Introduction
Co-lending is a lending arrangement in which two regulated entities jointly extend credit to a borrower, thereby pooling their resources to share both risks and returns. This collaborative model raises funds at lower costs and brings together both regulated entities, thereby giving better outreach to them in underserved or specialised markets.
On August 6, 2025, the Reserve Bank of India issued the Co-Lending Arrangements Directions, 2025 (“2025 Directions”), creating a unified regulatory framework to regulate such partnerships between banks and NBFCs. These directions are set to take effect from January 1, 2026 or earlier if regulated entities decide as per their internal policy. The introduction of these directions aims to bring in more transparency into loan pricing, sharing credit risks, and strengthening borrower protection.
These directions are both exhaustive and exclusive in terms of regulating co-lending arrangement as only arrangements permitted in these directions are allowed and anything beyond their scope is prohibited. For the first time, the guidelines apply to all commercial banks except Small Finance Banks, Local Area Banks, and Regional Rural Banks, all All-India Finance Institutions, and all Non-Banking Financial Companies (NBFCs). Unlike the previous framework regarding co-lending, these guidelines extend to all forms of co-lending between the regulated entities in both non-priority sector and priority-sector co-lending.
Interestingly, the draft directions issued earlier to the 2025 Directions had proposed a threshold of excluding co-lending arrangements sanctioned under multiple banking, consortium lending, or syndication exceeding hundred crore. However, this threshold did not find its place in the 2025 Directions as the scope of these directions exclude all loans falling under multiple banking, consortium lending, or syndication, regardless of the loan size.
This article examines the 2025 Directions in light of the earlier co-lending directions i.e. the Co-origination of Loans by Banks and NBFCs for Lending to Priority Sector Directions, 2018 (“2018 Directions”) and the subsequent Co-lending by Banks and NBFCs to Priority Sector Directions, 2020 (“2020Directions”), focusing on their scope, evolving role of NBFCs, the mechanism for determining interest rates, and asset classification. It analyses whether the revised framework has the ability to make co-lending more flexible, inclusive, and efficient in the interest of all stakeholders.
Evolution Of Rbi’s Co-Lending Framework: Traces From 2018 To 2025
2018 Directions
The erstwhile framework in relation to the co-lending was limited to priority sector lending. As per these guidelines, only scheduled commercial banks excluding Regional Rural Banks and Small Finance Banks were permitted to co-lend with NBFC- Non-Deposit-Taking- Systematically Important (NBFC-ND-Sis)exclusively for the priority sector, sharing both credit and risk.
Under the 2018 Directions, the borrower was charged a single rate of interest for the entire loan. For loans having fixed-rate, interest rate took the form of a blended interest rate derived from the proportion of risk sharing and the respective interest rates of the bank and the NBFC, while, loans having floating-rate, the borrower paid a weighted average of the benchmark rates, calculated in proportion to bank and NBFC’s share of the loan.
Banks’ lower cost of funds along with the operational efficiency of NBFCs led to the effective cost of borrowing for the ultimate beneficiary.
Under the 2018 Directions, each lender was required to follow its own provisioning rules, i.e, banks and NBFCs had to independently classify accounts as non-performing assets (NPAs) in accordance with the provisioning norms applicable to them. They were also required to maintain separate provisioning against their share of the loan. The directions also ensured that both lenders stayed aligned throughout the duration of loan as lenders were not allowed to transfer its share of the loan or alter the sanctioned loan limits without the consent of the partner entity.
2020 Directions
The 2020 Directions were issued with the aim of expanding participation and formalising the co-lending framework. Unlike the 2018 Directions, the 2020 permitted all scheduled commercial banks excluding Regional Rural Banks and Small Finance Banks to partner with any registered NBFC, including Housing Finance Companies. In order to conflict of interest, the 2020 Directions prohibited banks from co-lending with NBFCs belonging to the same promoter group.
The co-lending partners were required to execute a master agreement between the co-lending partners to set out the details of credit approval process, loan disbursement, creation of security, the ratio for risk sharing, and each partner’s responsibility in loan recovery.
These directions were known for introducing two types of arrangement – (i) one where the bank was required to provide an irrevocable prior commitment to take its share of loans originated by the NBFC; and (ii) one where the bank exercised its discretion to accept or reject loans sourced by the NBFC, thereby leading to a discretionary form of co-lending. In such case, the transaction was treated similar to a direct assignment transaction, where banks were required to comply with MasterDirection – Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021with the exception of the Minimum Holding Periodrequirements.
Another important feature of these directions was that NBFCs were required to retain at least 20% of each individual loan on their books until maturity, while the remaining share was taken up by the bank on a back-to-back basis. This ensured that NBFCs continued to have “skin in the game” and shared credit risk with their banking partners.
Highlights Of The Co-Lending Arrangements Directions, 2025
Scope and Applicability
With the 2025 Directions, the applicability of the framework is now much broader than before. It covers all commercial banks other than Small Finance Banks, Local Area Banks, and Regional Rural Banks, All-India Financial Institutions, and all NBFCs including Housing Finance Companies. However, loans sanctioned under multiple banking, consortium lending, or syndication norms are specifically excluded.
It is also noteworthy that unlike the Co-lending Directions, 2020, which expressly prohibited banks from entering into co-lending arrangements with NBFCs belonging to the same promoter group, the 2025 Directions are silent on this restriction. This reflects a regulatory shift that offers greater flexibility but may also raises concerns about conflict of interest.
