The document titled Co-Lending in India: How Banks and NBFCs Are Joining Hands to Widen Credit explores the emerging partnership between banks and non-banking financial companies (NBFCs) through the co-lending model. This collaborative approach aims to expand access to credit for borrowers while optimizing resource allocation for lenders. The implications of co-lending extend beyond the financial ecosystem, prompting regulatory considerations to ensure sustainable practices. As this trend evolves, it presents both opportunities and challenges for stakeholders in the Indian credit market. Co-lending represents a strategic alliance that enhances the lending capacity of both banks and NBFCs, enabling them to cater to a broader spectrum of borrowers. This model not only facilitates the sharing of risk but also leverages the strengths of each institution, thus fostering innovation in credit delivery. By pooling resources, banks and NBFCs can offer competitive interest rates and tailored financial products that meet the diverse needs of consumers. Furthermore, the growth of co-lending necessitates a robust regulatory framework to safeguard against potential risks associated with this collaborative lending approach. Ultimately, co-lending serves as a pivotal mechanism for driving financial inclusion and stimulating economic growth in India. Co-Lending in India: How banks and NBFCs are joining hands to widen credit — and what it means for borrowers, lenders and regulators
Executive summary:
Co-lending — a contractual arrangement where two (or more) regulated lenders jointly fund a loan (typically a bank + an NBFC/HFC) — has become a mainstream distribution model in India.
It aims to combine banks’ low cost of funds with NBFCs’ distribution, underwriting and product reach to push credit deeper into underserved segments (MSMEs, micro-enterprises, affordable housing, last-mile retail).
The Reserve Bank of India’s evolving rules (the 2020 “Co-Lending Model” circular and the more recent Co-Lending Directions/ draft framework issued in 2025) now provide a single, more comprehensive regulatory structure: they standardize disclosures, operational flows (escrow, blended rates), risk-sharing, accounting and prudential safeguards — while removing some previously allowed discretionary features. These regulatory changes materially affect how partnerships are structured and what borrowers can expect.
What is co-lending and why it matters
In a co-lending arrangement (CLA), permitted regulated entities (typically a bank and an NBFC or HFC) agree up-front to fund loans in a pre-agreed proportion. One partner (usually the NBFC) sources and services the loan; the other (usually the bank) provides the bulk of the funding.
The borrower sees a single loan and is charged a blended interest rate (a weighted average of the funding partners’ rates). Co-lending expands credit access, speeds up onboarding and can lower borrowing cost for end-customers when structured well.
How a typical co-lending arrangement works (operational flow)
1. Master agreement: Bank and NBFC sign a board-approved Master Agreement describing product scope, pricing method, risk-sharing, escrow mechanics, servicing and exit terms.
2. Origination & KYC: NBFC (sourcing entity) acquires the customer, conducts KYC/credit underwriting per agreed criteria; banks may perform ex-ante due diligence where required.
3. Funding split & books: Each lender books its proportional exposure on its books and maintains separate accounting for its share. Newer RBI directions set minimum exposures and other prudential norms.
4. Escrow & cash flows: All disbursements/repayments typically flow through an escrow account; appropriation rules are pre-defined.
5. Blended rate & disclosure: Borrower is told the blended APR and the roles of each partner via Key Facts Statement (KFS); any fees to sourcing/servicing party must be separately disclosed and cannot be a disguised credit enhancement.
Key regulatory milestones & what changed
RBI Co-Lending Model (CLM) — Nov 5, 2020: Officially allowed banks to co-lend with registered NBFCs/HFCs for priority sector lending, required NBFCs to retain a minimum 20% share (NBFC keep-in), and set out master agreement, KYC/disclosure and escrow rules. It also allowed banks either to take their share back-to-back automatically or retain discretion to accept/reject individual loans subject to conditions.
RBI Co-Lending Arrangements Directions — 2025 (draft/final directions published for consultation/issuance): RBI proposed a comprehensive set of directions for all co-lending arrangements (beyond priority sector), harmonizing operational, disclosure, accounting, reporting and prudential norms.
Important points include mandatory ex-ante legal agreements, blended APR methodology, escrow routing of funds, KFS disclosures, prohibition on implicit/default loss guarantees unless permitted, and reporting to credit bureaus. The draft also tightens rules around “cherry-picking” (discretionary purchase) and introduces minimum exposure/operational safeguards. The new Directions seek to replace patchwork rules and reduce regulatory arbitrage.
Practical effect: The 2025 directions bring all CLAs under a single framework (subject to some carve-outs such as digital lending rules), require stronger borrower disclosures and operational safeguards, and restrict structures that effectively transfer loan exposures without appropriate oversight.
Typical commercial / contractual terms you’ll see
Funding split / minimum share: Historically NBFCs were required to retain at least 20% in CLM (2020). Under the 2025 directions, regulators set clearer minimum exposure rules and book-keeping requirements — and expect each permitted RE to maintain a minimum fraction of the individual exposure on its books (see Directions for exact thresholds).
Blended interest rate / APR: Final rate to borrower is a weighted average of lending REs’ rates (and all fees must be included within APR disclosures).
