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Co-Lending Explained: The RBI Framework and What It Takes to Run One

Co-lending is an arrangement where two regulated lenders fund a single loan to a single borrower in agreed proportions, sharing the interest income and the credit risk between them. The borrower deals with one lender, sees one interest rate and makes one repayment. Behind that, two balance sheets are involved in every rupee.

‍

The appeal is straightforward. A bank has cheaper funds and surplus capital but limited reach into the segments and geographies where credit demand sits. An NBFC has origination capability, local presence and underwriting knowledge in exactly those segments, but costlier funds and a smaller balance sheet. Putting the two together lets each contribute what it has.

‍

What makes co-lending difficult has never been the idea. It is the accounting afterwards.

‍

What changed on 1 January 2026

‍

The Reserve Bank of India issued the Co-Lending Arrangements Directions, 2025, notified as RBI/DOR/2025-26/139 on 6 August 2025 and in force from 1 January 2026. They replaced the November 2020 circular on co-lending to the priority sector, which had governed the market until then.

‍

Four changes matter.

‍

Co-lending is no longer confined to priority sector lending

‍

The 2020 framework was built around priority sector targets, and that is where almost all co-lending activity sat. The new directions apply to arrangements between regulated entities across lending activity generally. A much larger share of the loan book can now be co-lent, which changes it from a niche compliance-driven structure into a mainstream funding strategy.

‍

Each partner retains at least ten per cent of every individual loan

‍

The retention floor came down from twenty per cent to ten per cent. It applies loan by loan rather than across the portfolio, so the retained share has to be held and demonstrable on each individual exposure. The lower floor frees up balance sheet capacity for originating NBFCs, which was the point of the change.

‍

The borrower sees a single blended rate

‍

Rather than two lenders pricing their portions separately, the borrower is charged one blended interest rate. This closes a practice where an NBFC could price the loan above its own cost, fund part of it with the bank’s cheaper money and keep the spread. The borrower now sees one number, and the economics between the partners are settled between them.

‍

The bank can no longer pick and choose

‍

Under the earlier model a partner bank could review sourced loans and decline the ones it did not want, leaving the NBFC holding them. That discretionary window has been removed. Selective purchase of exposures now falls under the separate rules governing transfer of loan exposures instead.

‍

The practical effect of this one is underrated. When the bank could reject individual cases after origination, underwriting alignment between the partners was optional and disagreements got resolved case by case. Now the credit policy has to be agreed in advance and applied consistently at the point of origination, because there is no rejection step afterwards to catch divergence.

‍

Arrangements that were in place before the effective date remain valid until they are aligned with the new framework. Any new arrangement entered into after it must comply from the start.

‍

How a co-lent loan actually works, end to end

‍

Following one loan through the arrangement is the clearest way to see where the operational weight sits.

‍

Before any lending happens

‍

The two regulated entities enter a master agreement setting out the sharing proportion, the credit policy both will apply, how the blended rate is arrived at, how collections will be settled, and how the relationship is unwound if either side exits. The agreement is signed before the first loan, not negotiated as cases arise.

‍

Origination

‍

The originating lender sources and underwrites the borrower against the jointly agreed credit policy. Because there is no cherry-picking stage afterwards, the policy applied here is the policy both partners live with. Systems on both sides need to be looking at the same rules and producing the same answer on the same file.

‍

Disbursal

‍

The loan is funded in the agreed proportions. The borrower receives one disbursement and signs one agreement. Internally, the exposure is recorded on two balance sheets from day one, each carrying its share of principal.

‍

Servicing

‍

The borrower pays one EMI. That single receipt then has to be split in the agreed proportion, allocated correctly across principal, interest and charges within each partner’s share, and settled through the escrow arrangement. This happens on every collection, on every loan, for the life of the book.

‍

Delinquency

‍

If the borrower misses payments, the account moves through overdue buckets. The critical requirement is that both partners classify it the same way on the same date. A loan cannot be standard on one set of books and non-performing on the other. Provisioning follows each partner’s own applicable norms, but the underlying classification has to agree.

