Is Co-Lending India’s Answer to Inclusive Credit Growth?
The Reserve Bank of India (RBI) has taken a decisive step toward reshaping India’s co-lending framework with the release of its draft guidelines in April 2025. While co-lending isn’t a new concept, having first emerged as a “co-origination” model in 2018, its evolution into a broader, more inclusive framework reflects the regulator’s commitment to marrying financial innovation with prudential safeguards. Co-lending allows two lenders — typically a bank and a non-bank financial company (NBFC) to jointly offer loans to a borrower, sharing both the risk and reward. The NBFC usually brings in its customer acquisition capabilities and localised reach, while the bank contributes a majority of the funds at a lower cost. For borrowers, especially those in underserved or risky segments, this creates a channel to access cheaper credit, something they might not qualify for from traditional banks alone.
The timing of the RBI’s regulatory overhaul is significant. In recent years, India’s NBFC sector has seen tremendous growth, both in reach and relevance, particularly in Tier 2 and Tier 3 towns. These are regions where banks often lack a ground-level understanding or find operating costs unviable. NBFC have stepped in to bridge that gap, but their ability to scale has been constrained by their access to capital and higher borrowing costs. Meanwhile, banks have remained cautious about lending directly to NBFC due to past defaults and liquidity crises (think IL&FS and DHFL). Co-lending presents a middle path, allowing banks to maintain credit exposure without overconcentrating risk on a single NBFC’s balance sheet. By proposing a model where lenders directly co-fund loans to individual borrowers, RBI is nudging the ecosystem toward decentralised, risk-dispersed credit expansion.
The draft guidelines have made four major departures from the previous framework: (a) Co-lending is no longer just for banks and NBFC, nor is it limited to priority sector lending (PSL). Now, any two regulated entities — even two banks or two NBFCs — can partner. More importantly, the rigid 80:20 funding structure is gone. Lenders can negotiate their risk participation ratio. (b) Borrowers must now be explicitly told that their loan is part of a co-lending agreement. From interest rate disclosures to service responsibilities and complaint redressal, the loan structure must be spelt out. This is a much-needed push for borrower awareness in a system that risks becoming opaque. (c) RBI has, for the first time, explicitly permitted first-loss guarantees of up to 5% of the loan pool. This gives flexibility for NBFC to attract more risk-averse banks by providing a loss cushion, while ensuring that the NBFC don’t over-leverage themselves. (d) A significant improvement — now, if a loan goes bad for one partner, it must be treated as an NPA by the other too. This prevents regulatory arbitrage and ensures both lenders are equally vigilant in monitoring and recovery.
The potential of this revised framework is substantial. For instance, MSME, often too small or informal for banks but too expensive for pure-NBFC loans, stand to benefit immensely. Similarly, self-employed individuals, gig workers, and Tier 3 borrowers can now be targeted using NBFC’s deep data insights, with banks backing them financially. Moreover, the blended interest rate approach, where the borrower sees just one rate, simplifies the customer experience. A loan may be part-funded at 14% by an NBFC and 9% by a bank, and the borrower only deals with a single average rate. This reduces confusion and makes co-lending more accessible to lay borrowers. However, the success of co-lending isn’t guaranteed. Operational integration between banks and NBFC remains a thorny issue. Core banking systems, loan management software, risk-scoring models, and even document formats can vary wildly between lenders. Unless both partners invest in seamless IT and data integration, execution delays and borrower dissatisfaction are inevitable. Then there’s the question of underwriting discipline. With no mandatory 20% skin-in-the-game requirement now, there’s the possibility that NBFC may take undue risks, offloading a larger chunk of questionable loans onto their bank partners. If not policed carefully, this could lead to asset quality issues, much like what the securitisation boom did in the US mortgage crisis.
References:
- Business World – RBI Expands Co-lending To All Regulated Entities, Ends Priority-sector Restriction
- Live Mint – What RBI’s proposed norms mean for co-lending, gold loans
- Economic Times – NBFCs raise concerns over planned co-lending rules
- Financial Express – RBI draft guidelines on expanding co-lending framework to boost credit for MSMEs: Experts
- The Hindu Business Line – Co-lending volumes to grow post RBI’s draft norms; intra NBFCs pacts to rise
- Image by storyset on Freepik
