Co-Lending Pacts: Welcome to a new world of cooperation in Indian finance

Introduction

The RBI has issued detailed guidelines on co-lending arrangements (“CLAs”). The new directions are “Reserve Bank of India (Co-Lending Arrangements) Directions, 2025”. They seek to give more precise regulatory clarity on, and to deal with prudential and conduct aspects of, such arrangements. This new format of co-lending is seen as broader than the area where it has become popular to date due to the specific nature of the regulatory framework for priority sector lending among banks and NBFCs. The direction shall be effective from January 1, 2026, or any date so determined by the Regulated Entity (“RE”) as per its internal policies.

Explanation – Link to Circular

The “Reserve Bank of India (Co-Lending Arrangements) Directions, 2025” were issued on August 6, 2025. The document references are RBI/DOR/2025-26/139 and DOR.STR.REC.44/13.07.010/2025-26. The directions are issued in exercise of powers conferred by Sections 21 and 35A of the Banking Regulation Act, 1949, read with Section 56 of the Act, Chapter IIIB of the Reserve Bank of India Act, 1934; and Sections 30A, 32 and 33 of the National Housing Bank Act, 1987. They apply to CLAs entered into by Commercial Banks (excluding Small Finance Banks, Local Area Banks and Regional Rural Banks), All-India Financial Institutions, and Non-Banking Financial Companies (including Housing Finance Companies). Any new CLA entered into after the effective date must comply with these directions.

Explanation

Introduction and Context

The “Reserve Bank of India (Co-Lending Arrangements) Directions, 2025” is a noteworthy regulatory milestone for the Indian financial sector. REs have hitherto been permitted to borrow from other REs, but there has been no generic regulatory approach for the same. The previous framework was for co-lending between banks and Non-Banking Financial Companies (“NBFCs”) for priority sector lending, as per a 2020 circular. The updated guidelines, released on Aug 6, 2025, come as co-lending is attracting increasing attention and intend to offer a broader context. These principles aim to offer clarity to supervisors on the appropriateness of such structures and on key prudential and conduct risk considerations. They are issued by the Bank under the powers given under the Banking Regulation Act, 1949, the Reserve Bank of India Act, 1934, and the National Housing Bank Act, 1987.

Applicability and Definitions

The instructions apply to CLAs entered into by specific categories of REs, i.e., Commercial Banks (excluding Small Finance Banks, Local Area Banks and Regional Rural Banks), All-India Financial Institutions (“AIFIs”), and NBFCs (including HFCs). Loans taken under multiple banking, consortium lending, or syndication are not covered by the framework. It also clarifies that even as the digital lending will be regulated under the Reserve Bank of India (Digital Lending) Directions, 2025, any digital lending arrangement which involves co-lending will have to comply with these new rules also.

Formally, the CLA is an ex-ante contract between an “originating RE” and a “partner RE,” to co-finance a portfolio of secured or unsecured loans whose release is shared according to some ex-ante agreed-upon proportion with revenue and risk sharing.

Core Guidelines and Operational Framework

Lending and Retention One basic premise of the new regime is that each RE in a CLA must retain at least 10% of the underlying loans on its books. A RE’s credit policy needs to have in-built controls in respect of CLAs, such as the maximum exposure of a RE for its own portfolio, target segments of borrowers, due diligence of partners, and grievance redressal of customers.

Agreement and Disclosure, there should be a contract between co-lending partners, the contract should furnish the terms & conditions, terms of borrower formulations, line of products, charges for lending services, etc. It also needs to detail responsibility separation and the exchange of vital information. Most importantly, the loan contract with the borrower shall specify the tasks and duties of the REs involved, as well as a single interface for the client. Any changes to this interface have to be given in advance to the borrowers. The entire terms and conditions of the CLA shall be made available in the Key Facts Statement (“KFS”). This is in terms of the RBI circular.

Financial and Operational Aspects:

1. Interest Rate and Fees: The borrower will be charged a “blended interest rate”. It is a weighted average of the interest rates over all REs, weighted by their funding shares. Other fees or charges should be included in the APR and disclosed in the KFS.

2. Operational Mechanics: CL Risk vs Reward: CLA procures an “irrevocable commitment” from the partner RE to take its loans onto its books; however, the RE pays an “absorbed spread disincentive” based on the projected originations if the loans are called. The proportionate shares of both REs should be booked in their books within 15 days from the date of disbursement by the originating RE. If the originating RE fails to transfer the Share within the above stipulated period, the loan shall continue to be reflected on its books, and any further transfer thereof would have to be in accordance with Master Directions on Transfer of Loan Exposures (“MD-TLE”). All deals are done between the REs and with the borrower escrowing all the funds.

3. Audits and Compliance: Loans availed under CLAs are internally and statutorily audited for compliance with internal policies as well as statutory compliance. REs should have a business continuity plan to ensure borrowers are not affected when a CLA is terminated. Every RE has to follow the KYC norms, and a partner RE may depend on the originating RE for the “Customer Identification Process”.

Default Loss Guarantee and Asset Classification

1. Default Loss Guarantee (“DLG”): The originating RE is eligible to offer a DLG of no more than five per cent on the loans in the CLA. This Decree is governed by the laws of the MD-DLD. The Reserve Bank of India’s Master Directions on Digital Lending (MD-DLD), 2025, govern all forms of digital lending conducted by banks, Non-Banking Financial Companies (NBFCs), and their associated lending partners. These directives establish regulations pertaining to borrower protection, the disclosure of terms and conditions, governance concerning outsourcing practices, and impose limitations on risk transfer mechanisms. Notably, the MD-DLD delineate the structural parameters for Default Loss Guarantees (DLGs), instituting a cap at 5% while ensuring that the originating regulated entity (RE) retains a sufficient level of credit risk. By correlating Credit Linked Approvals (CLAs) with the MD-DLD, the Reserve Bank of India guarantees that DLG agreements maintain transparency, prudential standards, and compliance within the framework of regulatory oversight. A DLG is a contract between the originating RE and a partner RE in which the originating RE agrees to reimburse the partner RE for a set percentage of defaults on the loan component.
2. Definition of NPAs for CLAs: The instructions specify a common borrower-level NPA (Asset Classification) for CLAs. This implies that once one of the REs categorises its exposure to an obligor as a Special Mention Account (“SMA”) or Non-Performing Asset (“NPA”) for default, then the exposure of the other RE under the CLA would also have to be classified as SMA or NPA. We need a solid capability to review and disseminate this in real time.

Disclosure and Repeal Provisions

In addition to the regulations, REs will also be required to clearly display a list of all live CLA partners on their website. They are also required to disclose these in their financial statements under Notes to Accounts on a quarterly or yearly basis. These disclosures should contain information on the amount of CLAs, weighted average interest rate, fees paid, big sectors to which the loans were made, and performance of the loans, as well as details about any DLG. The CCL issuance replaces the circular on “Co-Lending by Banks and NBFCs to Priority Sector” of November 5, 2020.

Conclusion

The fresh RBI (Co-Lending Arrangements) Directions of 2025 have repealed the previous circular issued for co-lending for priority sector lending by and to banks and non-banking financial companies. This is the framework providing a holistic and standardised co-lending arrangement. In doing so, the RBI has ensured greater transparency within and stability to these mutually assisted lending models by way of operational arrangements, risk-sharing frameworks, and customer protection mechanisms. Hence, these directions allow REs to reap co-lending benefits along with appropriate governance and risk management practices, which will ultimately serve the interests of both the institutions and the borrowers.