Co-lending has emerged as a significant credit delivery model in India, where two regulated entities jointly fund loans and share credit risk and rewards on a pre-agreed basis. The Reserve Bank of India (Co-Lending Arrangements) Directions, 2025 (“Co-Lending Directions, 2025”/ “Directions”) provide a comprehensive statutory framework governing such arrangements between regulated entities (“REs”), including commercial banks, all-India financial institutions and non-banking financial companies (NBFCs). The Directions expressly exclude multiple banking, consortium lending and syndication from their scope, establishing clarity on the perimeter of co-lending regulation.[1]
Historically, co-lending in India was regulated through sector-specific and circular-based guidance, particularly in relation to priority sector lending. However, the absence of a unified regulatory architecture led to fragmentation in operational norms, risk retention standards and disclosure requirements. In response, the RBI has issued the Co-Lending Directions, 2025 to codify the permissibility, prudential safeguards and conduct requirements for all eligible co-lending arrangements across lending segments.
The policy intent of the Directions is to institutionalise meaningful risk sharing, robust borrower protection and enhanced transparency. For instance, each RE participating in a co-lending arrangement is mandated to retain a minimum 10 per cent share of individual loans on its books.[2] The Directions also require upfront disclosures in loan agreements regarding the roles and responsibilities of REs, governance of customer interface, and grievance redressal mechanisms.[3]
Issued under statutory powers and effective from January 01, 2026, the Co-Lending Directions, 2025 are binding on all covered REs and are a key regulatory milestone in India’s credit landscape.
Applicability and Scope of the Co-Lending Directions, 2025?
The Co-Lending Directions, 2025 adopt a clearly defined applicability framework, anchored in the regulatory status of participating entities rather than the nature of borrowers or loan products. The Co-Lending Directions, 2025 apply to REs, namely scheduled commercial banks (other than excluded categories), all-India financial institutions, and non-banking financial companies, including housing finance companies. Importantly, each participant to a co-lending arrangement must independently qualify as an RE, and compliance obligations attach to every such participant on a standalone basis.[4]
At the core of the framework is the recognition of permissible co-lending arrangements, defined as structured arrangements where two REs jointly originate loans, fund their respective portions contemporaneously, and share credit exposure in accordance with a pre-agreed allocation. The Co-Lending Directions, 2025 emphasise that co-lending is loan-centric, requiring participation and risk sharing at the level of each individual loan, and not a mechanism for post-disbursement risk transfer or portfolio-level participation.[5] Subject to adherence to applicable prudential norms, such arrangements may be undertaken across lending segments, including priority and non-priority sector loans.[6]
Equally significant is the express exclusion of certain lending models from the scope of the Directions. Consortium lending, multiple banking arrangements and loan syndication are categorically carved out, reflecting the RBI’s view that these models involve fundamentally different risk allocation, governance and decision-making structures.[7] This exclusion is intended to prevent regulatory overlap and misclassification of transactions.
The Directions also operate in addition to, and not in derogation of, other applicable RBI regulatory frameworks. Participating Res shall remain fully subject to sector-specific prudential norms, customer protection requirements, KYC and AML obligations, and where relevant, digital lending and outsourcing guidelines.[8]
Core Structural Features of a Co-Lending Arrangement
1. Ex-Ante Contractual Framework:
The Directions mandate that every co-lending arrangement be governed by a comprehensive, legally binding agreement executed prior to loan origination. This agreement must clearly set out the roles, responsibilities and rights of each participating RE, including credit appraisal standards, servicing obligations, fee structures, dispute resolution and exit mechanics. The regulatory emphasis is on ex-ante clarity and standardisation, aimed at preventing opaque or informal funding arrangements that dilute accountability.[9]
2. Credit Appraisal and Loan Origination:
While operational responsibilities may be allocated contractually, each RE remains responsible for ensuring that loans originated under a co-lending arrangement comply with its board-approved credit policy and underwriting standards. The Directions do not permit arrangements where one RE functions merely as a passive fund provider without adequate oversight of credit quality. Credit appraisal, borrower selection and loan approval processes must therefore be aligned with the internal governance framework of each participating RE.[10]
3. Disbursement, Fund Flow and Accounting:
To ensure transparency and auditability, the Directions require that all disbursements and repayments be routed through an escrow account maintained for the co-lending arrangement. Further, each RE must reflect its respective share of the loan in its books within fifteen calendar days from the date of disbursement. These requirements are intended to provide a clear audit trail and prevent regulatory arbitrage through delayed or off-balance-sheet recognition.