Servicing fees: NBFCs may get a pre-agreed fee for sourcing/servicing; fees must not act as a credit enhancement and must be arm’s length.
Escrow mechanics: Receipts routed through escrow; appropriation rules and waterfall must be explicit.
Asset classification & provisioning: Each lender classifies and provisions its share per its regulatory norms; unrealised profits may be adjusted against capital for NBFCs.
Customer interface & grievance redressal: NBFCs are usually single point of contact; lenders must disclose roles and provide complaint escalation options (ombudsman).
Who’s doing co-lending in India? (major players & partnership types)
Large commercial banks: Several public and private banks maintain co-lending policies and partner with NBFCs to reach priority sectors and MSMEs. Banks publish CLA partner lists and policies as required by RBI disclosures. (See bank co-lending policies and public disclosures.)
NBFCs / HFCs / fintech lenders: Prominent NBFCs that often feature in co-lending arrangements include Bajaj Finance, HDFC Ltd (HFC), Tata Capital, Muthoot Finance, and other regionally strong players. These NBFCs bring sourcing, last-mile reach, digital onboarding and specialized underwriting to the table. (Top NBFC lists / industry reports show these names among leading lenders.)
Examples of partnerships: Standard models pair a bank that provides most of the funding with an NBFC that sources and services. Banks also co-lend with MFIs and fintech platforms for micro loans and consumer finance. Many banks and NBFCs maintain published co-lending policies and partner registries.
Note: Specific active partnerships change frequently as institutions sign/renew master agreements — check the respective bank/NBFC website for their current CLA partners and indicative blended-rate ranges, which RBI requires to be disclosed.
Pros — why lenders and borrowers like co-lending
For borrowers
Wider access to credit (especially in underserved geographies/segments).
Potentially lower effective cost when bank funding lowers blended rate.
Faster onboarding and localized servicing through NBFCs/fintechs.
For banks
Access to granular portfolios sourced by NBFCs without building distribution from scratch.
Ability to meet priority sector lending targets via co-funded exposures.
For NBFCs
Ability to scale through access to banks’ low-cost funds and share credit risk while retaining customer relationships.
Cons & risks — what to watch out for
Operational complexity & liability mismatches: Multiple parties, escrow flows and split accounting increase operational/IT complexity and reconciliation risk. If servicing fails, borrower impact and reputational damage can be significant.
Misaligned incentives: If sourcing fees or servicing incentives are poorly designed, it can create origination moral hazard (weaker underwriting, poor documentation). RBI directions explicitly prohibit fee structures that indirectly act as credit enhancement.
Regulatory & accounting traps: NBFCs must be careful with unrealised profits and capital treatment; banks must ensure due diligence obligations are satisfied (credit sanction cannot be outsourced). Non-compliance can trigger provisioning or capital hits.
Cherry-picking / transfer issues: Earlier models allowed banks to exercise discretion to accept/decline individual loans (creating direct assignment-like behaviors). RBI’s newer Directions tighten this and treat selective purchase differently to avoid regulatory arbitrage.
Regulatory compliance checklist (for institutions)
1. Have a board-approved CLA policy and publish it on your website.
2. Ensure Master Agreement spells out funding split, servicing fee, escrow/waterfall, reporting and exit mechanics.
3. Disclose blended APR, partner list and KFS details to borrowers up-front.
4. Keep separate accounting and report exposures accurately to credit bureaus; follow provisioning norms for your share.
5. Avoid implicit/default-loss guarantees; make sure any servicing/sourcing fees are arm’s-length and documented.
Practical advice for borrowers
Ask for the Key Facts Statement (KFS) and the blended APR upfront. Make sure all fees are disclosed and included in APR.
Confirm single point of contact for servicing and grievance redressal and the escalation path (NBFC servicing vs Banking Ombudsman).
Before signing, request a copy of the Master Agreement summary (or the loan schedule showing the funding split and servicing responsibilities).
Watch for fine print: ascertain who reports repayments to credit bureaus and how defaults will be reflected against you.
What to expect going forward:
RBI’s 2025 Directions indicate a regulatory push to make CLAs more transparent, standardised and prudentially robust — expanding the remit beyond priority-sector co-lending to capture a wider array of collaborative lending structures while curbing regulatory arbitrage. That means: clearer borrower disclosures, stricter operational controls (escrow, reconciliations), limits on exotic fee structures and tighter treatment of loan transfers. Lenders and fintechs should invest in compliance, reconciliation systems and customer-facing transparency to scale responsibly.
Conclusion — why co-lending matters:
Co-lending is a pragmatic, demand-driven response to India’s enormous credit gaps: it leverages banks’ funds and NBFCs’ market capital to extend finance to areas that traditional banking has struggled to reach. With RBI’s recent move to a consolidated set of Directions, co-lending is likely to become more standardized and safer — provided market participants align incentives, strengthen operations, and put borrower protection front and centre.
If you are looking for Co-lending Partnerships, you may connect with us on WhatsApp on 98200-88394 or email to intellex@intellexconsulting.com
Team- Intellex Strategic Consulting Private Limited
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