Co-Lending Arrangements: Collaborative Attempts to Bridge the Credit Gap

Co-Lending Arrangements: Collaborative Attempts to Bridge the Credit Gap

The Reserve Bank of India (“RBI”) has issued an updated regulatory framework for co-lending arrangements between regulated entities (“REs”), which came into effect on January 1, 2026. The revised co-lending framework, which forms part of the Reserve Bank of India (Commercial Banks - Transfer and Distribution of Credit Risk) Directions, 2025, Reserve Bank of India (All India Financial Institutions - Transfer and Distribution of Credit Risk) Directions, 2025 and Reserve Bank of India (Non-Banking Financial Companies - Transfer and Distribution of Credit Risk) Directions, 2025, each dated November 28, 2025 (collectively “2025 Directions”), significantly expands the scope of co-lending arrangements beyond priority sector lending and to partnerships between all REs rather than only between banks and non-banking financial companies (“NBFCs”). The 2025 Directions also introduce critical operational requirements to co-lending arrangements, including enhanced disclosures, a blended interest rate, a minimum retention share of 10% (Ten per cent) for each co-lending partner, synchronized asset classification norms and an enabling provision for default loss guarantees (“DLGs”) by the originating RE. This note analyzes the key features of the regulatory framework for co-lending as contained in the 2025 Directions.

BACKGROUND

Lack of access to formal credit facilities for unserved and under-served individuals and businesses has been one of the major issues hampering financial inclusion across various sections of our economy. Co-lending, a collaborative arrangement where multiple lending entities (typically a bank and an NBFC) partner to extend loans to a borrower, is a model that could potentially bridge this credit gap by making low-cost funding available to underbanked sectors. The primary intent behind the co-lending model is to combine the distributional capabilities of NBFCs in loan origination/sourcing with the lower cost of credit extended by banks. Such a blended model is also beneficial to both lending partners, with NBFCs earning commission fees for loan origination and banks getting exposure to borrower segments which were previously inaccessible to them on account of their outreach limitations.

The RBI first introduced a regulatory framework for co-lending in September 2018 (“2018 Directions”), that provided for a co-origination model between banks and Systemically Important Non-Deposit taking Non-Banking Financial Companies (NBFC-ND-SIs) for extension of credit to priority sectors, such as MSMEs, agriculture, social infrastructure, etc. The scope of the 2018 Directions was expanded by the guidelines on “Co-lending by Banks and NBFCs to Priority Sector” dated November 05, 2020 (the “2020 Directions”) which permitted banks to enter into such co-lending arrangements with all registered NBFCs. Accordingly, both the 2018 Directions and 2020 Directions were specifically focused on co-lending arrangements for priority sectors, where participation in the formal credit ecosystem has historically been limited. The 2025 Directions now provide for a harmonized framework for co-lending across all sectors, together with greater regulatory oversight.

ANALYSIS OF THE KEY PROVISIONS OF THE 2025 DIRECTIONS

Scope and applicability

In contrast to the 2020 Directions that applied only to co-lending arrangements between banks and NBFCs, the 2025 Directions are applicable to all co-lending arrangements between any two REs (defined to include (i) commercial banks (excluding small finance banks, local area banks and regional rural banks); (ii) All-India Financial Institutions (“AIFIs”); and (iii) NBFCs (including Housing Finance Companies). This expanded scope brings AIFIs such as NABARD and SIDBI within the purview of the regulatory framework for co-lending.

While digital lending arrangements will continue to be governed by the “Credit Facilities” directions issued by RBI for the respective REs, such arrangements that involve co-lending would additionally be subject to the 2025 Directions. However, any loans sanctioned under multiple banking, consortium lending or syndication are excluded from the scope of the 2025 Directions.

Minimum retention share

While the 2020 Directions required NBFCs to retain a minimum of 20% (Twenty per cent) share of the individual loans in their books, the minimum retention requirement has now been standardized across REs. The 2025 Directions require each RE to retain a minimum 10% (Ten per cent) share of the individual loans in its books.

Documentation

The co-lending partners are required to enter into an agreement that sets out the detailed terms of the co-lending arrangement, including the criteria for selection of borrowers, specific product lines and areas of operation, fees payable for lending, and all other provisions relating to segregation of responsibilities between the co-lending partners.

Further, the loan agreement executed with the borrower must disclose the segregation of roles and responsibilities amongst the co-lending REs along with clear identification of the RE that is to be the single point of interface with the borrower. Such an arrangement ensures a simplified communication channel for the borrower, thereby ensuring a seamless grievance redressal mechanism. Additionally, any subsequent changes to the customer interface require prior intimation to the borrower.