4. Customer Interface and Servicing:
The framework mandates the designation of a single customer interface for borrower interaction, including servicing, collections and grievance redressal. The co-lending agreement must clearly specify which RE will perform these functions and how responsibilities are allocated, while ensuring that borrower rights and disclosures remain consistent and transparent.
5. Governance, Audit and Supervisory Oversight:
Finally, the Directions require co-lending arrangements to be subject to internal audit, statutory audit and supervisory inspection. Participating REs must maintain adequate records and data to enable regulatory access and oversight. This governance layer reinforces the RBI’s objective of embedding co-lending within the mainstream prudential supervision framework.[11]
Risk Sharing, Asset Classification and Credit Discipline
1. Minimum Risk Retention:
A central prudential safeguard under the Directions is the requirement that each participating RE retain a minimum of ten per cent of the exposure in every individual loan originated under a co-lending arrangement. This retention must be maintained on an ongoing basis and cannot be diluted through contractual risk transfers or credit enhancements. The provision is intended to ensure genuine “skin in the game” for all co-lenders and to curb originate-to-distribute structures that weaken credit discipline.
2. Allocation of Credit Risk and Economic Interest:
The Directions require that credit risk, interest income and losses be shared strictly in proportion to the funded share of each RE. Contractual arrangements that result in asymmetry between economic upside and downside—such as disproportionate risk absorption by one RE—are inconsistent with the framework. This proportionality requirement reinforces alignment of incentives and ensures that co-lending remains a joint lending activity rather than a disguised risk transfer mechanism.
3. Asset Classification and Provisioning:
To prevent regulatory arbitrage, the Directions mandate borrower-level asset classification. Consequently, if a loan becomes overdue or is classified as a non-performing asset (“NPA”), the same classification applies uniformly to the exposures of all co-lenders, irrespective of internal assessment differences. Each RE must make provisions in accordance with its applicable prudential norms based on this common classification, thereby promoting consistency in income recognition and balance-sheet reporting.[12]
4. Default Loss Guarantee and Credit Support:
The framework permits the provision of a Default Loss Guarantee (“DLG”) by one co-lender to another, subject to a strict cap of five per cent of the outstanding loan portfolio under the co-lending arrangement. Such guarantees must not undermine the minimum risk retention requirement and are required to be transparent, contractually documented and appropriately accounted for. The limited permissibility of DLG reflects the RBI’s cautious approach to credit enhancements within co-lending structures.[13]
Collectively, these provisions underscore the regulator’s intent to embed co-lending within the prudential mainstream by aligning risk, reward and accountability across participating Res.
Pricing, Disclosures and Borrower Protection Framework
1. Interest Rate Determination:
The Directions prescribe that the interest rate charged to the borrower under a co-lending arrangement must be a blended rate, computed as the weighted average of the interest rates applicable to each participating RE, proportionate to their respective funding shares. This approach is intended to ensure pricing neutrality at the borrower level and to prevent differential or opaque interest structures arising from the participation of multiple lenders.[14]
2. Fees, Charges and Cost Transparency:
In addition to interest, all fees and charges associated with a co-lending loan—whether charged by the originating RE, the co-lender or any service provider engaged under the arrangement—must be clearly identified, objectively determined and disclosed upfront. The Directions prohibit hidden or contingent charges that may distort the effective cost of borrowing, reinforcing transparency and informed borrower consent.
3. Mandatory Borrower Disclosures:
The framework places significant emphasis on borrower-facing disclosures. Loan documentation and key fact statements are required to clearly disclose:
a. the identities of all co-lending REs;
b. the proportion of funding by each RE,
c. the roles and responsibilities of each participant, and
d. the applicable grievance redressal mechanism.
These disclosures are designed to mitigate borrower confusion in multi-lender structures and to ensure accountability across co-lenders.
4. Borrower Protection and Grievance Redressal:
While a single customer interface may be designated for operational efficiency, the Directions clarify that such designation does not dilute the regulatory responsibility of other co-lenders towards the borrower. Each RE remains accountable for fair conduct, mis-selling risks and effective grievance resolution in accordance with applicable RBI customer protection norms.
Collectively, these conduct-focused requirements underscore the RBI’s intent to embed co-lending within a framework of fair pricing, transparency and borrower confidence, complementing the prudential safeguards applicable to participating REs.
