The Reserve Bank of India (RBI) has issued draft directions to regulate co-lending arrangements (CLAs) between financial entities, aiming to increase credit penetration and financial inclusion. The draft Reserve Bank of India (Co-lending Arrangements) Directions, 2025, was released on April 9, 2025, and applies to regulated entities, excluding small finance banks, local area banks, and regional rural banks. The RBI had previously issued a circular in 2020 governing co-lending by banks and non-banking financial companies (NBFCs) to the priority sector.
The draft directions expand the scope of CLAs, allowing co-lending between banks, NBFCs, or a combination of both, and not limiting it to priority sectors. The directions lay down standards for permitted entities to follow when entering into CLAs, including calculations of interest rates and fees, operational arrangements, reporting requirements, and default loss guarantees. The directions only permit the co-origination model, where loans are given jointly to borrowers at origination, and remove the direct assignment model.
The draft directions provide guidance on key aspects of CLAs, such as borrower selection, funding ratio, revenue and risk sharing, and roles and responsibilities of co-lenders. Co-lenders must source funds independently and on a fee basis, rather than through profit-sharing. The directions also clarify the computation and charging of interest and fees from borrowers under CLAs. Co-lenders must issue a key fact statement disclosing details of the CLA and other necessary information.
The RBI has made it clear that any fee paid to co-lenders under the CLA for funding loans must be agreed upon upfront under a servicing arrangement, independent of interest rates charged to borrowers. The draft directions also allow co-lenders to obtain default loss guarantees from sourcing or funding entities to mitigate default consequences. Any subsequent transfers of loan exposures under CLAs must conform to the Master Direction – Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021, with the prior consent of the co-lender.
The RBI’s approach emphasizes transparency in co-lending, and the proposed changes under the draft directions are expected to lead to greater financial inclusion. The draft directions are a welcome reform, and the RBI’s efforts to regulate CLAs are aimed at increasing credit penetration and promoting financial inclusion for wider segments of society. The draft directions are a significant step towards achieving this goal and are likely to have a positive impact on the financial sector.