Rehauling co-lending

N AUGUST 6, the Reserve Bank of India notified the RBI (Co-Lending Arrangements) Directions, 2025.

- SANDEEP PAREKH

At first glance, the directions appear to be incremental changes to an existing framework. But a closer look reveals that they reshape the foundation of how banks, non-banking financial companies (NBFCs), and fintechs will collaborate in extending credit. The new framework widens opportunities, imposes tighter risk-sharing obligations, and sets the tone for the next phase of India's credit ecosystem.

Co-lending emerged in India as a hybrid model combining the best of both worlds. NBFCs and fintechs, agile in origin and distribution, could reach underserved borrowers in small towns, semi-urban centres, and niche segments. Banks, with their lower cost of funds, provided the balance-sheet heft to finance these loans. In theory, both parties gained—NBFCs earned fee income and continued customer engagement, while banks got exposure to segments they struggled to reach.

The RBI's first attempt to formalise this model came in 2020, restricting it largely to priority sector lending (PSL). Soon, concerns were raised with respect to higher effective borrower rates, inadequate disclosures, and NBFCs acting mainly as originators with minimal balance sheet exposure. By 2023-24, the RBI was scrutinising whether such practices were resulting in regulatory arbitrage and systemic risk.

The new directions are the regulator's response and an attempt to mainstream co-lending arrangements (CLAs) while curbing their excesses. To begin with, co-lending is no longer confined to PSL. Any loan, secured or unsecured, can be originated under a CLA between regulated entities, not just banks and NBFCs. This opens the gates for broader participation, including housing finance companies.