Default Loss Guarantee and Blended Interest Rate
The 2025 Directions also introduced a stricter financial safeguard for the co-lending partners in the form of Default Loss Guarantee. The directions have capped it at 5% of the outstanding loan amount, in line with the Guidelines on Default Loss Guarantee in Digital Lending and Reserve Bank of India (Digital Lending) Directions, 2025.Further, the 2025 Directions has re-introduced a single blended interest rate of interest, which calculated as the weighted average of the individual rates applied by each lending partner.
These individual rates shall be determined according to the respective regulated entity’s internal credit policy and the borrower’s risk profile, and the weighted average is a reflection of the proportion of funding contributed by each lender. The latest framework ensures greater uniformity and transparency with the mandate of blended interest rate, reducing the discretion that was previously available to lenders in determining rates as per their internal policies. This shift would provide clear disclosure to borrowers and ensure uniform pricing across co-lending arrangements.
Operational Arrangements
The 2025 Directions bring about decisive shift in operational arrangements, with significant implications for both lenders and borrowers. A key development is the elimination of the discretionary model permitted under the Co-lending Directions, 2020. Earlier, bank could follow a “cherry-picking” strategy by picking loans originated by NBFCs after disbursement, creating inconsistencies and delays in risk-sharing.
The current framework eliminated this discretion. Every co-lending arrangement must be governed by an ex-ante legal agreement, ensuring that both lenders participate from the initial disbursement, sharing rights, risks, and obligations equally from the day one.
The 2025 Directions also formalised the management of borrower accounts and fund flows. The Directions made it mandatory for the regulated entities to maintain its own account for its share of every borrower’s loan. All financial transactions, including repayments and disbursements, must go through an escrow account maintained with a bank, which may also be one of the co-lending partners.
Importantly, repayments can no longer be routed through third-party or pooled accounts. Where an arrangement involves only a sourcing arrangement without co-funding, borrower repayments must go directly into the regulated entity’s own bank account. This restructuring arrangement enhances transparency and reduces operational risks that could arise from intermediary intervention.
Further, each regulated entity is required record its share of the loan on its books within 15 days of disbursement, non-compliance of which would result in loan remaining with the originating regulating entity and can only be transferred under Master Directions – Transfer of Loan Exposures, 2021. Additionally, each regulated entity is required to independently comply with the KYC Master Directions, 2016, however, the 2025 Directions permits the partner entity to rely on the customer identification process carried out by the originating entity.
The directions also highlights continuity of borrower services as both regulated entities are required to have a business continuity plan even in the event of termination of a co-lending arrangementto ensure uninterrupted services to the borrower till the repayment of loan.Importantly, these Directions also formalised grievance redressal timelines, with resolution of complaints within 30 days, failing which borrowers have an option to escalate the matter to the RBI through the Complaint Management System (CMS) or the Centralised Receipt and Processing Centre (CRPC).
Asset Classification Norms
Under the 2018 Directions, banks and NBFCs adhered to their own prudential standards, where banks generally used the 90-days-past-due rule, while some NBFCs continued to use the 120 day rule. This meant that the same borrower could be tagged as an NPA by one lender but remained “standard” for the other, with no requirement to match classifications.
The 2020 framework also carried this forward, though the operational arrangements became more structured due to the mechanism of master agreement in place between the co-lending parties, however, there was still no rule requiring both partners to treat a borrower identically with respect to classifying them as an NPA.
The 2025 framework make a noteworthy shift in this regard as the asset classification happens at the borrower level across all co-lending partners. If any regulated entity in the arrangement flags a borrower as a NPA, this status would automatically apply to other regulated entity in the arrangement. This has drawn criticism for potentially forcing one lender to downgrade even if its own provisioning norms do not allow for such classification.
Disclosure
The 2025 Directions promotes transparency as every co-lending arrangement (CLA) is required to be supported by a detailed agreement between the co-lending entities, spelling out key terms such as details of borrowers, product lines on offer, geographical scope, and any fees for lending services like customer acquisition, underwriting, servicing, or recovery.
All disclosures relating to interest rates and charges are required to follow the RBI’s Key Facts Statement (KFS) circular dated April 15, 2024. This ensures disclosure in standardised format relating to blended interest rate, annual percentage rate (APR), and any associated fees to provide borrowers a comprehensive understanding.
For the borrower, the clarity starts with the loan agreement itself as the agreement identifies which co-lending partner serves as the primary point of contact and it specify the roles of each regulated entity in sourcing, funding, and servicing loan. Any change to customer-facing entity can only be made with intimation to the borrower. Additionally, the loan agreement should also outline grievance redress procedures in clear terms to ensure borrower’s confidence.
Conclusion
The 2025 Directions make a decisive shift in terms of its scope, applicability, operational arrangements and introduction of concepts like default loss guarantee. By mandating blended interest rates, enhanced borrower disclosures, and detailed operational protocols, the 2025 Directions strengthens borrower protection while also ensuring accountability of the lenders. The elimination of discretionary model has reduced flexibility, creating more consistency in origination of loans. In doing so, the RBI has addressed the lacunas and fostered a more transparent system, enhancing trust for both lenders and borrowers.
Author Name– Arundhathi Ram