‍

Closure

‍

On foreclosure or maturity, the final settlement has to clear both partners’ positions, release any security interest, and leave a reconciled record that will stand up when either side is audited.

‍

A worked example

‍

Numbers make the operational point faster than description does. Take a loan of ten lakh rupees under an arrangement where the originating NBFC holds twenty per cent and the partner bank holds eighty per cent.

‍

At disbursal, the NBFC funds two lakh and the bank funds eight lakh. The borrower receives ten lakh and signs one agreement at one blended rate. Both lenders now carry their share on their own books.

‍

The borrower pays an EMI of, say, twenty thousand rupees. That single receipt lands in the escrow account and has to be dealt with before it means anything to either lender. First it is allocated across principal, interest and charges according to the order set in the master agreement. Then each component is split eighty-twenty. Then each partner’s own ledger is updated with its share of each component, not with its share of the total, because a lender that records four thousand rupees as an undifferentiated receipt has no idea how much of its outstanding principal has reduced.

‍

Now the borrower pays twelve thousand instead of twenty thousand. The shortfall is not simply split. The allocation order decides which components are satisfied and which are left outstanding, and only then does the split apply to what each component received. Two systems applying different allocation orders to the same part payment will produce different outstanding balances for the same loan on the same day, and neither will be obviously wrong.

‍

Multiply that by a book of twenty thousand loans with a few thousand part payments a month, and the reason co-lending programmes stall becomes clear. It was never the credit decision.

‍

What co-lending is not

‍

Several arrangements get called co-lending in conversation and are governed differently.

‍

Direct assignment and loan transfers

‍

In a transfer, the originating lender makes the loan on its own book first and sells a portion afterwards. In co-lending, both lenders are in from origination. The distinction matters more since the 2025 directions removed the discretionary model, because selective purchase of exposures after the fact now falls squarely under the transfer of loan exposures rules rather than under co-lending.

‍

Securitisation

‍

Securitisation pools loans and issues instruments backed by that pool to investors. Co-lending involves no pooling and no instrument. Each loan is shared individually, and both participants are lenders rather than investors.

‍

The business correspondent model

‍

A business correspondent acts as an agent of a bank, extending the bank’s reach without lending on its own book. In co-lending both parties are lenders carrying their own exposure. An NBFC acting as a correspondent has no credit risk; an NBFC in a co-lending arrangement has at least ten per cent of every loan.

‍

Lending through a fintech platform

‍

If a technology partner sources borrowers but does not fund any part of the loan, that is a digital lending arrangement with a Lending Service Provider, not co-lending. Only regulated entities can be parties to a co-lending arrangement. Where a digital platform is used inside a co-lending arrangement between two regulated entities, both frameworks apply.

‍

Where co-lending arrangements actually break

‍

In practice, four things go wrong, and none of them involve the loan being badly underwritten.

‍

Failure What it looks like What prevents it
Reconciliation drift The two partners’ records of the same portfolio disagree by a small amount that grows every month. Someone eventually reconciles it manually across a spreadsheet exchange. Transaction-level settlement rather than periodic summaries, with each split recorded against the individual loan and the individual receipt
Classification divergence An account is overdue on one system and current on the other, because the two are computing days past due from different payment records. A shared source of truth for the repayment record, with classification derived from it on both sides rather than computed independently
Allocation disputes A part payment arrives and the partners disagree about how it split across principal, interest and charges, and therefore about what each is owed. The allocation order agreed in the master agreement and enforced by the system, not applied by whoever posts the receipt
Retention proof The lender can show the retention ratio across the portfolio but cannot demonstrate it on a specific loan when asked. Retention held and reportable at individual loan level, since that is the level the requirement applies at

Every one of these is a data problem rather than a credit problem. They are also all the kind of problem that stays invisible while volume is low and becomes unmanageable at scale, which is the worst possible failure profile.

‍

What the system has to do- all these are available in AllCloud’s Colending solution 

‍

If you are assessing whether a lending platform can carry a co-lending programme, these are the capabilities that matter.

