RBI Revamps Co-Lending Arrangements: Understanding New Draft Framework

Background

In India, the existing Co-Lending Arrangements (“CLA”) were previously governed by the Reserve Bank of India (“RBI”) through regulations specifically focused on co-lending by banks with NBFCs aimed at the priority sector (“Old CLA Framework”). However, this Old CLA Framework was restricted in its scope. The limitations of the existing framework were acknowledged by the RBI in its Statement on Developmental and Regulatory Policies, issued on April 9, 2025. In this statement, the RBI observed that, “The extant guidelines on co-lending are applicable only to arrangements between banks and NBFCs for priority sector loans. In light of the evolution of such lending practices, and the potential of such lending arrangements in catering to the credit needs of a wider segment in a sustainable manner, it has been decided to expand the scope for co-lending and issue a generic regulatory framework for all forms of co-lending arrangements among REs.”

The RBI noted that while distinct guidelines covered some common CLA forms, alongside rules for outsourcing financial services, these existing regulations did not address all potential types of co-lending arrangements. The central bank identified the need for a comprehensive, market-enabling draft framework. Such a framework would aim to specify general regulatory norms and provide guidance for all CLAs, while simultaneously addressing certain prudential issues. Acting on this decision, the RBI recently issued the draft Reserve Bank of India (Co-Lending Arrangements) Directions, 2025 (“New CLA Framework”) for public consultation.

A significant change introduced by the New CLA Framework is the expansion of eligible participants. Under the Old CLA Framework, only banks and NBFCs could enter into such arrangements. The new proposal allows for broader partnerships, including arrangements between two banks. The core idea driving this expansion is to effectively blend the lower cost of funds typically available to banks with the strong customer connect and specialized underwriting capabilities often possessed by NBFCs and fintech companies. The ultimate goal is to benefit borrowers by offering them more accessible credit at competitive interest rates, with a particular focus on reaching underserved segments and semi-urban regions.

Key Highlights of the New CLA Framework

A. Applicability & Definition

• Co-lending arrangement (CLA) Definition: Under this framework, a CLA is defined precisely as “an arrangement, formalised through an ex ante legal agreement, among the permitted REs to jointly fund a loan portfolio in a pre-agreed proportion, involving revenue and risk sharing with or without sourcing and management arrangement.”
• Sourcing arrangement Definition: This is defined as “an arrangement wherein an RE, or a non-RE sources loans (sourcing entity), in compliance with extant guidelines, for another RE (funding entity) on a fee basis i.e., without any reference to profit sharing agreement, with the exposure being entirely booked by the funding entity, ab-initio.”
• Applicable Entities (“permitted REs”): The framework applies to the following regulated entities (REs):
  • All Commercial Banks (but excluding Small Finance Banks, Local Area Banks, and Regional Rural Banks).
  • All All-India Financial Institutions.
  • All Non-Banking Financial Companies (including Housing Finance Companies).
• Exclusions: The framework does not cover loans exceeding ₹100 Crores that are sanctioned under multiple banking, consortium lending, or syndication arrangements.
• Extended Applicability: The framework’s principles also apply, with necessary adjustments (mutatis mutandis), to arrangements where REs source loans from other REs or non-REs under outsourcing agreements that do not involve fund or non-fund commitments.

B. General Guidelines

• Credit Policy Integration: Permitted REs must incorporate CLA-related provisions into their credit policies. This includes setting internal limits on the CLA portfolio size, identifying target borrower segments, outlining due diligence procedures for partner entities, and establishing customer service and grievance redressal mechanisms.
• Terms of CLA Agreement: The legal agreement between CLA partners must clearly outline:
  • Detailed terms and conditions of the arrangement.
  • Criteria for selecting borrowers.
  • Specific product lines and geographical areas of operation.
  • Any fees payable for lending services.
  • Provisions detailing the segregation of responsibilities.
  • Handling of customer interface and customer protection issues.
• Disclosures in CLA Agreement: The loan agreement signed by the borrower must clearly disclose:
  • The distinct roles and responsibilities (like sourcing, funding, servicing) of each partner involved.
  • Which entity will be the primary customer interface. (Any change to this interface later requires the borrower’s explicit consent).
  • Suitable provisions related to customer protection and how grievances will be addressed.

