Business Model:

Co-lending in India is a model where one or more banks co-lend with one or more non-banking financial companies (NBFCs) to extend credit to underserved sectors of the economy. This arrangement leverages the low-cost funds of banks and the extensive reach of NBFCs, particularly in rural and semi-urban areas, creating a symbiotic relationship that boosts financial inclusion.

The Reserve Bank of India (RBI) first issued guidelines for co-origination in 2018, which were later updated and renamed the Co-Lending Model (CLM) in November 2020. The framework was revised again in August 2025 with new rules effective January 1, 2026, aimed at enhancing transparency and risk-sharing.

How co-lending works:

The standard co-lending arrangement is a tripartite agreement between the borrower, the bank, and the NBFC.

Loan origination: The NBFC typically sources the loan applications, performs the initial credit appraisal, and manages the customer relationship.

Risk and capital sharing: Historically, the RBI allowed banks to take up to 80% of the loan on their books, with the NBFC retaining a minimum of 20%. Under the new 2025 guidelines, all co-lenders must retain a minimum of 10% of the loan.

Funding and disbursement: An escrow account is used to pool the capital from both lenders for disbursement and to collect repayments from the borrower.

Interest rate: The borrower is offered a single, blended interest rate, which is a combination of the rates charged by the bank and the NBFC.

Servicing: The NBFC acts as the single point of contact for the customer and handles loan servicing, including collections.

Benefits of the co-lending model

For banks:

Meets priority sector targets: By partnering with NBFCs, banks can access a wider pool of borrowers, helping them meet their mandated Priority Sector Lending (PSL) requirements.

Extended reach: Banks can tap into new customer segments in remote or underserved areas that are traditionally reached by NBFCs.

Risk diversification: Sharing the credit risk with an NBFC helps banks diversify their loan portfolios and reduce exposure.

For NBFCs:

Access to lower-cost capital: Partnering with banks, which have access to cheaper funds, allows NBFCs to offer more competitive interest rates to customers.

Enhanced credibility: The association with a large, regulated bank boosts the credibility of NBFCs.

Capital-efficient growth: The shared risk model enables NBFCs to grow their loan books in a more capital-efficient manner.

For borrowers:

Lower interest rates: Customers can benefit from lower interest rates due to the banks’ cheaper cost of funds.

Wider credit access: The model makes credit available to underserved individuals, including those with limited or no credit history.

Improved experience: The integration of technology by NBFCs and fintechs often leads to faster and more seamless digital loan processing and disbursement.

Evolution and future trends

Revised 2025 guidelines: Effective January 1, 2026, the RBI expanded co-lending to a broader range of financial institutions, not just banks and NBFCs. The new rules also mandate a minimum 10% loan retention by each co-lender and allow for a Default Loss Guarantee (DLG) of up to 5% to boost risk-sharing.

Digital integration: The entire co-lending ecosystem is increasingly driven by technology. Fintech firms act as facilitators, providing platforms for seamless integration, automated underwriting, and efficient data exchange.

Expansion beyond PSL: While initially focused on the priority sector, co-lending has expanded to include a wider range of products like personal loans, affordable housing, MSME financing, and vehicle loans.

Growth trajectory: Co-lending is seen as a key driver for credit expansion in India, with its market size projected for significant future growth.