‍

  • Proportional splitting on every transaction. Not just on disbursal. Every collection, every charge, every waiver and every write-off has to carry its split.
  • Escrow settlement with an audit trail. Each settlement traceable back to the individual receipts it represents, so a disputed figure can be resolved by looking rather than by arguing.
  • Partner-level portfolio views. Outstanding, collections, delinquency and provisioning by partner, available on demand rather than compiled monthly.
  • Aligned asset classification. One classification per loan, derived from one repayment record, shared by both partners.
  • Blended rate computation. The borrower-facing rate derived from the arrangement’s economics, with the internal split between partners calculated from it.
  • Configurable sharing terms. Different partners on different proportions and different products, without a code change for each new arrangement.
  • Individual-loan retention tracking. Continuous, and reportable per exposure.

‍

The question to put to any vendor is simple and most will struggle with it. Take one co-lent loan, post a part payment against it, and show me the split, the escrow entry, both partners’ updated positions and the reconciliation record. Describing the capability takes a minute. Demonstrating it is a different matter.

‍

Should you co-lend?

‍

Worth being honest about the trade-offs rather than treating it as free growth.

‍

What it gives you is real. An NBFC can originate well beyond what its own balance sheet would allow, at a lower blended cost of funds, with credit risk shared. For a lender whose constraint is capital rather than demand, that is the difference between growing and standing still. The widened scope of the 2025 framework makes this available across far more of the book than before.

‍

What it costs you is operational. Every co-lending partnership adds a reconciliation relationship, a reporting obligation and a second institution whose systems and timelines you now depend on. Three partners is three sets of all of that. Lenders who enter arrangements without the systems to support them end up with a finance team whose job is reconciling partner positions, which quietly consumes the margin the arrangement was meant to create.

‍

The honest test is whether your platform can run the arrangement without adding headcount. If it cannot, the economics are worse than the term sheet suggests, and the gap widens as the book grows.

‍

Frequently asked questions

‍

What is co-lending?

‍

Co-lending is an arrangement where two regulated entities, typically a bank and an NBFC, jointly fund a single loan to a borrower in agreed proportions, sharing the interest income and the credit risk. The borrower deals with one lender and makes one repayment.

‍

What are the RBI Co-Lending Arrangements Directions, 2025?

‍

A unified regulatory framework for co-lending between regulated entities, notified as RBI/DOR/2025-26/139 on 6 August 2025 and effective from 1 January 2026. They replaced the November 2020 circular on co-lending to the priority sector and extended the framework beyond priority sector lending.

‍

What is the minimum retention under the co-lending directions?

‍

Each regulated entity must retain at least ten per cent of every individual loan under a co-lending arrangement on its own books. The earlier framework required twenty per cent.

‍

Who can enter a co-lending arrangement?

‍

Commercial banks other than small finance banks, local area banks and regional rural banks, all-India financial institutions, and NBFCs including housing finance companies.

‍

What interest rate does the borrower pay in a co-lending arrangement?

‍

A single blended rate, rather than separate rates for each lender’s portion. The economics between the partners are settled between them and are not reflected as two prices to the borrower.

‍

Can a bank reject individual loans sourced by its co-lending partner?

‍

No. The discretionary model that allowed a partner bank to decline individual sourced loans has been removed. Selective purchase of exposures falls under the separate transfer of loan exposures rules.

‍

Do the digital lending rules apply to co-lending?

‍

Digital lending arrangements are governed by the Digital Lending Directions, 2025. Where digital platforms are used within a co-lending arrangement, the Co-Lending Arrangements Directions apply as well.

‍

Where to start

‍

If you are setting up a first arrangement, the sequence that works is to agree the credit policy before the commercial terms, and to test the settlement mechanics on a small tranche before scaling. Most partnerships are negotiated the other way round, with the economics settled first and the operational detail left to be worked out once loans are flowing. That is when reconciliation problems get discovered, and by then both institutions are committed.

‍

AllCloud supports co-lending arrangements as part of its lending platform, including proportional splitting, escrow settlement and partner-level reporting. If you want to see a split and settlement run against your own arrangement structure rather than a sample, that is the conversation worth having.

‍

Sources

‍

Checked October 2026. Confirm against the current RBI directions before relying on any figure below.

