Equities

RBI’s Revised Co-Lending Norms Set to Transform NBFC Growth

Major regulatory reforms empower joint lending, expand credit access, and boost risk sharing among financial institutions in India.

Introduction
The Reserve Bank of India (RBI) has introduced its landmark Co-Lending Directions, 2025, set to take effect from January 1, 2026. These new norms are poised to radically reshape the lending landscape for Non-Banking Financial Companies (NBFCs) by fostering collaboration between banks, NBFCs, and other regulated entities (REs). Industry experts, including rating agency Crisil, anticipate the measures will unlock significant growth opportunities and help overcome longstanding funding constraints that have troubled smaller lenders.

Key Highlights of the RBI Co-Lending Guidelines
1. Minimum Loan Retention Requirement
As per the revised framework, each participating RE—whether a bank or an NBFC—must retain a minimum of 10% of every individual loan on its own balance sheet. This is a notable reduction from the previous minimum of 20%, particularly benefiting mid-sized and smaller NBFCs that face higher funding constraints. The measure ensures all partners have genuine financial exposure (“skin in the game”) and participate actively in risk management.
2. Expanded Applicability and Partnership Scope
Earlier, co-lending was primarily limited to priority sector loans. The revised norms extend the model to all regulated entities and all forms of loans (secured and unsecured), vastly expanding the scope of credit delivery in India. Banks, NBFCs (including housing finance companies), and other financial institutions can now collaborate in lending to retail and MSME segments, driving deeper financial inclusion.
3. Default Loss Guarantee Cap
Originating REs, which initiate the loan, may provide a direct lending guarantee (DLG) of up to 5% of the pooled loan amount to their co-lending partner. This guarantee absorbs losses in case of default and was previously restricted to digital lending. The guarantee must be invoked only after 90 days of delinquency, ensuring prudent risk and reward sharing between partners without excessive risk transfer.
4. Uniform Asset Classification
In a major regulatory step, all co-lending partners must follow a uniform asset classification for each loan. If one partner flags a loan as a special mention account (SMA) or non-performing asset (NPA), the other must do the same, with this data shared in real time. This removes regulatory arbitrage, ensures early stress recognition, and promotes transparency across the system.
5. Blended Interest Rates and Disclosure Norms
Borrowers will be charged a blended interest rate, calculated as the weighted average of each RE’s internal rate based on their share of the loan. All additional fees and charges must be disclosed upfront in the Key Facts Statement (KFS) and factored into the annual percentage rate (APR). Financial institutions are required to disclose details of their co-lending arrangements, volumes, interest rates, fees, sectoral exposure, and partner lists both online and in financial statements.
6. Operational Clarity and Borrower Protection
Every co-lending agreement must detail the loan product, partner duties, borrower selection criteria, fee structures, and risk-sharing models. All transactions are to be routed through escrow accounts to ensure fund security and transparency. Borrowers will have a single point of contact throughout the loan lifecycle, with grievance redressal mechanisms in place and clear product information.

Impact on NBFCs and Credit Growth
Lending Opportunities and AUM Expansion
The new rules enable NBFCs, especially smaller ones, to participate in co-lending with banks on more flexible terms, reducing the minimum loan retention requirement. This alleviates funding pressures, encouraging NBFCs to scale up lending operations. Crisil reports co-lending assets under management for NBFCs exceeded ₹1.1trillion as of March 2025, with robust growth expected after the new framework takes effect.
Financial Inclusion and Risk Distribution
Wider partnership possibilities mean loans can reach underserved consumer, SME, and rural markets—key to achieving financial inclusion. Risk is distributed more efficiently between large and small lenders, reducing systemic vulnerabilities and paving the way for more resilient financial sector growth.
Regulatory Oversight and Compliance
Greater oversight ensures all partners adhere to prudent risk management standards, with no scope for regulatory arbitrage. Real-time asset classification and disclosures will lead to early problem loan identification and protect stakeholders, including borrowers and investors.

Challenges and Industry Feedback
Technology Integration
Industry commentary highlights that integrating diverse technology platforms among co-lending partners could prove challenging. Implementing seamless data sharing, unified asset classification, and escrow arrangements will demand substantial investment and collaboration.
Need for Clarity
While the guidelines provide a robust framework, stakeholders have sought further clarity on fee structures, business continuity plans (especially for failed partnerships), and operational responsibilities to avoid confusion and ensure smooth implementation.

Conclusion
The RBI’s Co-Lending Directions, 2025 mark a significant milestone for India’s financial sector, particularly for NBFCs. By lowering barriers, broadening collaboration, tightening regulatory standards, and prioritizing borrower protection, the new framework is set to unlock NBFC growth and drive financial inclusion. With careful execution and continued regulatory oversight, the benefits for lenders and borrowers alike are expected to be substantial.

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