Co-Lending Model: How Banks and NBFCs Share Loans in India

The co-lending model is changing how banks and NBFCs reach retail, MSME and semi-urban borrowers in India. It combines a bank’s low-cost funds with an NBFC’s customer reach, but RBI rules now demand tighter disclosures, shared accountability and clear pricing.

Under this arrangement, two regulated lenders jointly fund one loan to the same borrower. The borrower usually sees one sanction letter, one EMI schedule and one servicing point. Behind the scenes, funding, interest income, credit risk and servicing duties are split in a pre-agreed ratio, often 80:20 between a bank and an NBFC.

Co-lending model meaning under RBI rules

The co-lending model is a formal lending partnership between regulated entities, typically a commercial bank and an NBFC (non-banking financial company). The bank provides cheaper capital. The NBFC brings sourcing strength, underwriting experience in niche segments and last-mile reach.

The Reserve Bank of India has tightened the framework through the Reserve Bank of India (Co-Lending Arrangements) Directions, 2025, issued on 6 August 2025 and effective from 1 January 2026. These directions widened the framework beyond priority sector lending and standardised important areas such as blended interest rate, minimum retention, borrower disclosures and asset classification. A detailed legal summary is available from AZB & Partners.

Earlier, co-lending was mainly discussed in the context of priority sector loans such as agriculture, MSME and affordable housing. The 2025 framework allows broader use across loan categories, subject to each lender’s policy and regulatory eligibility.

How the co-lending model works for borrowers

A co-lent loan starts with a master co-lending agreement between the lenders. This agreement defines product type, borrower segment, pricing method, credit filters, servicing duties, fund transfer timelines and grievance handling.

In most cases, the NBFC sources the customer through its branch, digital app, field network or dealer channel. It collects KYC documents, income proofs and credit bureau data. The bank then applies its own credit policy. RBI expects the bank to perform independent credit assessment. It cannot blindly rely on the NBFC’s decision.

Once both lenders approve the loan, the borrower receives a sanction letter and Key Facts Statement, or KFS (a standard document showing loan amount, interest rate, charges, APR and key terms). Both lenders must be disclosed.

A simple example helps. Assume a ₹10 lakh personal or MSME loan is co-lent in an 80:20 ratio. The bank funds ₹8 lakh and the NBFC funds ₹2 lakh. The borrower receives one disbursement and pays one EMI. Internally, each EMI is split between the bank and the NBFC in the same proportion.

For borrowers, the biggest practical difference is pricing. Instead of paying two rates, the borrower pays one blended interest rate. This is the weighted average of each lender’s rate based on its funding share. Since banks usually have a lower cost of funds than NBFCs, the final rate may be more competitive than a pure NBFC loan.

RBI co-lending rules: key changes from 2025

The 2025 directions have made co-lending more structured and transparent. Key changes include:

• Wider scope, the framework now covers more loan segments, not just priority sector loans.
• Minimum retention, each participating regulated entity must retain at least 10% of every individual loan on its books.
• Blended rate, borrowers must be charged a single blended interest rate.
• No cherry-picking, the partner lender must commit upfront and cannot selectively accept loans after origination.
• Symmetric asset classification, if a borrower account turns stressed, classification must be aligned across co-lenders.
• Better data sharing, lenders must exchange borrower and repayment information quickly and consistently.
• Default Loss Guarantee, or DLG (a loss protection arrangement), is capped at 5% of the outstanding portfolio under applicable digital lending norms.

These rules matter because co-lending can create operational complexity. If one lender classifies a borrower as standard while another treats the same borrower as overdue, financial reporting becomes unreliable. RBI’s borrower-level asset classification rule aims to prevent such gaps.

Benefits and risks of the co-lending model

For borrowers, co-lending can improve access to credit. A salaried borrower in a Tier-II city, a self-employed trader or an MSME unit may get a loan faster because the NBFC has local reach. At the same time, the bank’s participation may reduce the overall rate.

For banks, the arrangement helps expand retail and MSME books without building expensive last-mile infrastructure. It can also support priority sector lending, provided the underlying loan qualifies under RBI’s PSL norms.

For NBFCs, co-lending improves balance sheet efficiency. They can originate more loans while funding only a part of each exposure. They may also earn servicing fees for managing collections and customer communication.

However, risks remain. Weak underwriting by the originating NBFC can hurt the bank’s larger share. Delayed reconciliation can create accounting mismatches. Poor disclosure can confuse borrowers about whom to approach for complaints. Data privacy is also important because borrower information moves between two institutions.

That is why lenders must maintain board-approved policies, audit trails, automated reconciliation, clear service-level agreements and proper grievance redressal systems.

Co-lending model checklist for borrowers and investors

Before signing a co-lent loan, borrowers should read the KFS carefully. Check the names of both lenders, final blended interest rate, processing fees, penal charges, prepayment terms and complaint escalation path. Do not assume that every co-lent loan is cheaper. Compare the all-in cost with a normal bank loan, NBFC loan and credit card EMI option.

Investors should also track co-lending exposure when analysing banks and NBFCs listed on NSE or BSE. Important indicators include partner concentration, asset quality, collection efficiency, DLG exposure, write-offs and provisioning policy. Rapid growth through co-lending is positive only if underwriting quality remains strong.

For CAs and finance teams, accounting treatment needs attention. Each lender recognises only its share of principal, interest income, provisioning and asset classification. Servicing income, escrow flows and borrower disclosures must match RBI norms.

What this means for you

The co-lending model can make credit more accessible and competitively priced, especially for MSMEs, self-employed borrowers and customers outside large metros. But borrowers must not treat it as a shortcut. Read the KFS, understand the blended rate and keep records of all loan documents.

For lenders and investors, co-lending is no longer just a growth tool. Under RBI’s 2025 framework, it is a regulated risk-sharing structure where transparency, underwriting discipline and operational control will decide long-term success.