1.2 Co-lending with banks and NBFCs

Co-lending is the RBI-blessed structure that lets a small originating NBFC scale book by partnering with a larger lender (typically a bank, sometimes a larger NBFC) who funds the majority of every loan.

The RBI framework is the Co-Lending Model (CLM) — originally CLM-1 (“co-origination”) under the September 2018 circular for priority sector NBFC-Bank arrangements, formalised and broadened in November 2020 to cover all NBFC categories, and now generally referred to as CLM in subsequent FAQs.

Source reference: RBI Co-Lending by Banks and NBFCs to Priority Sector, FIDD.CO.Plan.BC.No.8/04.09.01/2020-21, dated 5 November 2020.

Two flavours

Variant	What it means	Operational shape
CLM-1 (synchronous)	Both lenders take their share of the loan at the time of origination, into their respective books, on a back-to-back basis.	Real-time API integration with partner. Partner approves each loan individually or via pre-agreed credit policy.
CLM-2 (assignment)	Originating NBFC books the entire loan first, then transfers the partner’s share within a defined window (often `T+1` to `T+15`) via assignment / direct assignment.	More flexible for the originator. Used heavily when partner approval is slow.

CLM-1 is the cleaner, RBI-preferred structure. CLM-2 sits at the boundary with direct assignment rules under the Master Direction – Transfer of Loan Exposures, DOR.STR.REC.51/21.04.048/2021-22, dated 24 September 2021 (TLE-MD). Treat CLM-2 with care — the regulator periodically tightens the line between “co-lending” and “loan transfer”.

Money flow (CLM-1)

NBFC sources and underwrites the borrower; runs the file through both NBFC’s and partner’s credit policy.
On approval, the loan is split per the pre-agreed ratio — typically 80:20 partner:NBFC, sometimes 70:30 or 60:40.
Partner disburses its share into a co-lending escrow / nodal account at the sponsor bank.
NBFC disburses its share to the same escrow.
Combined amount disburses to borrower from the escrow with a single UTR.
Borrower repays into a collection escrow controlled by both lenders.
Daily / weekly settlement waterfall routes principal, interest, and fees back to each lender in the agreed ratio, after deductions.

Risk owner

Risk is split in the same ratio as the funding split — 80:20 means the bank carries 80% of credit risk, NBFC 20%. Both NPAs and recoveries split proportionally.

Optional layer: the originating NBFC may provide a Default Loss Guarantee (DLG), capped at 5% of the partner’s portfolio under the RBI Guidelines on Default Loss Guarantee in Digital Lending, DOR.CRE.REC.21/21.07.001/2023-24, dated 8 June 2023. See DLG / FLDG for the full rules.

Borrower relationship

The borrower receives one loan, with one EMI, and one repayment schedule.
The borrower must be informed in writing that the loan is co-lent, who the two lenders are, and the share of each — per the RBI co-lending guidelines and the Digital Lending Guidelines KFS rules.
Grievance redressal flows through the originating NBFC as the single point of customer interface, with escalation to the partner lender as required.
The Key Fact Statement (KFS) must disclose both lenders.

Underwriting owner

The originating NBFC runs the borrower through both its own policy and the partner’s policy.
The partner can run a pre-agreed policy (“system to system”) in batch / automated mode, or individual approval per file in slow-batch mode.
RBI requires that the bank takes a credit decision on each file, though this can be by automated rule.

Practical implementation: the platform stores both policies as machine-readable rule sets (see Section 6) and runs each application through both. Files that pass both are auto-allocated as co-lent; files that pass only the NBFC’s go on own book; files that pass only the partner’s go on partner book if partner accepts standalone origination.

Collections owner

The originating NBFC is the single point of collection. The NBFC presents NACH, runs tele-collection, runs field collection, and handles legal. Costs of collection are typically borne by the NBFC (and recovered via a higher servicing fee from the partner), or split in the funding ratio per the co-lending agreement.

The partner does not independently call the borrower. This is critical for borrower experience and for RBI’s “single point of customer interface” rule.

Loan booking and repayments

The originating NBFC books its own share on its books.
The partner books its share on its books, fed by a daily/weekly co-lending data file from the NBFC.
Repayments come into a shared escrow (or a virtual-account-routed bank account), reconciled daily, then settled to each lender via NEFT/RTGS per the waterfall.
Both lenders maintain separate ledgers per borrower; the NBFC also maintains a “consolidated borrower ledger” for borrower-facing statements.

Fees

Co-lending fees take several forms:

Fee	Typical owner	Notes
Processing fee on borrower	Split per ratio, or 100% to originator per agreement	Up to `2%` of sanction.
Servicing fee from partner to NBFC	Originating NBFC	`0.5% – 1.5%` per annum on partner’s outstanding. Pays for collection + servicing.
Origination / sourcing fee	Originating NBFC	`0.5% – 1.5%` per disbursal of partner share.
DLG premium (if any)	Partner pays to NBFC	Effectively part of the risk-sharing economics.
Tech / platform fee	Originating NBFC	Sometimes wrapped into servicing fee.

