1. INTRODUCTION
The draft Reserve Bank of India (Co-Lending Arrangements) Directions, 2025 ("Draft Directions") have been recently released by the Reserve Bank of India ("RBI") through which it seeks to directly regulate various co-lending arrangements ("CLAs") entered into between RBI regulated entities ("RE(s)"). Historically, the RBI has mostly only regulated certain aspects of lending arrangements such as digital lending, default loss guarantee for digital lending, outsourcing of financial services etc., and in terms of CLA, has so far only primarily regulated co-lending between banks and non-banking financial companies ("NBFCs") for priority sector ("Priority Sector Lending"). With the Draft Directions, the RBI seeks to expand its oversight and regulation to a far wider range of CLAs to address certain prudential issues.
Currently, the Draft Directions are open for stakeholder feedback till May 12, 2025. We have set out the key highlights of the Draft Directions and its implications below.
2. HIGHLIGHTS OF THE DRAFT DIRECTIONS
2.1. Scope and Applicability of the Draft Directions
- Applicability
The Draft Directions are proposed to apply to specific identified categories of REs, namely: (i) all commercial banks (excluding small finance banks, local area banks and regional rural banks); (ii) all all-India financial institutions; and (iii) all NBFCs (including housing finance companies) (collectively "Permitted REs").1 - Definition and scope of CLA
The Draft Directions define CLAs to mean arrangements that (i) are formalised through an ex-ante legal agreement; (ii) are among Permitted REs only; and (iii) involve joint funding of a loan portfolio in a pre-agreed proportion, involving revenue and risk sharing with or without sourcing and management arrangement.2 It is important to note that the Draft Directions now explicitly recognise co-lending between Permitted REs only and prohibit co-lending arrangements involving other REs (not qualifying as Permitted REs) or non-REs. However, they are intended to apply even in situations where Permitted REs have entered into CLAs and one of the REs/or a non-RE (with whom outsourcing agreements have been executed) is supporting with sourcing of loans. The Draft Directions do not apply to CLAs exceeding INR 100 (hundred) Crores under multiple banking, consortium lending, or syndication.3 - Co-existence with other regulations
The Draft Directions are intended to co-exist and be read in conjunction with other legislations and RBI circulars that may be relevant to the parties involved and subject matter of the arrangement. Eg., for digital lending arrangements, RBI's Guidelines on Digital Lending dated September 02, 2022,4 will continue to apply; and peer to peer lending shall continue to be guided by the Master Direction - Non-Banking Financial Company – Peer to Peer Lending Platform (Reserve Bank) Directions, 2017. This means that the Draft Directions prescribe additional requirements wherever co-lending may be involved- to the extent of co-lending, and is not in derogation of other applicable regulatory requirements, unless specifically mentioned.
Notably, the Draft Directions for the first time, propose to significantly extend the power of regulation and scrutiny by the RBI to a very wide spectrum of CLAs executed between any of the Permitted REs, regardless of the nature of lending activities being undertaken by them- which was previously focused on Priority Sector Lending. With the Draft Directions, the RBI's Co-Leding by Banks and NBFCs to Priority Sector 20205 ("Priority Sector Lending Directions") will stand repealed except for loans already sanctioned thereunder till the closing of such loans.
There is a degree of ambiguity on the applicability of the Draft Directions to existing CLAs as on date of its issuance. Specifically, it remains unclear if the Draft Directions would necessitate amendments to any existing CLAs – particularly those not previously regulated. Typically, where the RBI introduces changes to a regulatory regime which necessitates changes to existing arrangements, it is common for the RBI to explicitly require so from the REs and prescribe a compliance timeline in this regard (as seen with the introduction of prohibition of penal charges).6 However, a requirement of a similar nature is absent in the Draft Directions. In the absence of any specific provision of retrospective applicability, it may be reasonably inferred that the Draft Directions are only intended to be effective prospectively, i.e., to new CLAs or amendments to existing CLAs, executed on or after the date of the finalised directions.
2.2. General Guidance and Interest Rates
- Minimum terms and conditions prescribed for CLAs The Draft
Directions prescribe a set of general guidelines on the internal
documentation to be maintained by the Permitted REs as well as the
contents of the loan agreements executed by Permitted REs. This
includes: (i) mandating Permitted REs to suitably incorporate
provisions relating to CLAs such as specifying the internal limit
of the proportion of their total lending portfolio that can be
under CLAs, in their credit policies;7 (ii) mandating
agreements entered into between Permitted REs for CLA to contain
detailed provisions specifying: (a) the criteria for selection of
borrowers, (b) specific product lines and areas of operations, (c)
fees payable for lending services if any, (d) segregation of
responsibilities, if any; and (e) customer interface and protection
issues; and (iii) upfront disclosures in loan agreement signed with
borrower on the segregation of roles and responsibilities between
the lending partners.
