Small finance banks want to enter on-lending to manage risks better – Blue Barrows

Small finance banks (SFBs) are seeking approval from the regulator to enter on-lending, a growing practice where nonbank financial companies are gaining an advantage over traditional lenders.

These banks have written to the Reserve Bank of India to permit them to operate with bigger banks and NBFCs, as they have the products and reach but are at a disadvantage when it comes to resources, two people familiar with the matter said.

Allowing SFBs to carry out on-lending would help level the playing field, said bankers.

In multiple individual representations to the central bank, SFBs have submitted that co-lending would allow them to diversify risk, especially on microloans, assist last-mile credit delivery and release liquidity for further credit growth.

“Several requests have been made to the RBI to allow small finance banks to participate in the co-lending business. We are hopeful that the regulator will look at this request positively,” said the CEO of an SFB that has made such a request to the banking regulator. “Allowing us to join this model will help us shed credit risk and is an excellent opportunity to grow the book.”

The RBI did not respond till press time Sunday to a request for comment. In the case of co-lending, while NBFCs keep 20% of the loans on their books, the balance of 80% along with the credit risk on that portion goes to the balance sheet of the bank providing the funds.