Executive Summary

The Reserve Bank of India (RBI) has issued the Co-Lending Arrangements (CLA) Directions, 2025, effective January 1, 2026, replacing the earlier 2020 Co-Lending Model (CLM). These comprehensive guidelines expand the scope of co-lending beyond priority sector lending (PSL), while strengthening prudential safeguards and customer protection. This article reviews the journey from the 2020 circular, through the April 2025 draft framework, to the final August 2025 Directions, highlighting material changes, benefits for NBFCs and banks, compliance requirements, and a forward-looking analysis.

Under Existing CLM 2020

CLM is used to refer as a co-origination model where Banks and NBFCs come together to grant loans. The focus was to expand financial inclusion in priority sectors, including agriculture, MSME, etc, by increasing the flow of funds to these underserved and unserved sectors. NBFCs generally have depth and access to the ultimate beneficiaries, especially in rural areas however, they lack cheaper funds to provide loans to the economically weaker section of the society. To address this situation, banks, which generally have access to cheaper funds, enter into a partnership with the NBFCs to co-originate loan. However CLM 2020 is only restricted to priority sector activities wherein NBFCs’ share shall be a minimum of 20% of individual loans on their books. Besides, the following are the main features of existing model:

1. Prior Agreement

Both parties (Banks and NBFCs) must have a prior agreement to enter into a CLA, for which the regulated entities should adopt a CLA policy to govern loan sanctions and implementation of the said arrangement.

2. Master Agreement

NBFC or Bank shall enter into a Master Agreement with each partner entity with which the CLA is to be entered into. This master agreement shall provide the following terms and conditions:

1. Selection criteria of partner entity,
2. Specified products to be covered under this partnership such as unsecured lending, Micro Finance Loan, Affordable housing,
3. Area of operation,
4. Segregation of responsibilities of each partner entity and
5. Customers’ grievance redressal.

The Master Agreement is essential for ensuring clarity, transparency, and mutual understanding between the co-lending partners.

3.  Two models (CLM-1 and CLM-2)
• Irrevocable commitment (CLM-1): The bank makes a prior and irrevocable commitment to take its share of the individual loans, as originated by the NBFC, directly into its own books. In this model, both the bank and the NBFC are involved in originating the loan, and the loan is maintained on the books of both entities from the outset, with simultaneous disbursement of funds.
• Revocable commitment (CLM-2):  involves a process where the NBFC takes the lead in originating and disbursing the loan to the borrower. Following the disbursement, the bank then reimburses the NBFC for its share of the co-participation, which is typically up to 80% of the loan amount. In this approach, the bank often retains the discretion to either accept or reject its share of the loans originated by the NBFC, subject to its own due diligence processes. This discretionary arrangement under CLM 2 is considered akin to a Direct Assignment (DA) transaction, and consequently, the Minimum Holding Period (MHP) guidelines are not applicable in such cases.
4. Customer-related matters
• Under CLA, NBFC generally is a face for the customer and enters into a loan agreement with the borrower. In the loan agreement, the details about CLA are to be mentioned along with the roles and responsibilities of banks and NBFCs.
• The borrower shall be charged at an all-inclusive interest rate as agreed between the bank and NBFC.
• Both the lenders (bank and NBFC) are required to comply with Fair Practice Code.
• Complaints of the borrowers are to be taken up by NBFCs, and upon failure to redress the complaints, borrowers can approach the RBI Ombudsman.
5. Operational aspects
• An escrow account shall be opened to carry out the transactions between bank and NBFC for each borrower under CLA to avoid any intermingling of the funds.
• Based upon mutual agreement, creation of security/ charge over the borrower’s assets and monitoring/ recovery of the loan shall be implemented.
• Each partner lender shall be required to comply with the norms of asset classification and provisioning requirements, including reporting to Credit Information Companies (‘CIC’) to the extent of their respective share in a loan account.
• Any assignment of a loan to a third party can be done only with the prior consent of the partner lender.  