Accordingly, these proposed changes will necessitate review and alignment of the internal processes and practices of Permitted REs to ensure full compliance with the Draft Directions, including updates to credit policies, contract templates, loan agreements etc.
While as per market practice, the pre-existing CLAs already largely captured the provisions above in varying degrees of specificity, Permitted REs will now have to evaluate if CLAs executed between them clearly lay out the abovementioned provisions in sufficient detail as well as ensure adequate communication to the borrowers in re the CLAs, in the loan documents, so as to avoid any potential regulatory concerns or adverse observations from RBI during audits.
- Blended interest rate for the borrower and sufficient
disclosure
The interest rate charged to the borrower would mandatorily be required to a blended interest rate, and this rate is to be calculated by: (i) taking an average of the interest rates charged by the funding REs based on their internal lending policies and associated risk profile of the borrower; and (ii) this average is subject to the weighted proportionate funding share of the concerned REs under the CLAs.8
Previously, in CLAs where one of the funding REs had a higher risk exposure, i.e., 'skin in the game', such RE would often influence and dictate the rate of interest charged to the borrower, which resulted in lack of uniformity and transparency. However, with the introduction of this mandate by RBI of charging of blended interest rate to the borrower based on specific formula of weighted averages of the participating REs, the borrower can expect a more fair interest rate and has ensured a degree of certainty in the interest rates that may be charged to the borrower. In fact, to encourage maximum transparency to borrowers, Permitted REs will be required to disclose on their website a list of CLA partners for various arrangements, along with the indicative rate of blended interest rates (along with fees and charges charged to borrowers) under different CLAs.9
Further, determination of interest must be independent of any fee or charge that may be payable between the Permitted REs for the roles performed by them and must not be included in the calculation of the blended interest rates. Any and all amount payable by the borrower to the Permitted RE that may pertain to any other service provided by the Permitted RE, must be distinctly identified and disclosed in the KFS. This requirement also ties in with the existing stipulations under the DL Guidelines and the RBI's circular on the Key Facts Statement (KFS) for Loans and Advances.10 Both frameworks mandate that REs provide a KFS to borrowers at the time of loan sanction for complete visibility and such KFS must contain an upfront and comprehensive disclosure of all fees and charges payable by the borrower. In accordance with these guidelines, any fee or charge not explicitly disclosed in the KFS at the outset cannot be levied by the RE at any stage during the tenure of the loan.
2.3. Operational Requirements
The Draft Directions prescribe certain operational requirements in relation to CLAs, modelled on the requirements which have so far been applicable for Priority Sector Lending, such as: (i) mandating that all disbursements/repayments between the Permitted REs and the borrower be undertaken through an escrow account maintained with a bank - the Draft Directions specifically allow banks who are involved in the CLA to maintain such an escrow account, and the escrow agreement must specifically call out the manner of appropriation between the REs;11 and (ii) implementing of a business continuity plan to ensure uninterrupted service to the borrower, till repayment of loan.12 Separately, while the Priority Sector Lending Directions require banks to ensure compliance with KYC requirements, the Draft Directions propose to levy this responsibility individually on Permitted REs involved in the CLA for compliance with the RBI's Master Direction – Know Your Customer (KYC) Direction, 2016.13
Further, the Draft Directions also depart from the earlier requirement under the Priority Sector Lending Directions where NBFCs were required to bear a minimum risk share of 20% (twenty per cent) share of the individual loans on their book. Now, there is no specific minimum exposure that has been prescribed as part of CLAs, and parties are free to agree to their respective exposures in their inter se agreements.
Another key aspect introduced in the Draft Directions is the requirement for every single loan disbursed under a CLA to be jointly funded right from the time of disbursement, and this must be done based on a non-discretionary ex-ante creditor agreement with joint nature of rights,14 which essentially means that parties to a CLA would not have any discretion in which loans they share the risk. Now, under the Draft Directions for each loan disbursed as part of the CLA, both parties are mandatorily required to contribute as per their agreed risk exposures, regardless of the co-lending partner from whom the loan originated. The non-discretionary nature of CLAs alters the position that was previously seen in Priority Sector Lending where banks were given the option to contractually retain the right to either mandatorily share risk in the individual loans originated by the NBFCs, or reject such risk sharing for certain loans after due diligence (subject to applicable conditions). Now, this selective participation will no longer be permitted, thereby reinforcing the joint responsibility of co-lending partners at the outset.
