The Co-Lending Reset: What RBI's (Co-Lending Arrangements) Directions, 2025 Signal For Banks And NBFCs

Introduction

The Reserve Bank of India ("RBI") has ushered in a new era for co-lending with the issuance of the Reserve Bank of India (Co-Lending Arrangements) Directions, 2025 ("Directions" or "CLA Directions") on August 06, 2025. These Directions will take effect from January 01, 2026 ("Effective Date"), marking a significant regulatory milestone in regulating co-lending practices. Further, regulated entities ("REs") can also implement the Directions per their internal policy. Any Co-Lending Arrangement ("CLA") entered on or after the Effective Date must comply with these Directions. Meanwhile, the existing CLAs entered into before the date of issuance of the Directions, as well as those entered before the Effective Date, will continue to be governed by the RBI's Co-Lending by Banks and NBFCs to Priority Sector guidelines issued on November 05, 2020 ("Co-Lending Guidelines, 2020").

Previously, in its Statement on Developmental and Regulatory Policies dated April 09, 2025, the RBI recognised the growing use and evolution of co-lending arrangements and lending practices. It proposed to widen the scope of co-lending and introduce a unified framework applicable to all forms of such arrangements across eligible entities. Pursuant to this, the RBI released the draft Reserve Bank of India (Co-Lending Arrangements) Directions, 2025 ("Draft Directions") for public consultation. After examining stakeholder feedback, the RBI finalised and issued the present Directions, replacing the earlier framework.

This article examines the Direction by analysing its key provisions, highlighting the changes from previous frameworks, and outlining the practical considerations and compliance imperatives for REs, as well as the implications borrowers should remain alert to.

Understanding the Basics of Co-Lending Arrangements (CLA)

A CLA is a model where two REs, usually a bank and an NBFC, partner up to fund loans to borrowers jointly. The partnership is formalised through an agreement specifying the proportion of risks and rewards each party shares. These arrangements can apply to both secured and unsecured loans. It is essential to mention that co-lending helps extend credit deeper into India's underserved segments, especially the priority sector (like agriculture, affordable housing, MSMEs), by combining the bank's funding capacity with the NBFC's distribution reach.

Inside the Directions: Scope, Overlaps and Carve-Outs

The Directions govern CLA where two or more REs jointly fund a portfolio of loans secured or unsecured in an agreed proportion, sharing revenue and risk. Digital lending arrangements are governed by the Reserve Bank of India (Digital Lending) Directions, 2025, but where digital co-lending involves two REs, these Directions will also apply jointly. However, arrangements like multiple banking, consortium lending, and syndication remain outside this scope.

Permitted Regulated Entities: To Whom Do the Directions Apply?

The Directions apply to the following entities:

1. Commercial Banks (excluding Small Finance Banks, Local Area Banks and Regional Rural Banks);
2. All-India Financial Institutions; and,
3. Non-Banking Financial Companies (including Housing Finance Companies).

Key Features of RBI's CLA Directions, 2025

1. Minimum retention requirement

Every RE involved must retain at least 10 per cent (ten per cent) of the individual loan in its books. This ensures that the REs have a stake in the game and align their interests. This seems to be a sharp departure from the Co-Lending Guidelines, 2020, where NBFCs retained up to 20 per cent (twenty per cent) of the individual loans on their books, but banks had no explicit minimum.

2. Rigorous due diligence and internal checks

Both non-banking financial companies ("NBFCs") and banks must incorporate co-lending provisions in their credit policies. These covers setting internal portfolio limits for co-lending, identifying target borrowers, conducting thorough due diligence on the partner lender, and establishing robust grievance redressal protocols.

