Co-Lending Models Between Banks and NBFCs

In recent years, India’s financial sector has witnessed a significant transformation in the way credit is extended to individuals and businesses, especially in underserved markets. One of the most impactful developments is the Co-Lending Model (CLM) between Banks and Non-Banking Financial Companies (NBFCs). This collaborative framework is helping bridge the gap between demand and supply of credit in rural and semi-urban regions, where traditional banking services are often limited.

In this article, we’ll explore what co-lending is, how it works, its regulatory framework, benefits for stakeholders, and the future of this innovative financial partnership.

What is Co-Lending?

The Co-Lending Model (CLM) refers to a strategic alliance where banks and NBFCs come together to jointly lend to borrowers. The primary aim is to combine the low cost of capital available to banks with the last-mile connectivity and customer insight that NBFCs possess.

Under this model:

Both entities share the loan amount (typically in a pre-agreed ratio like 80:20 or 75:25).
Banks fund the larger share, while NBFCs originate and manage the customer relationship.
Both lenders earn interest on their share, and the NBFC often earns a fee for loan servicing.

RBI Guidelines on Co-Lending

The Reserve Bank of India (RBI) introduced the updated Co-Lending Model (CLM) framework in November 2020 to promote greater credit flow to the unbanked and underbanked sectors.

Key Guidelines:

Loan Origination & Agreement:
- NBFCs are responsible for originating the loans as per mutual agreement with the partner bank.
- A Master Agreement must define the terms of co-lending, including risk sharing, loan pricing, servicing, etc.
Loan Sharing Ratio:
- The minimum share of a bank should be 80%, while NBFCs contribute the remaining 20%.
Risk Sharing:
- Both parties share credit risk proportionally to their contribution.
- NBFCs may also provide a First Loss Default Guarantee (FLDG) to banks.
Single Loan Agreement:
- Borrowers sign only one loan agreement that clearly mentions the names of both lenders.
Loan Servicing:
- NBFCs usually handle loan disbursement, collections, and servicing functions.

Why Co-Lending is Gaining Popularity

Several factors have contributed to the growing popularity of the co-lending model:

1. Financial Inclusion

Banks often lack the reach and flexibility to assess and serve micro-entrepreneurs, self-employed individuals, and rural borrowers. NBFCs, however, have a strong presence in these markets.

2. Faster Loan Processing

NBFCs have more agile and digital-first processes, helping in faster onboarding, underwriting, and disbursal — even for small-ticket loans.

3. Cost Efficiency

Banks provide funds at lower interest rates, while NBFCs provide better customer acquisition and management. This results in a win-win solution with a lower cost of lending.

4. Risk Diversification

By sharing the credit exposure, both banks and NBFCs minimize individual risk, making it safer to lend to new borrower segments.

Sectors Benefiting from Co-Lending

Co-lending is helping credit flow into several critical sectors of the economy, such as:

MSMEs (Micro, Small, and Medium Enterprises)
Many MSMEs face challenges in availing formal credit due to lack of documentation or credit history. NBFCs help bridge this gap using alternative credit assessments.
Affordable Housing Loans
Co-lending is actively used in the housing finance sector, enabling access to low-cost housing loans in semi-urban and rural areas.
Personal Loans & Consumer Credit
With rising demand for small-ticket personal loans, co-lending helps reach underserved customers who may not qualify through traditional bank filters.
Education and Agri Loans
Education financing and agriculture-based loans are also being disbursed under co-lending partnerships, supporting rural development.

Leading Examples of Co-Lending in India

Several successful partnerships have emerged in the co-lending space. Notable examples include:

ICICI Bank & Paisalo Digital: Co-lending to small entrepreneurs and self-employed borrowers.
State Bank of India (SBI) & Adani Capital: Financing small-scale businesses and farmers.
HDFC Bank & Cholamandalam Finance: Serving rural customers and SMEs with customized loan products.
Bank of Baroda & U GRO Capital: Digital-first co-lending to MSMEs under data-driven underwriting.

Technology: The Backbone of Co-Lending

Digital infrastructure is a key enabler in co-lending partnerships. Modern co-lending platforms ensure:

Real-time credit underwriting
Digital KYC and document processing
Loan monitoring dashboards
Automated reconciliation of collections

API integrations allow banks and NBFCs to communicate seamlessly, reducing turnaround time and ensuring regulatory compliance.

Challenges in Co-Lending

While the model offers huge benefits, it also has its challenges:

Operational Complexity: Aligning processes between two institutions can be challenging due to different workflows and technologies.
Regulatory Compliance: Proper documentation, reporting, and adherence to RBI norms require robust backend systems.
Conflict Resolution: In case of NPAs (Non-Performing Assets), clarity on recovery responsibility is crucial.
Data Sharing: Sharing of customer and credit data must comply with data privacy laws.

However, these challenges are gradually being addressed with better technology and evolving regulatory clarity.

The Road Ahead

The co-lending model is poised for robust growth in the coming years. As the government and RBI push for financial inclusion, co-lending offers an efficient way to mobilize credit into the grassroots economy. With the rising adoption of AI-based underwriting, blockchain-powered smart contracts, and regtech solutions, the co-lending process is becoming more transparent, scalable, and secure.

Conclusion

The Co-Lending Model between banks and NBFCs is more than just a financial arrangement—it is a visionary solution to India’s deep-rooted credit access issues. By blending the strengths of both entities, this model has the power to transform how India borrows, builds, and grows. For lenders, it offers reduced risks and expanded reach. For borrowers, it brings affordability and access to funds they never had before. As the model matures and becomes mainstream, it could very well become the backbone of inclusive economic development in India.