A co-lending arrangement between a bank and an NBFC (non-banking financial company) sounds simple on a term sheet: two lenders, one borrower, one agreed split of the loan. In practice, it means two credit systems, two disbursal ledgers, one shared escrow account, and now, under new central bank rules, a 15-day clock ticking on every loan from the moment it is originated. If the operational layer is not well-designed, the partnership that was designed to speed up credit will end up slowing it down.
Quick answer
A co-lending model needs three things working together to function at scale: a shared origination and underwriting workflow between the originating and partner lender; an escrow-based cash flow and reconciliation system that meets the Reserve Bank of India’s 2025 co-lending rules; and synchronized reporting for asset classification, credit bureau submission, and public disclosure. Without these, the retention and transfer requirements that took effect on January 1, 2026 turn into manual, error-prone work that slows disbursal instead of speeding it up.
Key Takeaways
- The partner regulated entity must be identified at sanction, and its share must be transferred within 15 calendar days of disbursement.
- Each regulated entity must retain at least 10% of every individual loan on its own books.
- Escrow flows, borrower-level asset classification, bureau reporting and disclosures require synchronised data across both lenders.
- The technology requirement extends across origination, servicing, reconciliation, controls and audit evidence—not just the loan application journey.
What a co-lending model actually is
Co-lending is a partnership where two regulated entities (REs), typically a bank and an NBFC, jointly fund a loan in an agreed proportion and share the risk and revenue that come with it. The bank usually contributes the larger share of the capital and the NBFC brings origination reach, often into MSME (micro, small and medium enterprise), gold loan, or thin-file retail segments the bank cannot serve as cheaply on its own.
The Reserve Bank of India (RBI) first formalized this in its November 2020 circular on co-lending by banks and NBFCs to priority sector borrowers. That version restricted co-lending to priority sector loans and required the NBFC to retain a minimum 20% share of every loan.
Under the earlier framework, market participants commonly described two operating patterns as CLM-1 and CLM-2. In the first, the partner lender committed upfront against agreed criteria; in the second, it could decide whether to take a loan after origination. The RBI’s 2025 Directions no longer permit an open-ended discretionary take-out within a co-lending arrangement: the partner must be identified at sanction and its share transferred within the prescribed period.
Why the operational backbone matters right now
On August 6, 2025, the RBI issued the Reserve Bank of India (Co-Lending Arrangements) Directions, 2025, replacing the 2020 circular with a single framework that took effect on January 1, 2026 (or earlier, at an RE’s own discretion). The scope changed in three ways that matter for how lenders build their technology stack.
First, coverage expanded from banks-and-NBFCs-only to all commercial banks (excluding small finance banks, local area banks, and regional rural banks), all-India financial institutions, and NBFCs including housing finance companies. Second, it now applies to all loan types, secured and unsecured, not just priority sector lending. Third, the NBFC-only retention requirement was replaced with a symmetric rule: each RE, bank or NBFC, must retain a minimum of 10% of every individual loan on its own books.
What changed between 2020 and 2025
| Provision | 2020 Circular | 2025 Directions (effective Jan 1, 2026) |
| Eligible entities | Banks and NBFCs only | Banks (excl. SFBs, LABs, RRBs), all-India financial institutions, NBFCs incl. HFCs |
| Loan coverage | Priority sector loans only | All loan types, secured and unsecured |
| Minimum retention | NBFC retains 20% | Each RE retains 10% |
| Discretionary purchase (CLM-2) | Permitted | Eliminated; selective purchases now fall under Transfer of Loan Exposures rules |
| Default Loss Guarantee (DLG) | Limited to digital lending, capped at 5% | Extended to all forms of co-lending, capped at 5% |
| Cash flow mechanism | Escrow required only between co-lending partners | Mandatory escrow with a defined waterfall for all collections and disbursals |
| Asset classification | Each RE classified independently | Borrower-level classification; if one RE marks an account SMA or NPA, the other must follow |
| Loan transfer timeline | Not prescribed | Originating RE must transfer the loan to the partner RE within 15 days |
| Disclosure | Blended rate disclosure | Website listing of active co-lending partners; quarterly or annual financial statement disclosure |
Source: Reserve Bank of India, Co-Lending Arrangements Directions, 2025.
The importance of the right infrastructure
Each of these provisions sounds like a compliance checkbox until it is time to operationalize it across two organizations that run on different core systems.
Escrow reconciliation. Every rupee a borrower repays now has to be routed through an escrow account and split between the originating and partner RE according to the agreed ratio, then reconciled against both lenders’ internal ledgers. Industry commentary on the Directions has flagged this as one of the more labor-intensive steps in the new framework, particularly where the escrow provider, the originating RE’s loan management system, and the partner RE’s books are not integrated.