Net economics for the originator on a co-lent book are usually higher per ₹ of book than own-book, because the originator earns fees on the partner’s share without putting up its own capital — but lower than own-book on its own share, because the partner takes its yield.

Regulatory risks

CLM agreement breach — RBI insists on a written, comprehensive co-lending agreement covering all of the above. Breach can lead to direction to unwind.
Misclassification as loan transfer — if CLM-2 timing slips or back-to-back ratios drift, the arrangement may be re-characterised under the TLE-MD as a direct assignment, with different accounting and regulatory consequences.
Priority sector tagging — for bank partners, the loans typically qualify as priority sector lending (PSL) if the borrower meets PSL criteria (e.g., MSME). PSL tagging is the primary commercial driver for bank co-lending appetite — see RBI Master Directions – Priority Sector Lending, FIDD.CO.Plan.BC.5/04.09.01/2020-21, dated 4 September 2020.
Disclosure to borrower — failure to disclose co-lending is a Digital Lending Guidelines breach.
Single point of customer interface breach — partner approaching borrower for collection is a breach.
Data sharing / privacy — borrower data shared with partner must be on a need-to-know basis, with consent, per DPDP.

Technology modules needed

In addition to the own-book modules:

G — Co-lending module (partner master, policy mapping, allocation engine, waterfall, settlement).
Partner-portal extension of admin console for partner’s risk / ops users.
API + webhook layer for real-time loan handoff.
Escrow / nodal-account reconciliation module.
DLG monitoring sub-module (if DLG applies).
Partner-segregated reporting (vintage, delinquency, settlement) per Section 7.

Integrations needed

In addition to own-book integrations:

Partner core banking API for loan booking (if partner exposes one; usually bank IT integration via SFTP file + API).
Sponsor bank for escrow account, NACH presentation, NEFT settlement.
Shared data exchange (SFTP, API, or both) for daily loan, repayment, delinquency files.
Reconciliation rails — usually the sponsor bank’s MIS + an in-house reconciler.

Unit economics

For an ₹80 Cr co-lent portfolio (partner share) on top of ₹20 Cr own share (80:20 ratio):

Line	Originating NBFC view
Yield on own `₹20 Cr`	`18% – 24%` (same as own-book)
Servicing fee on partner `₹80 Cr`	`0.75% – 1.5%` per annum = `₹60 lakh – ₹1.2 Cr`
Origination fee on partner share (4× annualisation at 90 days)	`~2% – 4%` of partner book per annum = `₹1.6 Cr – ₹3.2 Cr`
Credit cost on own `₹20 Cr`	`1.5% – 3.5%`
Credit cost on partner `₹80 Cr` (only if DLG)	`0% – 5%` (capped by DLG cap)
Ops cost split	Typically borne by NBFC, recovered in servicing fee.

The originator effectively earns fees on ₹100 Cr of book while carrying credit risk on ₹20 Cr (or up to ₹20 Cr + 5% × ₹80 Cr = ₹24 Cr if DLG). This is the leverage that makes co-lending the default scale lever.

Pros

Scale book without proportional equity.
Bank partner brings cheaper cost of funds.
Bank’s PSL appetite is a structural tailwind.
Earns fees on the partner’s share.

Cons

Negotiation, legal, integration cycle to onboard each partner takes 6–12 months.
Partner policies override yours on co-lent files — limits agility.
Operational complexity: dual booking, dual ledger, dual reporting, dual reconciliation, escrow management.
Concentration: losing one partner can collapse 60–80% of disbursement capacity overnight.
DLG cap of 5% limits how much risk you can credibly take to comfort the partner.

Scalability

Very high — limited mostly by partner appetite and operational capacity to integrate new partners. A platform that has standardised co-lending APIs and partner-policy abstractions can plug in 5+ partners and grow book to ₹500 Cr+ on a ~₹100 Cr own-book base.

Fit for SME working-capital ₹20–50 lakh, 60–180 days, repeat borrowers

Excellent fit, and recommended. SME WC loans frequently qualify as MSME priority sector for bank partners, which is precisely what drives bank co-lending appetite. The short tenure + repeat-borrower pattern reduces partner credit-risk anxiety (each cohort matures within 6 months, so partner sees performance quickly). The recommended starting configuration in Section 15 is own-book NBFC + one bank co-lending partner under CLM-1, 80:20 ratio, 5% DLG.

Sources

RBI Co-Lending by Banks and NBFCs to Priority Sector, FIDD.CO.Plan.BC.No.8/04.09.01/2020-21, 5 November 2020.
RBI Co-origination of loans by Banks and NBFCs for lending to priority sector, FIDD.CO.Plan.BC.08/04.09.01/2018-19, 21 September 2018 (CLM-1 predecessor).
RBI Master Direction – Transfer of Loan Exposures, DOR.STR.REC.51/21.04.048/2021-22, 24 September 2021.
RBI Master Directions – Priority Sector Lending – Targets and Classification, FIDD.CO.Plan.BC.5/04.09.01/2020-21, 4 September 2020.
RBI Guidelines on Default Loss Guarantee in Digital Lending, DOR.CRE.REC.21/21.07.001/2023-24, 8 June 2023.