3. Transparency in agreements

CLA refers to an arrangement, formalised through an ex-ante agreement, between a RE that originates the loans ("originating RE") and another RE that co-lends ("partner RE") to jointly fund a portfolio of loans, comprising either secured or unsecured loans, in a pre-agreed proportion, involving revenue and risk sharing. For every CLA, the originating and partner REs must execute a detailed written agreement setting out all essential terms to maintain operational clarity and regulatory compliance. At a minimum, the agreement must set out:

1. Credit Policy: Each RE's credit policy must include provisions on internal portfolio limits for CLAs, target borrower segments, partner due diligence, customer service and grievance redressal.
2. Specific Terms: The agreement between the CLA partners shall specify borrower selection criteria, product lines, areas of operation, fees for lending services, segregation of responsibilities, timelines for information exchange, customer interface, and borrower protection measures.
3. Borrower Disclosures: The loan agreement with the borrower shall lay out the roles of each RE, identify the single point of contact, and set out grievance redressal provisions. Any change in the customer interface requires prior intimation.

4. Disclosures of Key Facts Statement and Priority Sector Lending requirements

All co-lending details must be disclosed to borrowers pursuant to RBI's Circular on 'Key Facts Statement (KFS) for Loans & Advances' dated April 15, 2024. Further, REs engaging in the CLA for loans eligible to be classified under priority sector lending in terms of Master Directions - Reserve Bank of India (Priority Sector Lending – Targets and Classification) Directions, 2025.

5. Interest Rate

The interest rate and other fees or charges under a CLA must follow the contractual terms and applicable regulatory norms. The final interest rate charged to the borrower shall be the blended interest rate, which is calculated as an average rate of interest derived from the interest rates charged by respective REs, as per their internal lending policies and risk profile of the same or similar borrower, weighted by the proportionate funding share of concerned REs under CLA. Any RE rate change must follow its credit policy, comply with regulations, be factored into the updated blended rate, and be communicated to the borrower. All additional charges beyond the blended rate must be included in the Annual Percentage Rate ("APR") and disclosed in the KFS. Each RE's credit policy must set objective fee criteria, considering factors like service type and loan amount. Fees cannot contain any credit enhancement or default loss guarantee element unless specifically allowed.

6. Operational safeguards

Under a CLA, the partner RE must irrevocably take its agreed loan share within 15 (fifteen) days of disbursement, as per the ex‑ante agreement and KFS. If not transferred, the loan remains with the originating RE, with further transfer allowed only per the provisions of Master Directions – Transfer of Loan Exposure, 2021 ("MD-TLE"). Each RE must maintain separate borrower accounts, route all transactions through an escrow account, and define appropriation methods in the agreement.

7. Audit and business continuity plan

All loans under CLA are subject to internal and statutory audit. Plans must also be in place to ensure uninterrupted service to borrowers in the event of the termination of CLA between the REs.

8. Default Loss Guarantee

Originating REs may provide a Default Loss Guarantee ("DLG") up to 5 per cent (five per cent) of loans outstanding in the portfolio. All such guarantees must strictly adhere to Reserve Bank of India (Digital Lending) Directions, 2025. Any implicit or explicit credit enhancement or similar arrangement for risk mitigation is restricted unless specifically permitted.

9. Transfer of loan exposures

Any later transfer of loan exposures originated under a CLA to a third party, or between REs, must comply with RBI's Master Directions- Transfer of Loan Exposure, 2021. Transfers to third parties require mutual consent from the originating and partner REs.

10. Disclosure norms

Active co-lending partners must be listed on the RE's website. Financial statements must contain CLA details, including total value, weighted average interest rate, fees/charges, sectoral breakdown, default loss guarantees and loan performance.

Practical Implications for REs: Comparative Insights

A review of the Guidelines, 2020, the 2025 Draft Directions, and the final 2025 Directions shows a clear shift - from a narrow priority-sector focus to a comprehensive, broad-based regulatory framework. This expansion carries practical implications that REs must adopt in their co-lending strategies and compliance practices.

The Road Ahead

The Directions carefully balance credit expansion into underserved markets with rigorous governance and borrower safeguards. NBFCs must emphasise compliance, internal controls, and clear contractual arrangements to navigate this new landscape successfully. The new Directions benefit borrowers by defining more precise terms, improving transparency, and increasing access to credit, provided they stay informed and assert their rights under this comprehensive regulatory regime. Ultimately, the success of the new era of co-lending will rest on transparent risk sharing and fair treatment between all parties.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.