The Reserve Bank of India (RBI) has introduced a significant regulatory framework aimed at enhancing the lending landscape in India through Co-Lending Arrangements (CLAs). This initiative is particularly relevant for regulated entities (REs) such as commercial banks and non-banking financial companies (NBFCs), allowing them to collaborate in extending credit to borrowers while adhering to prudential regulations.
The Need for Co-Lending Arrangements
Co-lending has gained traction in recent years, especially following the RBI’s circular dated November 5, 2020, which provided a specific regulatory framework for priority sector lending. This framework has encouraged banks and NBFCs to work together, thereby broadening the scope of credit availability for various borrower segments. The new Co-Lending Arrangements Directions, 2025 aim to provide clarity on the permissibility of such arrangements while addressing prudential and conduct-related aspects.
Key Features of the Directions
The Reserve Bank of India (Co-Lending Arrangements) Directions, 2025 will come into effect on January 1, 2026, or earlier as decided by the REs. Any new CLA entered into after this effective date must comply with these directions, ensuring that all lending arrangements are aligned with the latest regulatory standards.
Applicability
These directions apply to a range of REs, including:
- Commercial Banks (excluding Small Finance Banks, Local Area Banks, and Regional Rural Banks)
- All-India Financial Institutions
- Non-Banking Financial Companies (including Housing Finance Companies)
However, digital lending arrangements will continue to be governed by the Reserve Bank of India (Digital Lending) Directions, 2025. Importantly, the new directions do not apply to loans sanctioned under multiple banking, consortium lending, or syndication.
Definitions and General Guidelines
A Co-Lending Arrangement (CLA) is defined as a formal agreement between an originating RE and a partner RE to jointly fund a portfolio of loans, sharing both revenue and risk. Each RE involved in a CLA must retain a minimum of 10% of the individual loans in its books, ensuring that both parties have a vested interest in the loans they are funding.
The credit policy of each RE must incorporate provisions related to CLAs, including internal limits for the proportion of their lending portfolio under CLAs, target borrower segments, and customer service mechanisms. The agreement between CLA partners must detail the terms of the arrangement, including borrower selection criteria, product lines, and grievance redressal mechanisms.
Transparency and Customer Protection
Transparency is a cornerstone of the new directions. The loan agreement signed with borrowers must clearly disclose the roles and responsibilities of each RE involved in the CLA. This includes identifying the entity that will serve as the single point of contact for the customer. Any changes in customer interface must be communicated to the borrower in advance.
Additionally, all necessary details regarding the CLA must be disclosed to the borrower, in line with the RBI’s Key Facts Statement (KFS) for Loans & Advances. This ensures that borrowers are fully informed about the terms of their loans and the entities involved in servicing them.
Priority Sector Lending
REs engaging in CLAs for loans eligible for classification under priority sector lending can claim priority sector status for their share of credit under the CLA. This provision encourages REs to participate in co-lending arrangements that support the broader economic goals of the country.
Conclusion
The RBI’s Co-Lending Arrangements Directions, 2025 represent a significant step towards fostering collaboration between banks and NBFCs in extending credit to borrowers. By providing a clear regulatory framework, the RBI aims to enhance the efficiency and transparency of lending practices in India. As these directions come into effect, it will be crucial for REs to adapt their policies and practices to ensure compliance, ultimately benefiting borrowers and the financial ecosystem as a whole.