Draft Co-lending Guidelines

In a significant move aimed at further enhancing credit flow and financial inclusion, the RBI has proposed to overhaul the existing co-lending guidelines by extending their applicability to all regulated entities and across all loan segments, not just priority sector lending. Moreover, the arrangement was proposed to cover all regulated entities not only banks on one side and NBFCs on other side. The rationale behind this proposed expansion is to cater to the credit needs of a wider segment of borrowers in a sustainable manner, recognizing the evolution of lending practices and the potential of such arrangements. The material proposals in the draft guidelines were as follows:

• Sector

to move away from the current distinction between priority and non-priority sector lending in the context of co-lending.

• CLM Model

Propose to discontinue CLM 2 model which covers discretionary co-lending model.

• Open risk sharing model

Propose to replace the 80:20 risk-sharing model with arrangement entered between the regulated entities.

• Default loss guarantee (‘DLG’)

Proposed to extend the concept of a DLG to all co-lending arrangements, permitting a guarantee of up to 5% of the pool of loans, in line with the guidelines issued for digital lending.

• Asset Classification

Classification by the lenders for their exposure under this arrangement is to be determined at the borrower level, which means if one of the lenders under an arrangement classifies the borrower as SMA/ NPA, then the other lender in that arrangement needs to classify the said borrower as SMA/ NPA.

• Blended Interest Rate

The interest rate to be charged to the customer under this arrangement shall be average of lending rates of all partner lenders to be called as blended interest rate.

• Other fees and charges

Sourcing or services charges or fees payable to any third party, including non-regulated entities such as Fin-tech companies or any lending partner for its services shall not form part of the blended interest rate and such charges if payable by the borrower shall be clearly disclosed to the borrower beforehand and shall form part of Key Fact Statement (‘KFS’).

Final Co-lending Guidelines

The final guidelines released by RBI are similar to the draft guidelines and the following are the changes made in the existing framework and draft guidelines:

1. Covering all Sectors: As proposed in the draft, the final guidelines shall cover all sectors besides the priority sector to expand financial inclusion.
2. Minimum contribution of each partner lender: As opposed to the draft guidelines and relaxing the existing one, RBI has fixed a minimum contribution of 10% each of the partner lender in each such arrangement per borrower.
3. CLM: In line with the existing guidelines, the Final guidelines have retained both the models, i.e. CLM-1 and CLM-2, provided that it must be guided by prior agreement.
4. Single Point of Interaction: As opposed to the existing framework, the final guidelines provide and decide amongst themselves the name of one lending partner who will be a face for the borrower, which shall form part of the loan agreement entered into with the borrower.
5. Blended Interest Rate: As proposed in the draft guidelines, interest rate charged to any borrower under CLA shall be determined based upon the average interest rate charged by all the partner lenders as per their respective credit policy, considering the risks involved.
6. Transfer of Loan Exposure: Under the CLA, the respective shares of all lending partners shall be reflected in their books within 15 days of the disbursement of the loan to the borrower. In case of failure, the loan shall remain in the books of the originating lender which can be transferred to other entity in compliance with the guidelines related to Transfer of Loan Exposure, 2021. This requirement is practically very challenging for the NBFCs and banks to reflect in their books, since a lot of operational activities are involved before taking their respective share in their books, such as alignment of credit policies.
7. DLG and Asset Classification norms: as proposed in the draft guidelines, there is no change in the DLG and asset classification norms.
8. Disclosures: All regulated entities must disclose a list of all active CLA partners on their website. The final framework requires each lending partner to disclose details related to CLA in their notes to the account, quarterly as well as annually, such as the number of CLA, weighted average rate of interest, sourcing/ service fee paid for these arrangements, details of DLG, the performance of the loans under CLA, etc.

The New Co-lending framework is a strategic evolution in India’s co-lending regime:

1. By reducing NBFC retention and broadening scope, RBI has unlocked greater lending capacity for the sector.
2. The borrower-level NPA classification ensures discipline and avoids regulatory arbitrage between banks and NBFCs.
3. By dropping non-RE sourcing in the final Directions, RBI has drawn a clear boundary—keeping fintech partnerships within the digital lending regime.

Overall, the 2025 Directions institutionalise co-lending as a mainstream model for retail and SME credit, beyond PSL mandates. They balance growth, prudence, and borrower protection, setting the stage for a more integrated financial ecosystem. The existing loans under CLA have been grandfathered which shall remain guided by the extant 2020 guidelines.