‍

  • Reserve Bank of India (Co-Lending Arrangements) Directions, 2025, RBI/DOR/2025-26/139, issued 6 August 2025, effective 1 January 2026
  • RBI circular on Co-Lending by Banks and NBFCs to Priority Sector, 5 November 2020, repealed by the 2025 directions
  • Reserve Bank of India (Digital Lending) Directions, 2025, 8 May 2025

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Co-Lending Explained: The RBI Framework and What It Takes to Run One

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Co-lending is an arrangement where two regulated lenders fund a single loan to a single borrower in agreed proportions, sharing the interest income and the credit risk between them. The borrower deals with one lender, sees one interest rate and makes one repayment. Behind that, two balance sheets are involved in every rupee.

‍

The appeal is straightforward. A bank has cheaper funds and surplus capital but limited reach into the segments and geographies where credit demand sits. An NBFC has origination capability, local presence and underwriting knowledge in exactly those segments, but costlier funds and a smaller balance sheet. Putting the two together lets each contribute what it has.

‍

What makes co-lending difficult has never been the idea. It is the accounting afterwards.

‍

What changed on 1 January 2026

‍

The Reserve Bank of India issued the Co-Lending Arrangements Directions, 2025, notified as RBI/DOR/2025-26/139 on 6 August 2025 and in force from 1 January 2026. They replaced the November 2020 circular on co-lending to the priority sector, which had governed the market until then.

‍

Four changes matter.

‍

Co-lending is no longer confined to priority sector lending

‍

The 2020 framework was built around priority sector targets, and that is where almost all co-lending activity sat. The new directions apply to arrangements between regulated entities across lending activity generally. A much larger share of the loan book can now be co-lent, which changes it from a niche compliance-driven structure into a mainstream funding strategy.

‍

Each partner retains at least ten per cent of every individual loan

‍

The retention floor came down from twenty per cent to ten per cent. It applies loan by loan rather than across the portfolio, so the retained share has to be held and demonstrable on each individual exposure. The lower floor frees up balance sheet capacity for originating NBFCs, which was the point of the change.

‍

The borrower sees a single blended rate

‍

Rather than two lenders pricing their portions separately, the borrower is charged one blended interest rate. This closes a practice where an NBFC could price the loan above its own cost, fund part of it with the bank’s cheaper money and keep the spread. The borrower now sees one number, and the economics between the partners are settled between them.

‍

The bank can no longer pick and choose

‍

Under the earlier model a partner bank could review sourced loans and decline the ones it did not want, leaving the NBFC holding them. That discretionary window has been removed. Selective purchase of exposures now falls under the separate rules governing transfer of loan exposures instead.

‍

The practical effect of this one is underrated. When the bank could reject individual cases after origination, underwriting alignment between the partners was optional and disagreements got resolved case by case. Now the credit policy has to be agreed in advance and applied consistently at the point of origination, because there is no rejection step afterwards to catch divergence.

‍

Arrangements that were in place before the effective date remain valid until they are aligned with the new framework. Any new arrangement entered into after it must comply from the start.

‍

How a co-lent loan actually works, end to end

‍

Following one loan through the arrangement is the clearest way to see where the operational weight sits.

‍

Before any lending happens

‍

The two regulated entities enter a master agreement setting out the sharing proportion, the credit policy both will apply, how the blended rate is arrived at, how collections will be settled, and how the relationship is unwound if either side exits. The agreement is signed before the first loan, not negotiated as cases arise.

‍

Origination

‍

The originating lender sources and underwrites the borrower against the jointly agreed credit policy. Because there is no cherry-picking stage afterwards, the policy applied here is the policy both partners live with. Systems on both sides need to be looking at the same rules and producing the same answer on the same file.

‍

Disbursal

‍

The loan is funded in the agreed proportions. The borrower receives one disbursement and signs one agreement. Internally, the exposure is recorded on two balance sheets from day one, each carrying its share of principal.

