NBFCs and banks have agreed on a GST of 18% for co-lending service charges. This fee is likely around 0.5–1% of the loan amount. The move aligns with the RBI’s push for co-lending, which now has assets under management nearing Rs 1 lakh crore. Clarity on GST rules is expected at the next Council meeting, as co-lending expands beyond just priority sector loans. In April 2024, Crisil reported that co-lending assets managed by NBFCs are close to Rs 1 lakh crore. This is the first time in over five years since the model was launched that the assets have reached this level.
This change comes after NBFCs and banks agreed that these deals include a service fee. After months of debate, both sides accepted this point. The move happens as the Reserve Bank of India backs co-lending with new policies. This approach was launched six years ago and now grows by about 35-40% each year. Currently, NBFCs largely source loan proposals in co-lending with banks. However, no GST is paid on the service charges, as NBFCs argue that extra interest corned by them in such cases is “income.”
Typically, in co-lending arrangements (CLAs), sourcing NBFCs finance 20% of the loan amount to the customer, while banks finance 80%. Recently, FIDC, the Indian Banks Association, the department of financial services, and the department of revenues discussed the issue. They aimed to agree on whether a service component exists in CLAs, which is often not clearly mentioned. The Directorate General of GST Intelligence (DGGI) is examining banks and NBFCs. Its goal is to find out if they have evaded GST in their co-lending business. Previously, FIDC said that NBFCs charge a higher interest rate, which is just interest on the loan. They argued this should not be considered a service. Therefore, it should not be taxed with GST.
In co-lending arrangements, the interest is shared based on a set ratio. For example, if a co-lender charges a blended rate of 16% to the customer, the bank gets 10% of that rate for its part of the loan. The remaining 6% from the customer goes to the sourcing NBFC. The NBFC also earns interest at the same blended rate on its share of the loan. FIDC explained that the “Excess interest spread” is the difference between the blended interest rate charged to the borrower and the interest paid to banks or financial institutions on the co-lent loans. This isn’t a fee or a charge but simply the interest earned by NBFCs from their part of the co-lending deal. Since it is earned as interest, it qualifies as “interest income” and is taxable under income tax laws. This spread is not a fee or charge, so it is not subject to GST. The move to apply GST on such charges is significant. The Reserve Bank of India recently released a draft of the updated CLA rules. This draft suggests expanding the rules to include more types of regulated lenders, such as all India Financial institutions. It also aims to broaden co-lending guidelines. Currently, these rules only cover priority sector lending. The new draft would include all types of loans, expanding co-lending in India. The framework does not specify how much risk or reward each lender gets, which adds flexibility. The move to apply GST on such charges is significant. The Reserve Bank of India recently released a draft of the updated CLA rules. This draft suggests expanding the rules to include more types of regulated lenders, such as all India Financial institutions. It also aims to broaden co-lending guidelines.