C. Interest Rate and Other Fees/Charges

• Rate Determination: The interest rate and any other charges applied to the borrower are based on the contractual agreement and must comply with applicable regulatory norms for the REs.
• Blended Interest Rate: The final interest rate charged to the borrower must be a blended interest rate. This is calculated as a weighted average of the interest rates that each funding RE would charge individually (based on their policies and the borrower’s risk profile), weighted by their respective funding shares in the CLA.
• Fees for Services:
  • The RE’s Board-approved policy must set objective criteria for any fees or charges payable to a sourcing or servicing entity, considering factors like service nature and loan size.
  • Crucially, these fees must not directly or indirectly include any element of credit enhancement or default loss guarantee, unless specifically permitted otherwise.
• Fee Separation & Disclosure:
  • Any fees paid to sourcing or servicing entities must be part of a separate arrangement and are not included when calculating the blended interest rate.
  • All such additional charges, along with the blended interest rate, must be factored into the computation of the Annual Percentage Rate (APR) and clearly disclosed in the Key Fact Statement (KFS) provided to the borrower.

D. Operational Arrangements

• Individual Accounts: Each funding RE must maintain separate accounts for each borrower, reflecting their individual exposure.
• Escrow Account: All financial transactions (disbursements, repayments) between the REs, and between the REs and the borrower, must be routed through a designated escrow account held with a bank (which can be one of the participating REs). The CLA agreement must clearly define how funds in the escrow account will be appropriated among the REs.
• Exception for Sourcing Arrangements: In pure sourcing arrangements (as defined), borrower repayments and servicing must happen directly into the funding RE’s bank account, without using any pass-through or pool account managed by a third party.
• Upfront Sharing & Agreement: Every single loan under a CLA must be shared among the funding REs right from the initial disbursement. This sharing must be based on a pre-agreed, non-discretionary Inter Creditor Agreement establishing joint rights.
• Business Continuity: REs must have a business continuity plan in place to ensure borrowers receive uninterrupted service until their loans are fully repaid, even if the CLA between the partner REs is terminated.

E. Default Loss Guarantee (DLG)

• Permitted DLG: Permitted REs participating in a CLA (either sourcing or funding) are allowed to provide a default loss guarantee.
• DLG Limit: This guarantee is capped at a maximum of five per cent of the total outstanding loan amount under that specific CLA or sourcing arrangement.
• Restriction: Providing DLG in any form by other REs (not part of the specific transaction) or by non-REs is prohibited.

F. Asset Classification Norms

• Borrower-Level Classification: Since the borrower is the same for all lenders in a CLA, the asset classification (e.g., Standard, SMA, NPA) applied by the REs must be consistent at the borrower level.
• Uniformity: If any one RE classifies its exposure to the borrower as Substandard (SMA) or Non-Performing Asset (NPA), all other REs in that arrangement must adopt the same classification for their respective exposures to that same borrower.

G. Transfer of Loan Exposures

• Compliance: Any transfer of loan exposures created under a CLA, whether to a third party or between the participating REs themselves, must strictly comply with the RBI’s Master Direction on Transfer of Loan Exposures (MD-TLE).
• Mutual Consent for Third-Party Transfer: A specific condition applies: an RE can transfer its exposure under a CLA to a third party only if all other REs involved in that specific CLA provide their mutual consent.

H. Norms for Loan Sourcing/Servicing Arrangements

• Outsourcing Compliance: REs can engage another RE or a non-RE entity for loan sourcing and/or servicing activities, provided they comply with the relevant RBI outsourcing guidelines.
• Additional Conditions: Such arrangements are also subject to the following specific conditions:

1. A written agreement must clearly specify the nature, purpose, extent of the service, and required performance standards.

2. The arrangement must operate on an ‘arm’s length’ basis, with terms and conditions reflecting market standards.

3. Payment of fees/charges for sourcing/servicing cannot be deferred or waived in a manner that indirectly provides credit enhancement or a liquidity facility.

4. The duration of the sourcing/servicing facility is limited and ends at the earliest of: (i) full amortization of the underlying loans, (ii) full payout of claims related to the funding REs’ interest, or (iii) other termination of the servicer’s obligations.

5. There should be no recourse to the sourcing/servicing entity beyond their defined contractual obligations.

6. The servicing entity is only obligated to remit funds to the funding RE(s) after it has actually received those funds from the underlying borrowers.

Conclusion

In conclusion, the RBI’s proposed New CLA Framework represents a significant and progressive step towards deepening financial inclusion across India. By broadening the scope beyond the earlier Priority Sector Lending restrictions and allowing participation from all regulated entities, the framework empowers diverse players, including smaller NBFCs, to enhance credit delivery, especially in underserved markets like Tier 2/3 cities, informal sectors, and SME clusters.

This move is seen as democratizing capital access and enabling co-lending models to evolve. It fosters a symbiotic relationship where banks benefit from the reach and niche underwriting capabilities of their partners (NBFCs/fintechs), while the framework aims to balance innovation with accountability and systemic stability. The removal of previous limitations is expected to encourage more partnerships, ultimately holding the potential to significantly catalyze credit penetration where it’s needed most.

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(This Banking & Finance update has been prepared by Shubham Sharma, student at Chanakya National Law University. He can be reached out at 2636@cnlu.ac.in)