In furtherance of the draft directions on co-lending arrangements released by the Reserve Bank of India ("RBI") vide its press release dated April 9, 2025, the RBI vide its notification dated August 6, 2025, issued the Reserve Bank of India (Co-Lending Arrangements) Directions, 2025 ("Directions"). The Directions have been issued with the aim of providing a comprehensive regulatory framework for co-lending arrangements ("CLAs"), ensuring customer protection, operational transparency, and regulatory compliance.
The Directions shall come into force from January 1, 2026, or from any earlier date as may be decided by an RE (as defined below) as per its internal policy ("Effective Date"). Any new CLA entered into after the Effective Date shall comply with these Directions, while existing CLAs shall adhere to the extant regulations.
Key provisions of the Directions
Scope
The Directions will apply to all CLAs entered into by: (i) Commercial Banks (excluding Small Finance Banks, Local Area Banks, and Regional Rural Banks); (ii) All-India Financial Institutions; and (iii) Non-Banking Financial Companies (including Housing Finance Companies) (collectively referred to as "REs").
Although digital lending arrangements (not involving co-lending arrangements) shall continue to be governed by the RBI (Digital Lending) Directions, 2025 ("DLD Directions"), any digital lending arrangement involving co-lending must also adhere to the Directions.
Notably, the Directions explicitly exclude loans sanctioned under multiple banking, consortium lending, or syndication.
Key Definitions
As per the Directions, a 'co-lending arrangement' has been defined as an arrangement, formalised through an ex ante legal agreement, between the RE which is originating the loans ("Originating RE"), and another RE which is co-lending ("Partner RE"), to jointly fund a portfolio of loans, either secured or unsecured, in a pre-agreed proportion, involving revenue and risk-sharing terms.
Governance and Documentation
Each RE under the CLA is required to maintain a minimum of 10% (ten percent) of each loan on its books to ensure aligned interests and risk participation.
The Directions emphasise that each RE shall formulate its credit policies to suitably incorporate provisions relating to the CLA, including internal portfolio limits, target borrower segments, due diligence of the partner entities, customer service and grievance redressal mechanisms.
Furthermore, the CLA agreement to be executed between the REs shall include detailed terms and conditions of the arrangement, including the criteria for selection of borrowers, specific product lines and areas of operation, fees payable for lending services, segregation of responsibilities, time frame for exchanging critical information, customer interface and customer protection issues.
Additionally, the loan agreement to be executed with the borrower shall clearly disclose the division of responsibilities (such as sourcing and servicing) between the REs, including identification of a single point of contact for the borrower throughout the tenure of the loan. Any changes in the customer interface must be communicated in advance to the borrower.
Pricing and Fees
The Directions mandate that the interest rate or any other fees/ charges payable by the borrower shall be based on a 'blended rate', i.e., weighted average of individual interest rates of the REs, in proportion to their share of funding, as per their internal policies and risk profile for a comparable borrower. Any additional charges are to be incorporated in computation of the annual percentage rate and shall be disclosed to the borrower upfront.
Importantly, the REs shall lay down the objective criteria for any fees/ charges that may be payable in relation to the lending services in their credit policies and such fees/ charges must not involve any form of implicit or explicit credit enhancement or default loss guarantee, unless otherwise permitted.
Operational Controls
The Directions stipulate that the Partner RE shall irrevocably commit to acquiring its share of the loans on a back-to-back basis. Further, it shall be ensured under the CLA that the respective shares of the REs are reflected in the books of both REs within 15 (fifteen) calendar days from the date of disbursement by the Originating RE. However, in the event that the Originating RE fails to transfer the share of the exposure within the prescribed time frame, the loan shall remain on the books of the Originating RE and can be transferred to other eligible REs only under the provisions of RBI's Master Directions on Transfer of Loan Exposure Directions, 2021.
Each RE is also mandated to maintain the individual borrower's account for its respective share. Further, all transactions between the REs, as well as with the borrower, shall be routed through an escrow account and the agreement executed between the REs shall clearly specify the manner of appropriation between the Originating RE and the Partner RE.
Additionally, the REs are mandated to implement a business continuity plan to ensure uninterrupted service to their borrowers in the event of termination of the CLA. The REs shall also comply with the prescribed norms under the Master Direction - Know Your Customer (KYC) Direction, 2016 ("KYC Directions"), and the Partner RE may rely upon the Originating RE for the customer identification process as per the provisions of the KYC Directions.
Default Loss Guarantee
The Directions also outline provisions for providing Default Loss Guarantees ("DLG"). The Originating RE may provide the DLG up to 5% (five percent) of the outstanding loan portfolio under the CLA, subject to compliance with the DLD Directions.
Reporting and Asset Classification
Each RE shall independently report regarding its share of the loan exposure to credit information companies (CICs) in accordance with the Credit Information Companies (Regulation) Act, 2005 and the rules and regulations issued by the RBI.
Further, the REs shall apply a borrower-level asset classification for their respective exposures to a borrower under the CLA, implying that if either of the REs classifies its exposure to a borrower under the CLA as special mention account/ non-performing asset on account of default in the CLA exposure, the same classification shall be applicable to the exposure of the other RE to the borrower under the CLA.
Disclosures
The REs are required to publish a list of their active co-lending partners on their website. Additionally, the REs in their quarterly/ annual financial statements shall disclose details regarding the quantum of CLAs, weighted average interest rates, fees paid/received, sector mix, loan performance, and DLGs.
Analysis
The Directions, by expanding the scope beyond priority sector lending and providing a detailed operational and compliance framework, aim to provide specific regulatory clarity on the permissibility of CLAs. The Directions offer a balanced structure that encourages collaborative credit delivery, while safeguarding borrowers and ensuring prudent risk-sharing between financial institutions. For instance, the Directions prioritise borrower interests through mandatory disclosures via the 'Key Facts Statement', a single point of contact, and clear grievance redressal channels. Further, by requiring each regulated entity to retain at least 10% (ten percent) of the individual loan exposure on their books and synchronising asset?classification at the borrower level, the Directions incentivise proper due diligence and shared accountability in credit origination and servicing.
Please find attached a copy of the Directions, here.
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.