2.4. Default Loss Guarantee
Interestingly, the Draft Directions permit REs in a CLA (whether participating as a sourcing or a funding entity) to provide default loss guarantee of up to 5% (five per cent) of loans outstanding in respect of loans under CLA.15 The provision of such default loss guarantee would be governed mutatis mutandis in terms of the RBI's Guidelines on Default Loss Guarantee issued for digital lending vide circular dated June 08, 2023 ("DLG Guidelines").16 The DLG Guidelines were originally limited in scope and applicability to digital lending arrangements and the Draft Directions intend to extend the applicability of the DLG Guidelines to all CLA arrangements, regardless of whether such arrangements qualify as 'digital lending', i.e., also extend to offline co-funded loans by Permitted REs.
Accordingly, Permitted REs who previously were adopting a flexible outlook in relation to availing of default loss arrangements not falling within the scope of digital lending, will have to now revisit such arrangements, going forward, and ensure strict compliance with the requirements of the DLG Guidelines. This will not only include ensuring that such arrangements are capped at 5% (five per cent) of the outstanding loan portfolio, but portfolio but also ensure that the loan portfolio on which DLG is offered is specified upfront, and adopting relevant internal mechanisms as well, such as adopting a board approved policy on DLG.
2.5. Loan Sourcing and Servicing Arrangements
Under the Draft Directions, Permitted REs are allowed to engage other REs or non-REs to source and/or service loans in compliance with applicable outsourcing guidelines.17 Moreover, the Draft Directions mandate additional requirements for such outsourcing arrangements, which inter alia include specifying in the outsourcing arrangement the required standards of performance;18 and de-linking the payment of any fees/charges to any deferral or waiver which would directly/indirectly provide credit enhancement or liquidity facility.19
Importantly, the Draft Directions prescribe that sourcing/servicing facility must be provided on an 'arm's length' basis on market linked terms and conditions. In this circumstance, it appears that the RBI's intent may have been to ensure that REs or non-REs engaged in sourcing and/or servicing loans do not either undercharge (and undercut other players in the market to get more business) or overcharge (on account of their wide presence) for their services, and this accordingly ensures that a largely fair service fee is paid to such REs/non-REs providing these services. This requirement may also be to ensure that CLAs between Permitted REs are kept independent and distinct to services provided by either RE in a CLA and the commercials agreed for such services.
3. CONCLUSION
The Draft Directions mark a significant step towards a more mature, transparent and operationally robust co-lending ecosystem in India. By expanding the regulatory scope, enhancing borrower-centric transparency, and clarifying key operational aspects, the RBI aims to foster greater confidence and participation in co-lending. One of the key highlights of the Draft Directions is the explicit restriction of CLAs to only Permitted REs coupled with the increased scope of RBI oversight and regulation to all CLAs
Footnotes
1. Section 3 of the Draft Directions.
2. Section 7(i) of the Draft Directions.
3. Section 4(e) of the Draft Directions.
4. Section 4(a) of the Draft Directions.
5. The Priority Sector Lending Directions have been superseded by the Master Directions – Reserve Bank of India (Priority Sector Lending – Targets and Classification) Directions, 2025.
6. Fair Lending Practice - Penal Charges in Loan Accounts, dated August 18, 2023.
7. Section 9 of the Draft Directions.
8. Section 15 of the Draft Directions.
9. Section 32 of the Draft Directions.
10. The RBI's circular can be accessed here.
11. Section 19 of the Draft Directions.
12. Section 21 of the Draft Directions.
13. Section 23 of the Draft Directions.
14. Section 20 of the Draft Directions.
15. Section 26 of the Draft Directions.
16. Please see our analysis of the RBI's Guidelines on Default Loss Guarantee available here, and our analysis of the FAQs on the RBI's Guidelines on Digital Lending available here.
17. Directions on Managing Risks and Code of Conduct in Outsourcing of Financial Services by NBFCs, dated November 9, 2017; Guidelines on Managing Risks and Code of Conduct in Outsourcing of Financial Services by banks, November 3, 2006; and Master Direction on Outsourcing of Information Technology Services, April 10, 2023.
18. Section 31(1) of the Draft Directions.
19. Section 31(3) of the Draft Directions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
