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To deal with recent developments of co-lending arrangements between financial entities, the Reserve Bank of India (RBI), under its Statement on Developmental and Regulatory Policies, issued its , 2025 (draft directions), on 9 April 2025 for regulating co-lending arrangements (CLA) between regulated entities apart from small finance banks, local area banks and regional rural banks (permitted entities). It will allow greater credit penetration for wider segments of society to achieve financial inclusion.

In 2020, the RBI issued a governing co-lending by banks and NBFCs to the priority sector (circular). However, various regulated entities have entered into CLAs that do not fall within the terms of this circular. These CLAs are purely commercial transactions. Recognising this gap and the success of CLAs under the circular, the RBI is looking to expand and regulate the scope of CLAs. The draft directions aim to enable and regulate co-lending between banks, between NBFCs or between a combination of them and are not limited to loans being co-lent to priority sectors.

The draft directions lays down standards that permitted entities have to consider and follow when entering into CLAs. These deal with such matters as calculations of interest rates and fees charged to borrowers, operational arrangements, reporting requirements default loss guarantees, etc. Under the circular, two types of structures were permitted that banks and NBFCs could adopt while entering into the CLA, the CLM 1 Model (co-origination), and the CLM 2 Model, (similar to direct assignment).

However, the draft directions do not allow permitted entities to enter into any CLAs not in compliance with it. Under the draft directions, the CLM 2 Model has been removed, leaving only co-lending under the co-origination – the CLM 1 Model. Under the draft directions, the exceptions provided for a minimum holding period for co-lent loans under the CLM 2 Model under the circular will not apply because the loans will be required to be given jointly to the borrowers at origination. The co-lenders can now commercially decide on the funding ratio without the requirement for one of the lenders to retain a minimum of 20% share of the individual loans on their books.

The draft directions provide guidance as to the key aspects required to be covered under agreements for CLAs between the co-lenders. This includes the criteria for selection of the borrowers, funding ratio between co-lenders, the terms of sharing revenue and risk, sourcing of funds for the loan and its management, and the roles and responsibilities of each co-lender.

The sourcing of funds for the borrowers has to be done independently and on a fee basis, not by profit-sharing. The draft directions also provide clarity on the computation and charging of interest and the fees from the borrowers under the CLA. Co-lenders would be required to issue a key fact statement disclosing the details of the CLA and such other necessary information set out in the RBI Circular on Key Facts Statements.

Such matters are in addition to the loan agreement/facility documents to be executed between the parties. This is a notable development because the RBI is clear that any fee which is to be paid to the co-lenders under the CLA for funding the funds for the loans has to be agreed upfront under a servicing arrangement, independent of the interest rates charged to borrowers.

The draft directions now allow for the co-lenders to obtain default loss guarantees from sourcing or funding entities to mitigate the consequences of default. It also makes clear that any subsequent transfers of the loan exposures under the CLA have to conform to the provisions of 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 is clear that lenders must be more transparent in their co-lending. The changes proposed under the draft directions will surely lead to greater financial inclusion and are a welcome reform.

Anju Gandhi is a partner, Rashmi Raveendran is an associate partner and Prateek Mohnot is a senior associate at SNG & Partners.