The 15-day transfer rule. If a loan is not transferred to the partner RE within 15 days of origination, it stops qualifying as a co-lending arrangement. Market participants told Business Standard in August 2025 that this timeline, combined with mandatory escrow accounts and stricter KYC (know your customer) checks, could compress co-lending volumes in the near term, especially for smaller NBFCs with limited technology and compliance infrastructure. Anil Gupta of ICRA noted that volumes could see short-term moderation as lenders adapt, though he expected them to recover once the technology integration is in place.
Borrower-level asset classification. Because a default recorded by one RE now has to flow through to the other in near real time, lenders need a shared or tightly synced view of loan performance rather than two independent classification processes running on separate schedules.
Disclosure and bureau reporting. Both partners must report to credit information companies and disclose active co-lending relationships on their own websites and in financial statements, which means the operational record of who originated what, at what split, has to be traceable and current.
What the market already shows
Co-lending has grown into a meaningful book even under the older, narrower framework. CRISIL Ratings estimated that NBFC co-lending assets under management (AUM) crossed ₹1.1 lakh crore (about ₹1.1 trillion) as of March 31, 2025, up from roughly ₹1 lakh crore in December 2023, with CRISIL projecting medium-term growth of 35 to 40% annually as more banks and NBFCs enter the model. An earlier CRISIL study of about 100 NBFCs, representing more than 90% of sector AUM, found personal loans made up about a third of the co-lending book, housing loans around 20%, and unsecured MSME loans and gold loans about 13% each, with secured MSME and vehicle loans comprising the rest.
CRISIL’s analysis of the 2025 Directions points to where growth could become operationally demanding. Arrangements built around an upfront commitment change less; back-to-back transfer structures must identify the partner at sanction and complete the partner’s share within 15 calendar days of disbursement. That raises the need for integrated systems, aligned credit policies and exception tracking across both lenders.
An earlier PwC analysis estimated that the co-lending industry disbursed between ₹470 billion and ₹520 billion in FY23 and projected roughly fivefold growth to ₹2,000 to ₹2,500 billion within five years, driven largely by personal loans, home loans, and MSME financing.
Those growth numbers were built on a lighter compliance load than what took effect in January 2026. The direction of travel, more partnerships, more asset classes, more regulated entities in scope, has not changed. What has changed is the operational bar for participating in it. CRISIL’s own read is that the CLM-2 model, the more common structure among newer entrants, is where that bar bites hardest.
Evaluation checklist: what to look for in a co-lending-ready stack
- Shared or API-linked underwriting. Can the originating and partner RE apply consistent credit criteria without re-keying data between two loan origination systems (LOS)?
- Escrow-native disbursal and collection flows. Does the platform route cash through escrow automatically and reconcile the split against both ledgers, rather than relying on manual matching at month-end?
- Real-time or near real-time data exchange. Can asset classification changes, prepayments, and delinquency flags reach both REs fast enough to meet the borrower-level classification requirement?
- Transfer timeline tracking. Is there a built-in trigger that flags loans approaching the 15-day transfer deadline before they fall out of compliance?
- Dual credit bureau reporting. Can the system generate and submit records to credit information companies (CICs) from both REs without duplicate or conflicting entries?
- Audit-ready disclosure records. Can the platform produce a current, accurate list of active co-lending partners and portfolio splits for website and financial statement disclosure on demand?
- Configurable split logic. Does the system support different retention ratios and DLG (Default Loss Guarantee) structures across multiple partner relationships, rather than a single hardcoded split?
Bottom line
The RBI’s 2025 Directions turn co-lending into an operational discipline. A 10% retention floor for each regulated entity, a 15-day transfer clock, escrow-based fund flows and synchronised borrower-level asset classification are difficult to manage reliably through spreadsheets and manual hand-offs at scale. Lenders that treat the operating model, data architecture and controls as one design problem will be better placed to scale partnerships.
Explore how configurable lending infrastructure can connect origination, servicing, escrow reconciliation and partner reporting for co-lending programmes.
Frequently Asked Questions (FAQs)
What is the difference between CLM-1 and CLM-2 co-lending models?
CLM-1 involves the bank committing in advance to take its share of every loan the NBFC originates that meets agreed criteria. CLM-2 allowed the bank to review and selectively purchase loans after origination. The RBI’s 2025 Directions eliminate the discretionary CLM-2 structure; selective loan purchases now fall under the separate Transfer of Loan Exposures framework instead of co-lending rules.
What retention requirement applies under the new RBI co-lending rules?
Each regulated entity, whether bank or NBFC, must retain a minimum of 10% of every individual loan on its own books. This replaced the 2020 rule, which required only the NBFC to retain a minimum 20% share.
When did the RBI Co-Lending Arrangements Directions, 2025 take effect?
The Directions were issued on August 6, 2025 and came into force on January 1, 2026, with regulated entities permitted to adopt them earlier based on their internal policy.
