risks of both banks and NBFCs, and should not be treated as a service fee subject to GST. - Focus on Priority Sector Lending:
The report emphasized that co-lending should be limited to priority sector lending, such as agriculture, micro, small, and medium enterprises (MSMEs), and housing. Expanding it to other areas was deemed too risky. - Dedicated Co-Lending Departments:
The committee recommended that each bank establish a dedicated co-lending department to streamline processes and manage risks effectively. - Separate Appraisal and Risk Assessment:
To balance the responsibilities, the committee suggested creating separate appraisal and risk assessment processes for both parties in the co-lending arrangement, allowing each entity to contribute based on their expertise. - Common Channels for Collaboration:
The report proposed creating a common channel between banks and NBFCs to facilitate smoother co-lending operations and collaboration.
Background and Context:
Co-lending, which has been allowed by the Reserve Bank of India (RBI) since 2018, has been slow to gain traction. The concept allows banks and NBFCs to collaborate, with NBFCs retaining at least 20 per cent of individual loans on their books while the rest is held by the banks. The goal is to make loans more affordable for end-borrowers in underserved sectors.
Despite this potential, co-lending has not seen widespread adoption. In May 2024, the Department of Financial Services (DFS) tasked SBI with forming a committee to address the challenges facing the co-lending model. The committee, led by SBI’s Deputy Managing Director Surender Rana, included representation from Punjab National Bank, Union Bank of India, Central Bank of India, and three NBFCs, including the Finance Industry Development Council (FIDC).
Future Outlook:
CRISIL Ratings predicts that co-lending portfolios of NBFCs will grow significantly, potentially reaching Rs 1 trillion by June 2024, with an annual growth rate of 35-40 per cent in the medium term. The finance ministry’s guidelines, expected to be based on the committee’s report, aim to overcome the hesitancy banks have shown towards co-lending and unlock the potential of this model to support priority sectors in India’s economy.