Summary: The Reserve Bank of India (RBI) has issued the Co-Lending Arrangements Directions, 2025, establishing a comprehensive regulatory framework for co-lending partnerships between regulated entities (REs). This framework significantly expands the scope beyond priority sector lending to cover all lending activities, while introducing key operational requirements, including a minimum 10% retention by each RE, mandatory transfer within 15 calendar days, blended interest rate calculations, and enhanced disclosure norms. The directions also introduce provisions for Default Loss Guarantee (DLG) up to 5% and unified borrower-level asset classification across partner REs, marking a substantial evolution from the previous 2020 framework.
The Reserve Bank of India has issued the Co-Lending Arrangements Directions, 2025 (“Co-Lending Directions 2025”), to provide a comprehensive regulatory framework for co-lending arrangements (CLA) between regulated entities (REs). The Co-Lending Directions 2025 shall come into force from January 1, 2026, or from any earlier date as decided by a RE as per its internal policy. Any new CLA entered into after the effective date must comply with these directions. In comparison with the existing RBI circular on Co-Lending by Banks and NBFCs to Priority Sector (“2020 Co-Lending Circular”), the Co-Lending Directions 2025 attempt to bring about significant regulatory shift in the co-lending space, while fostering greater partnerships between banks and NBFCs to promote credit penetration in the economy.
Shift from the Previous Co-Lending Directions
The RBI formally introduced the co-lending framework in 2018 (“2018 Co-Lending Directions”), which outlined the co-origination model between banks and non-deposit taking, systemically important non-banking financial companies (NBFC-ND-SI). Interestingly, the scope of NBFC participation was expanded under the 2020 Co-Lending Circular, where the RBI permitted banks to co-lend with all registered NBFCs, including HFCs, to leverage the extensive reach of NBFCs in the underserved segments of the economy.
Contrastingly, the Co-Lending Directions 2025 have expanded the scope of co-lending by allowing such arrangements among permitted REs, which include all Commercial Banks (excluding Small Finance Banks, Local Area Banks and RRBs), all AIFIs and all NBFCs (including HFCs). Notably, the inclusion of AIFIs marks a departure from the earlier framework, thereby providing greater impetus to institutions such as NaBFID, NABARD, SIDBI, etc. While the draft directions on Co-Lending Arrangements 2025 proposed stipulating that such arrangements would apply to loans up to INR 100 crore that are sanctioned under multiple banking, consortium lending, or syndication structures, the Co-Lending Directions 2025 have specifically restricted its applicability to all loans sanctioned under multiple banking, consortium lending, or syndication structures.
Unlike the 2020 Co-Lending Circular and 2018 Co-Lending Directions, which were only linked to priority sector lending targets, the Co-Lending Directions 2025 apply to priority sector lending, as well as any other lending that can be pursued in accordance with the RE’s credit policy, thereby creating a harmonised regulatory framework. While the 2020 Co-Lending Circular prohibited co-lending arrangements between banks and NBFCs belonging to the promoter group, such restrictions are not explicitly provided in the latest directions.
The 2020 Co-Lending Circular permitted banks to either mandatorily take their share of the individual loans sourced by the NBFC in their books or reject certain loans based on their due diligence. This discretionary model, which provided flexibility to banks to reject loans based on their assessments, has been done away with in the Co-Lending Directions 2025. While the RBI mandated NBFCs in the 2020 Co-Lending Circular to retain a minimum 20 percent share of the individual loans on their books to ensure that they have some skin in the game, the Co-Lending Directions 2025 have reduced this threshold as each RE (whether it’s a bank or an NBFC) is now required to retain minimum 10 percent share of the individual loans in their books. Further, the CLA shall entail an irrevocable commitment on the part of partner RE to take into its books, on back-to-back basis, its share of the individual loans as originated by the originating RE.
Detailed Disclosures and Operational Arrangements
The Co-Lending Directions 2025 prescribe comprehensive disclosure requirements by elaborately setting out the roles and responsibilities of each RE, covering areas such as sourcing, servicing and customer interface. This may warrant rethinking the templates of loan agreements to include such requirements. A partner RE may rely upon the originating RE for KYC process, instead of doing it again, provided that the KYC process has been conducted in accordance with the Master Direction — Know Your Customer (KYC) Direction, 2016, as amended from time to time.
Further, sharing of both the loan amount and its repayment obligations among the originating REs and partner REs is also envisaged under the arrangement. Therefore, it’s crucial for co-lenders to agree upon inter-creditor terms, such as how the principal and interest will be split, how the loan will be serviced, and the respective rights and limitations of each RE.
The directions also stipulate that if the originating RE is unable to transfer the loan share to the partner RE within 15 calendar days from the date of disbursement by the originating RE, then such loan would remain in the books of the originating RE. Any subsequent transfer must be made only to eligible lenders in accordance with the provisions of Master Directions – Transfer of Loan Exposure, 2021. The directions also mandate that respective shares of REs must be reflected in both REs’ books without delay after disbursement, and in any case not later than 15 calendar days from disbursement. Consequently, the transferor will be required to comply with the minimum holding period as specified therein. All transactions between the REs, as well as with the borrower, shall be routed through an escrow account maintained with a bank (which can also be one of the RE in the co-lending arrangement).
Mandate for Blended Interest Rate
The Co-Lending Directions 2025 have re-introduced the concept of blended interest rate in the interest of providing relief to the borrower. The blended interest rate 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 borrower, weighted by the proportionate funding share of concerned REs under CLA.
Inclusion of Default Loss Guarantee
The inclusion of a default loss guarantee (DLG) provision, applicable to all forms of lending, rather than limiting it to digital lending, is another important element of this regime. DLG would demonstrate the originating RE’s sourcing capabilities. The partner RE may require the originating RE to provide DLG, ensuring that the originating RE retains the risk for their originated loans.
The directions permit originating REs to provide default loss guarantee up to five per cent of loans outstanding in respect of loans under CLA. This provision is however intended to be governed by the Reserve Bank of India (Digital Lending) Directions, 2025.
Revised Approach to Asset Classification
REs shall apply a borrower-level asset classification for their respective exposures to a borrower under CLA. Accordingly, if one lender classifies its exposure to the borrower as SMA/NPA, the same classification will apply to the exposure of the other lender as well. This marks a departure from the position under the 2020 Co-Lending Circular, which required each lender to follow their own regulatory standards for asset classification and provisioning in respect of its share in the loan account. The proposed position may pose challenges for the borrower, particularly if the bank and the NBFC follow different norms for classifying an exposure as SMA/NPA.
Conclusion
The Co-Lending Directions 2025 have significantly strengthened borrower protection by introducing enhanced disclosure requirements, mandating blended interest rate and detailing several operational arrangements. The directions have also placed more responsibilities on banks in terms of customer interface, marking a shift from the previous co-lending directions. Overall, the directions contribute positively to the co-lending arrangement framework, fostering greater transparency, accountability and robustness among REs.