Part 04 — Digital & Embedded Lending

Co-lending Business

Co-lending is not a referral arrangement. It is a joint loan structure where two regulated entities (REs) fund the same borrower exposure in pre-agreed proportions and share risk and revenue. The classic Indian small business version was bank plus non-banking financial company (NBFC): the NBFC originates and services borrowers it understands; the bank contributes lower-cost funds and books priority-sector eligible exposure. RBI’s earlier framework was the Co-Lending by Banks and NBFCs to Priority Sector circular, November 5, 2020. The newer Reserve Bank of India (Co-Lending Arrangements) Directions, 2025, dated August 6, 2025, effective January 1, 2026 unless adopted earlier, broaden the framework beyond that priority-sector-only origin.

From 80:20 CLM To Minimum 10 Percent Skin

The industry shorthand “80:20 co-lending” came from bank-NBFC co-lending model (CLM) practice: a bank often took 80 percent of the loan and the NBFC retained 20 percent. That split aligned a low-cost bank balance sheet with an NBFC’s sourcing, underwriting and servicing capability. The 2025 directions do not prescribe an 80:20 split. They require each RE in a co-lending arrangement (CLA) to retain at least 10 percent of each individual loan in its books. In practice, 90:10, 80:20 and 70:30 structures can all exist if the REs’ policies, risk appetite and product economics support them.

The legal definition matters. A CLA is an ex-ante agreement between an originating RE and a partner RE to jointly fund a portfolio of secured or unsecured loans in a pre-agreed proportion with revenue and risk sharing. This is different from direct assignment after origination, where a lender sells a pool under transfer-of-loan-exposure rules. In CLA, the partner RE has an irrevocable commitment to take its share on a back-to-back basis.

Fund Flows And Escrow

Operationally, the originating RE often disburses the full loan first, then transfers the partner RE’s share into its books. The 2025 directions require both REs’ shares to be reflected without delay and no later than 15 calendar days from borrower disbursement. If the transfer does not happen within that window, the loan remains on the originating RE’s books and any later transfer must follow the Master Direction on Transfer of Loan Exposures.

All transactions between REs and with the borrower must be routed through an escrow account maintained with a bank, and the agreement must specify appropriation between the REs. Each RE maintains a borrower’s account for its own share. That creates real system work: a single borrower repayment must be split into principal, interest, penal charges if any, and fees for each RE according to agreed waterfalls. The loan management system (LMS) has to reconcile the customer view, the escrow bank statement, each RE’s general ledger and credit bureau reporting.

Co-lending money flow where a bank funds 80 percent and an NBFC funds 20 percent through escrow, borrower repayments return to escrow and are split to each lender book. — In an 80:20 co-lending structure, escrow and split-ledger reconciliation are the operating backbone behind the borrower’s single loan experience.

The borrower should not experience two lenders chasing two repayments. The loan agreement must disclose role segregation, including the single point of interface. If that customer interface changes, the borrower must be told in advance. These requirements link directly to regulatory guardrails applied and to the future co-lending partner module.

Blended Rate And KFS

Co-lending pricing is usually built from two rates: the bank’s rate on its share and the NBFC’s rate on its retained share. The borrower sees the blended rate, weighted by funding share. A simplified example:

Participant	Share	Internal rate	Weighted contribution
Bank	80%	13%	10.4%
NBFC	20%	24%	4.8%
Borrower blended rate	100%	-	15.2%

Fees and charges payable by the borrower must be included in annual percentage rate (APR) and disclosed in the Key Facts Statement (KFS). The RBI KFS circular, Key Facts Statement (KFS) for Loans & Advances, April 15, 2024, is the disclosure baseline referenced by the digital lending and co-lending directions. In SME practice, processing fees of 1-3 percent, documentation charges, insurance pass-throughs and platform service charges can materially change APR, so the KFS calculation is not cosmetic.

Co-lending risk sharing is not the same as a sourcing platform’s default loss guarantee (DLG). In CLA, each RE holds credit exposure for its funded share and earns interest on that share. If the borrower defaults, each RE has an exposure to classify. The 2025 co-lending directions require borrower-level asset classification: if either RE classifies its CLA exposure as special mention account (SMA) or non-performing asset (NPA) because of default in the CLA exposure, the same classification applies to the other RE’s CLA exposure, with near-real-time information sharing and at latest by the next working day.

DLG can exist in CLA, but the 2025 co-lending directions say the originating RE may provide DLG up to 5 percent of loans outstanding, governed by the digital lending directions. That is narrower than many legacy commercial first-loss structures. For unsecured merchant loans with 4-7 percent annualized credit cost, a 5 percent DLG may improve confidence but cannot absorb a badly originated book.

Economics By Participant

For the bank, the attraction is asset growth, priority-sector lending (where eligible), lower acquisition cost and a higher yield than many direct MSME assets, while relying on an NBFC’s sourcing and servicing. The costs are integration, partner due diligence, audit, operational risk and reputational risk if the NBFC mis-sells or collects poorly.

For the NBFC, co-lending is capital-efficient. A ₹100 crore origination program at 80:20 consumes NBFC funding for only ₹20 crore of retained exposure, while the NBFC may earn interest on its share plus sourcing, servicing or processing income where permitted. The trade-off is lower absolute interest income than holding the full loan, more reconciliation complexity and bank partner covenants.

For a platform or LSP, co-lending can be one layer behind an embedded experience. The platform supplies borrower access and data, the originating RE may be an NBFC, and the partner RE may be a bank. The platform’s income is usually a service fee, success fee or DLG fee, not interest spread unless it is itself an RE participating in the loan. Under the Digital Lending Directions, 2025, LSP fees must be paid by the RE and not separately collected from the borrower.

Marketplace seller programs are a useful co-lending edge case because the platform may be only an LSP/data anchor, the originator may be an NBFC, and repayment may be settlement-linked; see Marketplace Seller Finance for the concrete fund-flow patterns.

For a numerical P&L comparison of own-book lending, 80:20 co-lending and DLG-backed sourcing, see How Lenders Make Money.

Practical Failure Points

The hard failures in co-lending are rarely conceptual. They are operational: delayed partner booking beyond 15 days, stale repayment files, interest mismatch between lenders, missed bureau reporting, incorrect NPA mirroring, unapproved fee deductions, and customer-service gaps where the borrower cannot tell who owns the complaint. A serious CLA implementation needs daily loan-level reconciliation, immutable event logs, dual-lender audit reports, escrow ageing, DLG ledger if applicable and explicit business-continuity rules if the arrangement terminates.