Even though the Reserve Bank of India’s final co-lending guidelines provide more clarity and a regulated path, it is likely to drive up operational costs for lenders, market participants said.
On August 6, the central bank released the final guidelines for co-lending, which detailed several operational guidelines such as the use of escrow accounts for all transactions, compliance with Know-your customer guidelines, and the inclusion of loans under the co-lending arrangements in audits.
Higher Compliance and Tech Costs
“Increased operational responsibilities – including mandatory escrow arrangements, enhanced due diligence of partner entities, and integration of co-lending protocols within internal credit policies – will require significant investment in compliance, technology and governance,” Yashoraj Tyagi, chief executive officer at CASHe – an NBFC-backed digital lending platform said.
Escrow-based disbursements and collections pose more significant operational challenges, especially for smaller NBFCs and in segments like micro, small and medium enterprises (MSME) and microfinance, where cash collections are prevalent.
“For customers who pay digitally, we will need to build or integrate systems that can handle payments via multiple channels—including QR codes, UPI, or bank transfers—into escrow accounts. For cash-paying customers, additional steps will be required to ensure traceability and compliance with the escrow mechanism,” Shalya Gupta, chief executive officer at Credifin said.
For banks too, it raises the complexity of operations as they would have to do a lot of integration on the pricing bit.
According to the guidelines, the final interest rate charged to the borrower must be the blended interest rate which is calculated as an average rate of interest derived from the interest rates charged by respective regulated entities.
Banks expect the process to smoothen out in the next few months, but it does make life a little complicated for those banks who are dealing with multiple NBFCs.
Impact on Smaller NBFCs
Some market participants said that the move is likely to ensure that only serious and well-capitalized players with strong governance frameworks participate.
“The new norms are likely to dissuade smaller or less-prepared NBFCs, especially those considering co-lending as a trial model, from entering these arrangements. The heightened compliance requirements, technological upgrades, and risk-sharing mandates raise the entry threshold,” Gupta said.
He added that the guidelines ensure that both lenders share risk meaningfully, prompting more rigorous credit evaluation by the senior lender, which in turn helps strengthen the junior lender’s underwriting and risk management processes.
The norms also state that the co-lending agreement must ensure that the respective shares of the regulated entities are reflected in their books, within 15 calendar dates from the date of disbursement.
“We believe the 15-day funding transfer rule will ease our operations and help us scale faster with more partners. For banks and NBFCs where tech integration has been challenging or time-consuming, the extended timeframe to book loans will be beneficial,” spokesperson from Navi Finserv said.
As the final guidelines will be effective from January, it seems like lenders will need to recalibrate systems, governance protocols, and partner selection strategies to remain compliant and competitive under the revised regime.