Reporting, Disclosure and Supervisory Compliance
1. Credit Information Reporting:
To ensure integrity of the credit reporting ecosystem, the Directions require each participating REs to report its respective share of the co-lent loan to Credit Information Companies (CICs). Such reporting must be consistent with borrower-level asset classification and repayment performance, notwithstanding the presence of multiple lenders. This requirement is intended to preserve a unified and accurate credit history for borrowers and prevent fragmentation of credit information arising from co-lending structures.[15]
2. Accounting Recognition and Financial Reporting:
Each RE is required to recognise its proportionate exposure, income and provisioning in its own books of account, in accordance with applicable accounting standards and prudential norms. The Directions reinforce that co-lending does not permit off-balance-sheet treatment or deferred recognition of exposure, thereby ensuring transparency in financial statements and regulatory returns.
3. Public Disclosure of Co-Lending Arrangements:
The framework mandates public disclosure of active co-lending arrangements, including the identities of co-lending partners, through appropriate channels such as the RE’s website. This obligation enhances market transparency and allows stakeholders, including borrowers and investors, to assess the nature and extent of collaborative lending undertaken by an RE.[16]
Comparison with the Earlier Co-Lending Framework
The Co-Lending Directions, 2025 mark a clear departure from the RBI’s earlier, sector-specific approach to co-lending. Prior regulatory guidance was largely anchored in priority sector lending, with limited applicability and significant reliance on bilateral structuring between lenders. This resulted in fragmentation across eligibility, risk retention, disclosure practices and supervisory treatment.
In contrast, the Co-Lending Directions, 2025 establish a single, consolidated framework applicable across eligible lending segments. By moving away from a priority-sector-centric construct, the RBI has enabled co-lending to function as a generalised lending architecture, while simultaneously embedding stronger prudential and conduct safeguards. This expansion of scope is complemented by express exclusions for consortium lending, multiple banking and syndication, thereby preserving conceptual clarity between distinct lending models.
Another material shift lies in the strengthening of prudential discipline. The earlier framework permitted greater structural flexibility, which in practice allowed uneven risk allocation and passive funding models. The Directions introduce uniform minimum risk retention, borrower-level asset classification and capped DLG, collectively reducing the scope for regulatory arbitrage. Equally, borrower-facing disclosures and transparency obligations are now codified more explicitly, addressing concerns around borrower awareness in multi-lender structures.
Conclusion
The Co-Lending Directions, 2025 reflect a broader regulatory maturation in the RBI’s approach to collaborative lending. By harmonising prudential safeguards, conduct norms and supervisory oversight, the RBI has repositioned co-lending as a mainstream, well-regulated lending model, rather than a narrowly tailored regulatory exception.
From an implementation standpoint, regulated entities will need to undertake a comprehensive review of existing co-lending arrangements, revisiting contractual frameworks, internal credit policies, accounting systems and disclosure practices, to ensure alignment before the effective date. Board-level oversight and compliance readiness will be critical, particularly for entities operating multiple partnerships. Looking ahead, the Directions are likely to provide a stable foundation for bank–NBFC collaborations and fintech-assisted origination models, enabling responsible credit expansion while preserving systemic stability. With enhanced regulatory clarity and clearly defined guardrails, co-lending is poised to play a more structured and scalable role in India’s evolving credit ecosystem under the supervision of the Reserve Bank of India.
[1] Clause 1-7, Reserve Bank of India (Co-Lending Arrangements) Directions, 2025.
[2] Clause 10, Reserve Bank of India (Co-Lending Arrangements) Directions, 2025.
[3] Clause 12-13, Reserve Bank of India (Co-Lending Arrangements) Directions, 2025.
[4] Clauses 1-4, Reserve Bank of India (Co-Lending Arrangements) Directions, 2025.
[5] Clause 3 read with Clause 9, Reserve Bank of India (Co-Lending Arrangements) Directions, 2025.
[6] Clause 7, Reserve Bank of India (Co-Lending Arrangements) Directions, 2025.
[7] Clause 5, Reserve Bank of India (Co-Lending Arrangements) Directions, 2025.
[8] Clause 6, Reserve Bank of India (Co-Lending Arrangements) Directions, 2025.
[9] Clause 9, Reserve Bank of India (Co-Lending Arrangements) Directions, 2025.
[10] Clause 8 read with Clause 9, Reserve Bank of India (Co-Lending Arrangements) Directions, 2025.
[11] Clause 14, Reserve Bank of India (Co-Lending Arrangements) Directions, 2025.
[12] Clause 13, Reserve Bank of India (Co-Lending Arrangements) Directions, 2025.
[13] Clause 15, Reserve Bank of India (Co-Lending Arrangements) Directions, 2025.
[14] Clause 12-13, Reserve Bank of India (Co-Lending Arrangements) Directions, 2025.
[15] Clause 16, Reserve Bank of India (Co-Lending Arrangements) Directions, 2025.
[16] Clause 17, Reserve Bank of India (Co-Lending Arrangements) Directions, 2025.