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Co-Lending Explained: The RBI Framework and What It Takes to Run One
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Co-lending is an arrangement where two regulated lenders fund a single loan to a single borrower in agreed proportions, sharing the interest income and the credit risk between them. The borrower deals with one lender, sees one interest rate and makes one repayment. Behind that, two balance sheets are involved in every rupee.
The appeal is straightforward. A bank has cheaper funds and surplus capital but limited reach into the segments and geographies where credit demand sits. An NBFC has origination capability, local presence and underwriting knowledge in exactly those segments, but costlier funds and a smaller balance sheet. Putting the two together lets each contribute what it has.
What makes co-lending difficult has never been the idea. It is the accounting afterwards.
What changed on 1 January 2026
The Reserve Bank of India issued the Co-Lending Arrangements Directions, 2025, notified as RBI/DOR/2025-26/139 on 6 August 2025 and in force from 1 January 2026. They replaced the November 2020 circular on co-lending to the priority sector, which had governed the market until then.
Four changes matter.
Co-lending is no longer confined to priority sector lending
The 2020 framework was built around priority sector targets, and that is where almost all co-lending activity sat. The new directions apply to arrangements between regulated entities across lending activity generally. A much larger share of the loan book can now be co-lent, which changes it from a niche compliance-driven structure into a mainstream funding strategy.
Each partner retains at least ten per cent of every individual loan
The retention floor came down from twenty per cent to ten per cent. It applies loan by loan rather than across the portfolio, so the retained share has to be held and demonstrable on each individual exposure. The lower floor frees up balance sheet capacity for originating NBFCs, which was the point of the change.
The borrower sees a single blended rate
Rather than two lenders pricing their portions separately, the borrower is charged one blended interest rate. This closes a practice where an NBFC could price the loan above its own cost, fund part of it with the bank’s cheaper money and keep the spread. The borrower now sees one number, and the economics between the partners are settled between them.
The bank can no longer pick and choose
Under the earlier model a partner bank could review sourced loans and decline the ones it did not want, leaving the NBFC holding them. That discretionary window has been removed. Selective purchase of exposures now falls under the separate rules governing transfer of loan exposures instead.
The practical effect of this one is underrated. When the bank could reject individual cases after origination, underwriting alignment between the partners was optional and disagreements got resolved case by case. Now the credit policy has to be agreed in advance and applied consistently at the point of origination, because there is no rejection step afterwards to catch divergence.
Arrangements that were in place before the effective date remain valid until they are aligned with the new framework. Any new arrangement entered into after it must comply from the start.
How a co-lent loan actually works, end to end
Following one loan through the arrangement is the clearest way to see where the operational weight sits.
Before any lending happens
The two regulated entities enter a master agreement setting out the sharing proportion, the credit policy both will apply, how the blended rate is arrived at, how collections will be settled, and how the relationship is unwound if either side exits. The agreement is signed before the first loan, not negotiated as cases arise.
Origination
The originating lender sources and underwrites the borrower against the jointly agreed credit policy. Because there is no cherry-picking stage afterwards, the policy applied here is the policy both partners live with. Systems on both sides need to be looking at the same rules and producing the same answer on the same file.
Disbursal
The loan is funded in the agreed proportions. The borrower receives one disbursement and signs one agreement. Internally, the exposure is recorded on two balance sheets from day one, each carrying its share of principal.
Servicing
The borrower pays one EMI. That single receipt then has to be split in the agreed proportion, allocated correctly across principal, interest and charges within each partner’s share, and settled through the escrow arrangement. This happens on every collection, on every loan, for the life of the book.
Delinquency
If the borrower misses payments, the account moves through overdue buckets. The critical requirement is that both partners classify it the same way on the same date. A loan cannot be standard on one set of books and non-performing on the other. Provisioning follows each partner’s own applicable norms, but the underlying classification has to agree.
Closure
On foreclosure or maturity, the final settlement has to clear both partners’ positions, release any security interest, and leave a reconciled record that will stand up when either side is audited.
A worked example
Numbers make the operational point faster than description does. Take a loan of ten lakh rupees under an arrangement where the originating NBFC holds twenty per cent and the partner bank holds eighty per cent.
At disbursal, the NBFC funds two lakh and the bank funds eight lakh. The borrower receives ten lakh and signs one agreement at one blended rate. Both lenders now carry their share on their own books.
The borrower pays an EMI of, say, twenty thousand rupees. That single receipt lands in the escrow account and has to be dealt with before it means anything to either lender. First it is allocated across principal, interest and charges according to the order set in the master agreement. Then each component is split eighty-twenty. Then each partner’s own ledger is updated with its share of each component, not with its share of the total, because a lender that records four thousand rupees as an undifferentiated receipt has no idea how much of its outstanding principal has reduced.
Now the borrower pays twelve thousand instead of twenty thousand. The shortfall is not simply split. The allocation order decides which components are satisfied and which are left outstanding, and only then does the split apply to what each component received. Two systems applying different allocation orders to the same part payment will produce different outstanding balances for the same loan on the same day, and neither will be obviously wrong.
Multiply that by a book of twenty thousand loans with a few thousand part payments a month, and the reason co-lending programmes stall becomes clear. It was never the credit decision.
What co-lending is not
Several arrangements get called co-lending in conversation and are governed differently.
Direct assignment and loan transfers
In a transfer, the originating lender makes the loan on its own book first and sells a portion afterwards. In co-lending, both lenders are in from origination. The distinction matters more since the 2025 directions removed the discretionary model, because selective purchase of exposures after the fact now falls squarely under the transfer of loan exposures rules rather than under co-lending.
Securitisation
Securitisation pools loans and issues instruments backed by that pool to investors. Co-lending involves no pooling and no instrument. Each loan is shared individually, and both participants are lenders rather than investors.
The business correspondent model
A business correspondent acts as an agent of a bank, extending the bank’s reach without lending on its own book. In co-lending both parties are lenders carrying their own exposure. An NBFC acting as a correspondent has no credit risk; an NBFC in a co-lending arrangement has at least ten per cent of every loan.
Lending through a fintech platform
If a technology partner sources borrowers but does not fund any part of the loan, that is a digital lending arrangement with a Lending Service Provider, not co-lending. Only regulated entities can be parties to a co-lending arrangement. Where a digital platform is used inside a co-lending arrangement between two regulated entities, both frameworks apply.
Where co-lending arrangements actually break
In practice, four things go wrong, and none of them involve the loan being badly underwritten.
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