Part 02 — RBI Regulatory Framework

Co-lending Directions

Co-lending is the regulated form of two lenders jointly funding the same borrower under a pre-agreed arrangement. In SME finance it is used to combine a bank’s lower cost of funds and PSL appetite with an NBFC’s sourcing, underwriting and collections reach. The framework changed materially in 2025: RBI replaced the earlier bank-NBFC priority-sector co-lending model with broader Reserve Bank of India (Co-Lending Arrangements) Directions, 2025, August 6, 2025, effective January 1, 2026 or earlier if adopted by an RE’s policy.

I could verify the direction text through public reproductions and RBI current-site references, but during this task the exact RBI notification URL for the August 6, 2025 final direction was not retrievable through the search tool. The title, date, reference number RBI/DOR/2025-26/139 DOR.STR.REC.44/13.07.010/2025-26, effective date and mechanics below are cross-checked against multiple public legal reproductions and RBI “What’s New” references.

From 2020 PSL CLM to 2025 CLA

The earlier model came from RBI’s November 5, 2020 circular on co-lending by banks and NBFCs to the priority sector. It was mainly a PSL channel: bank plus NBFC, common borrower, 80:20-style economics in many market arrangements, and NBFC skin in the game. The 2025 Co-Lending Arrangements (CLA) framework is broader. It applies to commercial banks excluding SFBs, Local Area Banks and RRBs, All-India Financial Institutions and NBFCs including HFCs. It is not limited to PSL loans.

The scope expressly excludes multiple banking, consortium lending and syndication. A ₹50 crore SME facility with several banks under a consortium is not a CLA merely because more than one lender exists. CLA is an ex-ante agreement between an originating RE and a partner RE to jointly fund a portfolio of loans in a pre-agreed proportion with risk and revenue sharing.

Core Mechanics

Rule	Practical meaning
Minimum share	Each RE must retain at least 10% of every individual loan. The old market shorthand of 80:20 is no longer the only structure; 90:10 is possible, but neither side can be below 10%.
Back-to-back commitment	Partner RE must have an irrevocable commitment to take its share of originated loans into its books as per the ex-ante agreement.
Transfer window	Respective shares must be reflected in both REs’ books without delay and not later than 15 calendar days from disbursement. If transfer fails, the loan remains with originating RE and any later transfer must follow RBI Transfer of Loan Exposures directions.
Borrower account	Each RE maintains the borrower’s account for its own share.
Escrow	Disbursement/repayment flows between REs and borrower must route through an escrow account with a bank, which can be one of the REs.
Interest	Borrower sees a blended rate, i.e. weighted average of the REs’ rates, with fees and APR disclosed in KFS.
CIC reporting	Each RE reports its share to credit information companies.
Audit	CLA loans must be in scope for internal/statutory audit of each RE.

This is very different from a sourcing arrangement. If an NBFC merely sources loans for a bank and does not share risk/revenue as co-lender, it is an LSP/outsourcing model, not co-lending. If the NBFC originates and later sells a pool after seasoning/cherry-picking, that is transfer/assignment/securitisation territory, not CLA.

KYC, Servicing and Customer Interface

Each RE must comply with KYC Master Direction, 2016, but the partner RE may rely on the originating RE for the Customer Identification Process where the KYC direction permits. Reliance does not remove responsibility; it changes how evidence is exchanged. The partner needs access to KYC records, consent, borrower agreement, KFS, sanction terms and ongoing servicing data.

Customer interface should be disclosed. If the NBFC is the single front-end servicer, the borrower must still know that two REs are lending and what each one’s role is. Changes in customer interface should be communicated. Complaints must be handled under each RE’s grievance framework, with no “the other lender is responsible” loop.

Asset Classification and DLG

Asset classification is borrower-level. If one RE classifies the borrower as NPA under the CLA, the other RE must mirror treatment as required by the direction and its own applicable IRAC norms. This means the co-lending module must exchange delinquency and classification events no later than the next working-day SLA used by the partners. A stale partner feed can create wrong NPA reporting and CIC disputes.

The 2025 CLA framework permits DLG subject to the RBI Digital Lending DLG guardrails, including the 5% cap, eligible forms, fixed DLG set and 120-day invocation limit. Do not confuse this with the old “FLDG comfort” letters that some fintechs used before June 2023. A servicing fee deferral or payout structure that economically absorbs default loss can become implicit DLG and must be tested against the cap.

What Changed for Market Practice

The 2025 direction effectively reduced regulatory tolerance for CLM-2-like structures where the funding partner could cherry-pick loans after origination. The 15-calendar-day transfer rule and back-to-back commitment push genuine co-lending toward near-real-time joint booking. That is a systems problem as much as a legal problem: partner APIs must exchange sanction, disbursement, repayment, cancellation, DPD, closure, refund, charge and KFS data quickly enough to keep ledgers aligned.

For a typical SME co-lending flow, the originating NBFC sources and underwrites under joint policy, the bank applies policy/scorecard or portfolio-level eligibility, the borrower receives a blended-rate KFS, funds move through escrow, ledgers split principal/interest/fees, collections are serviced by one interface, and both REs report their share to CICs. See co-lending business and colending partner module.