‍

Servicing

‍

The borrower pays one EMI. That single receipt then has to be split in the agreed proportion, allocated correctly across principal, interest and charges within each partner’s share, and settled through the escrow arrangement. This happens on every collection, on every loan, for the life of the book.

‍

Delinquency

‍

If the borrower misses payments, the account moves through overdue buckets. The critical requirement is that both partners classify it the same way on the same date. A loan cannot be standard on one set of books and non-performing on the other. Provisioning follows each partner’s own applicable norms, but the underlying classification has to agree.

‍

Closure

‍

On foreclosure or maturity, the final settlement has to clear both partners’ positions, release any security interest, and leave a reconciled record that will stand up when either side is audited.

‍

A worked example

‍

Numbers make the operational point faster than description does. Take a loan of ten lakh rupees under an arrangement where the originating NBFC holds twenty per cent and the partner bank holds eighty per cent.

‍

At disbursal, the NBFC funds two lakh and the bank funds eight lakh. The borrower receives ten lakh and signs one agreement at one blended rate. Both lenders now carry their share on their own books.

‍

The borrower pays an EMI of, say, twenty thousand rupees. That single receipt lands in the escrow account and has to be dealt with before it means anything to either lender. First it is allocated across principal, interest and charges according to the order set in the master agreement. Then each component is split eighty-twenty. Then each partner’s own ledger is updated with its share of each component, not with its share of the total, because a lender that records four thousand rupees as an undifferentiated receipt has no idea how much of its outstanding principal has reduced.

‍

Now the borrower pays twelve thousand instead of twenty thousand. The shortfall is not simply split. The allocation order decides which components are satisfied and which are left outstanding, and only then does the split apply to what each component received. Two systems applying different allocation orders to the same part payment will produce different outstanding balances for the same loan on the same day, and neither will be obviously wrong.

‍

Multiply that by a book of twenty thousand loans with a few thousand part payments a month, and the reason co-lending programmes stall becomes clear. It was never the credit decision.

‍

What co-lending is not

‍

Several arrangements get called co-lending in conversation and are governed differently.

‍

Direct assignment and loan transfers

‍

In a transfer, the originating lender makes the loan on its own book first and sells a portion afterwards. In co-lending, both lenders are in from origination. The distinction matters more since the 2025 directions removed the discretionary model, because selective purchase of exposures after the fact now falls squarely under the transfer of loan exposures rules rather than under co-lending.

‍

Securitisation

‍

Securitisation pools loans and issues instruments backed by that pool to investors. Co-lending involves no pooling and no instrument. Each loan is shared individually, and both participants are lenders rather than investors.

‍

The business correspondent model

‍

A business correspondent acts as an agent of a bank, extending the bank’s reach without lending on its own book. In co-lending both parties are lenders carrying their own exposure. An NBFC acting as a correspondent has no credit risk; an NBFC in a co-lending arrangement has at least ten per cent of every loan.

‍

Lending through a fintech platform

‍

If a technology partner sources borrowers but does not fund any part of the loan, that is a digital lending arrangement with a Lending Service Provider, not co-lending. Only regulated entities can be parties to a co-lending arrangement. Where a digital platform is used inside a co-lending arrangement between two regulated entities, both frameworks apply.

‍

Where co-lending arrangements actually break

‍

In practice, four things go wrong, and none of them involve the loan being badly underwritten.

‍

Failure What it looks like What prevents it
Reconciliation drift The two partners’ records of the same portfolio disagree by a small amount that grows every month. Someone eventually reconciles it manually across a spreadsheet exchange. Transaction-level settlement rather than periodic summaries, with each split recorded against the individual loan and the individual receipt
Classification divergence An account is overdue on one system and current on the other, because the two are computing days past due from different payment records. A shared source of truth for the repayment record, with classification derived from it on both sides rather than computed independently
Allocation disputes A part payment arrives and the partners disagree about how it split across principal, interest and charges, and therefore about what each is owed. The allocation order agreed in the master agreement and enforced by the system, not applied by whoever posts the receipt
Retention proof The lender can show the retention ratio across the portfolio but cannot demonstrate it on a specific loan when asked. Retention held and reportable at individual loan level, since that is the level the requirement applies at
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