Co-lending between banks and Non-Banking Financial Companies (NBFCs) is a strategic partnership model designed to expand credit access in underserved segments while ensuring efficient risk-sharing. Under this framework, both banks and NBFCs jointly finance loans to Priority Sector Assets (PSAs), with each contributing a pre-agreed share and managing the process collaboratively.
For banks, this model offers a smarter way to meet Priority Sector Lending (PSL) targets by leveraging the local reach and specialized underwriting strengths of NBFCs. NBFCs, in turn, gain access to cheaper funds from banks, while borrowers benefit from a single blended interest rate reflecting the combined cost of funds and shared risks of both lenders.
How the Co-Lending Model Works
The Reserve Bank of India (RBI) allows all scheduled commercial banks (except certain smaller and regional players) to enter into co-lending arrangements with eligible NBFCs, including Housing Finance Companies (HFCs).
Key features include:
- Joint Loan Contribution – NBFCs usually retain at least 20% of each loan, while banks hold the balance. The bank’s portion qualifies for PSL recognition.
- Operational Framework – Loan disbursals and repayments flow through an escrow account, with borrowers signing a tripartite agreement with both lenders.
- Independent Compliance – Each partner follows separate provisioning, reporting, and NPA classification norms as per regulations.
Why Co-Lending Matters
Co-lending bridges structural gaps in reaching small-ticket borrowers, particularly in rural and semi-urban markets where banks often struggle to penetrate.
NBFCs bring:
- Localized knowledge and customer proximity.
- Flexible underwriting suited to last-mile credit.
- Stronger repayment monitoring in niche markets.
Banks gain:
- Wider reach without heavy infrastructure costs.
- Direct PSL exposure with reduced origination risk.
- Shared risk with specialized NBFC partners.
For borrowers, the blended rate—based on the weighted cost of funds—makes loans more affordable, driving deeper financial inclusion across agriculture, MSMEs, housing, and other PSAs.
Recent RBI Enhancements (2025 Update)
- Minimum 10% loan retention by each lender on every loan.
- Transparent and standardized pricing protocols.
- Enhanced disclosures and borrower communication.
- Synchronized NPA reporting across lenders.
- Option for a Default Loss Guarantee (DLG) to strengthen risk mitigation.
Quick Summary: Features, Benefits & RBI Updates
| Aspect | Key Highlights |
| Features of the Model | Joint loan contribution (NBFC ≥20%), escrow-based disbursement, tripartite loan agreements, separate NPA reporting & compliance. |
| Benefits | • Banks: meet PSL targets, wider reach, shared risk. • NBFCs: access to low-cost funds, operational scale. • Borrowers: blended lower interest rate, easier access to credit. |
| RBI Updates (2025) | • Minimum 10% retention by each lender. • Expanded to all regulated loans. • Standardized pricing & protocols. • Enhanced disclosures & communication. • Default Loss Guarantee option. |
Conclusion
Co-lending between banks and NBFCs is more than a compliance mechanism—it’s a collaborative finance model that aligns with India’s financial inclusion vision. By balancing credit growth with prudent risk management, it creates operational synergies that benefit lenders, regulators, and most importantly, borrowers.
With RBI’s 2025 enhancements, co-lending is set to become more transparent, efficient, and scalable, paving the way for a stronger and more inclusive credit ecosystem in India.
Related Posts:
Disclaimer:
The information provided herein is exclusively for educational purposes based on publicly available sources and subject to change. The author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial/real estate decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
