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Co-Lending Agreements in India
RBI's Co-Lending Model (CLM) — how banks and NBFCs partner to deliver affordable credit to priority sectors while sharing risk and return.
RBI Co-Lending ModelPriority SectorCLM 2020Bank-NBFC Partnership
What is Co-Lending?
Co-lending (also called co-origination) is a model where a bank and a Non-Banking Financial Company (NBFC) jointly originate loans to the same borrower, share the loan on their respective books, and bear risk and return in proportion to their contribution. This framework was formalised by RBI in the Co-Lending Model (CLM) guidelines of November 2020.
The rationale: Banks have low-cost funds (deposits) but lack last-mile distribution networks, especially in rural and semi-urban areas. NBFCs and MFIs have deep rural networks, strong underwriting capabilities for thin-file borrowers, and technology-driven processes — but face higher cost of funds. Co-lending combines both strengths.
🎯Co-lending is primarily for Priority Sector Lending (PSL) — agriculture, MSME, housing, education, weaker sections. Banks count co-lent loans towards their PSL targets, making it a win-win: cheaper credit for borrowers, PSL compliance for banks, and scale for NBFCs.
How Co-Lending Works — The Mechanics
Standard Split (80:20 Model)
Under RBI's CLM, the bank takes a minimum of 80% of the loan on its books at the bank's interest rate. The NBFC takes the remaining 20% at the NBFC's rate. The blended rate offered to the borrower is lower than what the NBFC would charge alone — but slightly higher than what the bank would charge alone.
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Bank's Share
Minimum 80%. Funded at bank's cost of funds. Counts towards PSL target. Lower risk, lower return.
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NBFC's Share
Up to 20%. Funded at NBFC's cost. Earns NBFC-level return. Bears higher risk on its tranche.
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Borrower's Rate
Blended rate — lower than standalone NBFC rate. Single loan, single EMI, single account statement.
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Single Interface
Borrower deals with one entity only (usually the NBFC as the 'front-end partner'). No complexity for the borrower.
The NBFC's Role
The originating NBFC (front-end partner) sources, underwrites, and disburses the loan. It also handles collections and customer service. The bank's 80% share is transferred to the NBFC's escrow account, which then disburses to the borrower. The NBFC holds the bank's 80% as a 'pass-through' — it does not appear as the NBFC's liability.
Benefits of Co-Lending
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Lower Rates for Borrowers
MSME or agricultural borrowers get bank-linked rates instead of standalone NBFC rates — saving 3–7% p.a. on interest.
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PSL Compliance for Banks
Banks meet Priority Sector Lending targets without building own distribution networks in rural areas.
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Scale for NBFCs
NBFCs access cheap bank funding to grow their loan book 4–5× beyond what their own capital allows.
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Financial Inclusion
Credit reaches farmers, artisans, and micro-enterprises in remote areas that banks traditionally couldn't serve efficiently.
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Risk Sharing
Credit risk is shared between bank and NBFC — neither party takes 100% exposure on the risky borrower segment.
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Better Underwriting
NBFCs bring local knowledge and alternative data for underwriting thin-file borrowers who lack traditional credit history.
Regulatory Framework — RBI CLM Guidelines 2020
Eligible Lenders: All scheduled commercial banks (except Small Finance Banks and Payment Banks) and registered NBFCs (including MFIs, HFCs).
Eligible Loans: Priority Sector loans — agriculture, MSME, housing (affordable), education, weaker sections, renewable energy, and social infrastructure.
NBFC Skin-in-the-Game: The NBFC must retain at least 20% on its books — it cannot originate and pass on 100% risk to the bank. This ensures the NBFC maintains underwriting standards.
Single Borrower Interface: The borrower must deal with only one entity (the NBFC typically). The borrower cannot be charged separately by both the bank and NBFC.
KYC: KYC is conducted by the NBFC at origination — the bank relies on this. Both entities are jointly responsible for KYC compliance.
📋Co-lending agreements must be documented with clear terms on risk allocation, servicing responsibilities, default handling, and exit provisions. RBI can inspect both parties under the CLM arrangement.
Frequently Asked Questions
Q: As a borrower, do I need to know if my loan is co-lent?
A: Yes — you should be informed. The loan agreement must disclose the arrangement and identify both the bank and NBFC. Your EMI goes to one account and one entity services the loan — but technically two institutions hold your loan.
Q: What happens if the NBFC fails in a co-lending arrangement?
A: The bank's 80% share is protected as per the CLM agreement. Loan servicing arrangements (collections, customer service) would be transferred to the bank or a new servicer. Borrowers continue repaying as per the original schedule.
Q: Is co-lending available for retail borrowers?
A: Currently, co-lending under RBI's CLM is restricted to Priority Sector loans. However, bilateral loan participations (outside the formal CLM framework) exist for other loan types between banks and NBFCs.
Q: How is co-lending different from loan assignment?
A: In loan assignment, the originating entity sells the entire loan to another entity (full risk transfer). In co-lending, both entities hold proportional shares simultaneously from the beginning. Co-lending involves co-origination; assignment is post-origination transfer.