RBI’s New Co-Lending Rules

Syllabus: GS3/ Economy

Context

• The Reserve Bank of India (RBI) has issued revised guidelines to tighten co-lending arrangements between banks and non-banking financial companies (NBFCs), effective January 1, 2026.

What is Co-Lending?

• It refers to the collaborative loan service where two lending institutions jointly fund loans to borrowers. 
• This partnership allows both entities to distribute their resources more efficiently, providing customers with the combined expertise and financial muscle of both lenders.
• The RBI introduced the co-origination framework in 2018, allowing banks and NBFCs to co-originate loans. This framework was later updated in 2020 and renamed the Co-Lending Model (CLM).

Key Highlights of Co-Lending Guidelines

• Mandatory Loan Retention: All regulated entities (REs) involved in co-lending (banks, NBFCs, etc.) must retain at least 10% of each individual loan on their balance sheet.
• Default Loss Guarantee Cap: The  loan-originating entity can provide a default loss guarantee capped at 5% of the outstanding loan amount.
• Uniform Asset Classification: If one lender classifies a borrower as a Special Mention Account (SMA) or non-performing asset (NPA) due to default, the same status must be adopted by the co-lending partner for its share of the exposure. 
• Credit Information Sharing: Both entities must also share relevant credit information on a near real-time basis, and no later than the end of the next working day.
• Internal Policy Requirements: REs must update their credit policies and prepare dedicated internal guidelines covering; Target borrower segments, Internal portfolio limits, Fee structures, Partner due diligence processes, Customer service protocols, Grievance redressal mechanisms.

Significance of Co-Lending Guidelines

• Improved Transparency: Clear borrower-level disclosures and uniform NPA classification reduce confusion and misreporting.
• Strengthening Priority Sector Lending (PSL): It banks to meet PSL targets by partnering with NBFCs and fintechs that have deeper rural and MSME reach.
• Regulatory Discipline: Near real-time credit information sharing promotes early detection of stress and prevents “evergreening” of loans in co-lending portfolios.

Implementation Challenges

• Technology Integration: Linking multiple lenders’ systems for near real-time credit info sharing will be costly and complex.
• Capital Constraints: Retention requirements may reduce lending appetite in certain sectors, impacting small-ticket loans.
• Operational Coordination: Ensuring uniform asset classification across different institutions requires process alignment and strong governance frameworks.
• Transition Period Risks: Existing agreements need renegotiation; and confusion could arise during the transition to the new norms.

Way Ahead

• Gradual Phase-In: Consider a phased capital retention increase for smaller players to avoid sudden liquidity shocks.
• Regular Audits: Third-party audits of co-lending arrangements to ensure adherence to asset classification, DLG caps, and retention rules.
• Stakeholder Forums: Create an industry-RBI working group to address implementation issues promptly during the transition phase.

Source: BS