Pricing and fees

The final interest rate charged to the borrower under the co-lending arrangement is required to be a blended interest rate calculated as an average rate of interest derived from the interest rates charged by the respective co-lending REs. The interest rates of the respective REs shall be as per their internal lending policies and the risk profile of the borrower weighted by the proportionate funding share of the concerned RE under the co-lending arrangement. Any fees/charges payable by the borrower in addition to the blended interest rates are required to be incorporated in the computation of the annual percentage rate and disclosed in the “key facts statement” that is required to be provided to the borrower by the REs.

In addition, the REs, as a part of their credit policy, are required to lay down the objective criteria for fees/charges payable for lending services, depending upon factors such as nature of the services provided and quantum of loans. However, such fees/charges shall not involve, directly or indirectly, any element of credit enhancement or DLG, unless otherwise permitted.

Operational mechanisms

The 2020 Directions permitted banks to either take their share of individual loans sourced by NBFCs onto their books or, at the banks’ discretion, reject certain loans sourced by the NBFCs based on their due diligence. In a critical change from the prior regime, this discretionary option previously available to banks has been done away with in the 2025 Directions. A partner RE is now required to take onto its books, on a back-to-back basis, its share of each of the individual loans originated by the originating RE.

Further, the respective share of the REs under any co-lending arrangement is required to be reflected in the books of both REs no later than within 15 (fifteen) calendar days from the date of disbursement of the loan by the originating RE. In case such transfer of exposure from the originating RE to the partner RE is not completed within the stipulated 15 (fifteen) day period, the loan shall remain on the books of the originating RE and can be transferred to any other eligible lender only under the provisions of Part A of the 2025 Directions that relate to the transfer of loan exposures.

Each RE is required to maintain the borrower’s account individually for its respective share under the co-lending arrangement and all transactions (disbursements/repayments) inter-se the REs as well as the borrower are required to be routed through an escrow account maintained with a bank. In this regard, the escrow agreement must clearly provide the manner of appropriation between the participating REs under the co-lending arrangement. The routing of funds through the escrow account ensures transparency for all stakeholders involved and prevents any discrepancies involving transfer of funds.

KYC and other compliances

All REs involved in a co-lending arrangement must comply with the prescribed norms under the corresponding “Know Your Customer” directions issued by the RBI for the applicable entity (“KYC Directions”). The REs may rely upon the originating RE for “Customer Identification Process” as per the provisions of the said KYC Directions.

Further, each RE is required to have in place a fair practices code and grievance redressal mechanism as applicable to such entity.

Default loss guarantee

While the 2020 Directions did not provide for any provisions relating to DLGs, the 2025 Directions permit the originating RE to provide a DLG of up to 5% (Five percent) of the outstanding loan portfolio under the co-lending arrangement. However, the terms of the DLG are to be governed by the RBI’s “Credit Facilities” directions for the relevant RE. This enabling provision for a DLG is a mechanism for instilling greater accountability of the originating RE, as partner REs are likely to require a DLG to ensure that the originating RE retains a sufficient share of the risk related to the loans it originates.

Reporting, asset classification and disclosure

Each RE in a co-lending arrangement must comply with it reporting requirements to credit information companies for its share of the loan accounts as per the provisions of the Credit Information Companies (Regulation) Act, 2005 and other requirements prescribed by the RBI.

REs are also mandated to apply a borrower-level asset classification for their exposures to a borrower under the co-lending arrangement. Accordingly, if either of the REs classifies its exposures to the borrower as a non-performing asset (NPA) or special mention account (SMA) on account of a default by such borrower, the same classification will apply to the exposure of the other RE under the co-lending arrangement. Such synchronizing of asset classification across co-lending partners is a departure from the 2020 Directions, which permitted each co-lending partner to follow their own regulatory requirements for asset classification and provisioning for their share of the loans under the co-lending arrangement. To ensure compliance, REs are required to put in place a robust mechanism for sharing of information regarding changes to asset classification on a near-real time basis, and in any case no later than the end of the next working day.

REs have been mandated to prominently disclose on their website a list of all their active co-lending partners and are also required to make appropriate disclosures in their financial statements regarding the quantum of co-lending arrangements entered into by them, weighted average rate of interest, fees charged etc. These disclosures are required to be made on a quarterly/annual basis, as may be applicable for the concerned RE.

CONCLUSION

The 2025 Directions are likely to have a profound impact on the co-lending landscape. By expanding the scope and applicability and providing for greater transparency in risk sharing between partner REs, the 2025 Directions provide much needed clarity to all stakeholders which will help in attracting innovative co-lending arrangements between REs, increase transaction volumes and motivate further participation in such arrangements. The interests of borrowers have also been safeguarded by including provisions such as single points of contact for grievance redressal, blended rate of interest and enhanced disclosure norms.

Overall, the 2025 Directions mark a critical step towards greater credit penetration for various sectors of our economy by enabling the stakeholders involved to build a more responsible, efficient and inclusive financial system. The robust regulatory framework provided for co-lending under the 2025 Directions will be crucial in ensuring that interests of both borrowers and financial institutions are protected.