By Sandeep Parekh
On August 6, the Reserve Bank of India notified the RBI (Co-Lending Arrangements) Directions, 2025. At first glance, the directions appear to be incremental changes to an existing framework. But a closer look reveals that they reshape the foundation of how banks, non-banking financial companies (NBFCs), and fintechs will collaborate in extending credit. The new framework widens opportunities, imposes tighter risk-sharing obligations, and sets the tone for the next phase of India’s credit ecosystem.
Co-lending emerged in India as a hybrid model combining the best of both worlds. NBFCs and fintechs, agile in origin and distribution, could reach underserved borrowers in small towns, semi-urban centres, and niche segments. Banks, with their lower cost of funds, provided the balance-sheet heft to finance these loans. In theory, both parties gained—NBFCs earned fee income and continued customer engagement, while banks got exposure to segments they struggled to reach.
The RBI’s first attempt to formalise this model came in 2020, restricting it largely to priority sector lending (PSL). Soon, concerns were raised with respect to higher effective borrower rates, inadequate disclosures, and NBFCs acting mainly as originators with minimal balance sheet exposure. By 2023-24, the RBI was scrutinising whether such practices were resulting in regulatory arbitrage and systemic risk.
The new directions are the regulator’s response and an attempt to mainstream co-lending arrangements (CLAs) while curbing their excesses. To begin with, co-lending is no longer confined to PSL. Any loan, secured or unsecured, can be originated under a CLA between regulated entities, not just banks and NBFCs. This opens the gates for broader participation, including housing finance companies.
Balancing growth with tighter guardrails
Further, each co-lender must retain at least 10% of the loan exposure on its books. This “skin in the game” requirement ensures that lenders do not offload risks entirely to their partners. Additionally, the use of default loss guarantees or DLGs, where one party promises to absorb losses up to a cap, has been restricted to 5% of loans outstanding in respect of loans under CLA. This prevents an illusion of risk transfer and guards against hidden leverage.
The directions mandate enhanced disclosures—quarterly and annual publication of co-lending partners, weighted average interest rates, fees charged and paid, and DLG details. Escrow accounts are compulsory for all collections, and tighter know-your-customer rules have been prescribed. Loan transfer timelines are also specified, reducing scope for regulatory arbitrage. The originating regulated entity (RE) must ensure that any loan under a CLA is transferred only to the designated partner RE according to the agreement and the key fact statement at the time of sanction. If such transfer cannot be completed within 15 calendar days, the loan remains on the originating RE’s books and can only be transferred to other eligible lenders following applicable directions. Moreover, any subsequent transfer of loan exposures originated under CLA, whether to third parties or between REs, must strictly comply with applicable directions and requires mutual consent of both the originating and partner REs. Collectively, these requirements signal that the days of opaque “back-to-back” loan originations are over.
The directions will reshape the co-lending landscape, bringing both opportunities and challenges. On the positive side, they create a new growth avenue for NBFCs by allowing co-lending across all loan categories, helping them scale beyond the narrow PSL channel. This could unlock long-term growth potential while enhancing their credibility through greater transparency. Banks, in turn, benefit by leveraging the NBFC distribution network without having to build their own last-mile reach, which could expand access to formal credit in historically underserved regions. From a systemic perspective, the RBI’s insistence on risk retention and caps on DLGs ensures that no participant can fully distance itself from loan performance, thereby reducing moral hazard and encouraging a more balanced partnership.
The framework also introduces challenges—compliance with escrow accounts, IT upgrades, and detailed reporting will raise costs, straining smaller NBFCs and driving industry consolidation. Additional costs may be passed on to borrowers, thereby undermining the goal of financial inclusion. Further, operational frictions like system coordination and stricter timelines could erode the model’s fintech-driven efficiency by slowing down disbursements. Thus, while the framework strengthens resilience, it risks dampening the agility that gave co-lending its edge.
Global lessons shaping India’s model
Globally, co-lending or collaborative lending models have taken diverse forms. In the US, the Federal Deposit Insurance Corporation has promoted partnerships between large banks and minority depository institutions to channel funds to underserved communities. These arrangements emphasise trust, governance, and community focus—elements the RBI is now embedding through mandatory disclosures.
In Europe and East Asia, big techs often collaborate with banks—the latter provides low-cost funding while the former contributes towards underwriting models and distribution. The Bank for International Settlements has cautioned that such partnerships disproportionately benefit fintechs unless risk-sharing is properly designed. India’s insistence on a 10% retention echoes this learning, ensuring that originators cannot offload risk entirely.
The directions are neither overly liberal nor excessively restrictive. They represent a calibrated attempt to harness the promise of co-lending while putting guardrails around its risks. The framework’s success will depend on its execution, particularly regarding whether lenders invest in technology to streamline compliance, whether costs are contained, and whether transparency indeed builds trust with investors and customers.
In the near term, smaller NBFCs may face pain, and credit costs could inch higher. But over the medium term, co-lending could evolve from a niche regulatory experiment into one of India’s primary channels of credit delivery, fuelled by banks’ balance sheets and NBFCs’ last-mile reach. The challenge for all participants will be to avoid viewing the new rules as a compliance burden alone. If treated instead as an opportunity to build transparent, resilient, and scalable lending partnerships, the directions could mark the beginning of a more balanced, and more credible era of joint lending in India.
Co-authored with Aniket Singh Charan and Pragya Garg, associates, Finsec Law Advisors
The writers is managing partner, Finsec Law Advisors.
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