NBFC Compliance RBI Notification

Reserve Bank of India (Co-Lending Arrangements) Directions, 2025- A Practical Guide

Reserve Bank of India (Co-Lending Arrangements) Directions, 2025, issued by the Reserve Bank of India, is an assertive undertaking by the regulator that seeks to streamline and tighten regulations that guide co-lending between banks and Non-Banking Financial Companies (NBFCs).

Co-lending has played a significant role in the extension of credit on a large scale, whereby banks and NBFCs may use low-cost funds provided by each other, and potential synergies in scale earned through distribution/underwriting. The new Directions establish concrete guardrails for risk sharing, borrower protection, transparency, and mechanics of operation, indicating that co-lending will continue to be a crucial tool, but one that should be much more carefully used and documented than earlier.

Applicability

The guidelines apply to both Commercial Banks (other than Small Finance Banks, Local Area Banks and Regional Rural Banks), All-India Financial Institutions and the NBFCs (including Housing Finance Companies).

Nevertheless, the framework does not apply to loans exceeding one hundred crores sanctioned under consortium lending or multiple bank or loan syndication agreements. This ensures that the focus is on retail and mid-sized loans rather than large-ticket corporate exposures.

Effective Date

The new directions in co-lending will be implemented starting January 1, 2026. Regulated entities can implement the framework earlier, provided they are technologically and operationally prepared. This extension of the enforcement date is meant to ensure that the lenders have enough time to make internal policy amendments, Computer IT systems integrations, as well as training of employees.

Minimum Loan Retention Requirement

Among the most fundamental provisions is the fact that the individual lending partners should keep at least 10 per cent of every single lending on the books. This arrangement does not permit a full transfer of credit risk to the other partner, instead allowing both entities to have an equal share in the performance of loans. The nonreimbursed amount is not supposed to be hedged or sold to a third party.

Default Loss Guarantee (DLG) Cap

The framework allows the arranging lender to offer a Default Loss Guarantee (DLG) to partner lenders to help give comfort over risks. Nevertheless, this assurance is limited to 5 per cent of the current loan portfolio specification in the co-lending model. The cap would ensure a reasonable amount of risk shifting that would not hurt good lending standards.

A moderate DLG factor ensures that lenders bear an equal risk of default and exercise strict oversight in loan issuance and recovery. Through the limiting of the DLG, RBI is dealing with the moral hazard problems, where either one of the partners is likely to become over-exposed to the guarantee and jeopardize the standards associated with credit qualities.

Loan Transfer Timelines

The model also includes a very rigid booking schedule of loan exposures. A component of a loan extended by a co-lending partner should be recognized in the books of that partner within 15 days of the time of origination by the partner lender. This necessitated ensuring that the loans are promptly accounted for in the books of both partners to boost accuracy in portfolio reporting and regulatory compliance.

Late bookings might lead to a mismatch in the accounting, risk assessment and provisioning, and this rule ensures that this does not happen. The provision also provides higher financial control among the partners and lowers the chances of conflicts connected to property possession and derivation of income out of the loan.

Escrow Account for Transactions

All financial transactions of a co-lending transaction, both the payment of the loan to the borrower as well as payment to the lending partners, should circulate in and out of the business through a special escrow account between the lending partners.

An escrowing account facilitates openness, ease in reconciliation, and proper sharing of the funds as per the sharing ratio that was previously agreed upon. It is further used as another form of control to avoid the misappropriation of funds or accounting irregularities.

This arrangement of escrow account arrangement is beneficial to both the lenders as it offers a definite audit trial and creates less risk for them. It also benefits the borrowers as loan repayment is tracked more easily, and there are fewer possibilities of disputes raised by either lender in repayment of the loan.

Borrower-Level Asset Classification

To eliminate the mismatch, the guidelines require harmonized classification of assets between the two lenders. If one of the lenders classifies a borrower as a Special Mention Account (SMA) and/or a Non-Performing Asset (NPA), the other lender has to do the same on their respective exposure. Also, communication of such reclassification should be made to the partner lender within the next working day.

Such sharing of credit health data in real-time serves to keep a consistent recovery strategy, provides accurate provisioning and prevents scenarios whereby the same borrower is treated differently by the two lenders. Such harmonization is essential in terms of financial stability and regulatory compliance.

Background – How Co-lending Developed in India?

Co-lending has increased exponentially over the past ten years due to its win-win-win aspect: banks can utilize NBFC distribution channels to reach more underserved borrowers, while NBFCs gain access to cheaper funds.

At an earlier stage, ad-hoc-based co-lending and specific priority-sector regulations prompted co-lending; however, the regulations did not align with the actions. After a consultative draft in April 2025, RBI finalized the 2025 Directions to normalize the rules applicable to each form of co-lending, generalize the scope of the framework into the non-priority sector, and provide some reference to conduct and prudential concerns made evident as volumes swelled.

Ambit and Reachability – Who is to Comply?

The scope of Directions is extensive, with a wide circle of regulated entities (REs) (most commercial banks, all-India financial institutions and NBFCs, including the housing finance companies).

The RBI has articulated that parties that do not enjoy a qualification to be termed as permitted REs would be excluded from such a co-lending arrangement provided in this framework.

 Directions are also applicable mutatis mutandis to arrangements where the loan sourcing between one RE and another is conducted along with outsourcing agreements. This renders the Rules comprehensive, including co-lending in every shape and size.

Key Principle 1: There shall be a minimum of book retention (10%)

One of the changes in a headline is that every participating RE is required to keep at least 10 per cent of every particular co-lent loan on its balance sheet. This necessitates ensuring that both parties have skin in the game and that their incentives are aligned.

The 10% retention would have to be kept on the balance sheet. It cannot be fully transferred away using pure pass-through structures, increasing capital and accounting concerns to both originators and participating lenders.

Key Principle 2: Default loss guarantee cap (5%) and guarantees limitation

The Directions permit first-loss default guarantees (FLDG) but only under certain conditions and reserve FLDG to not exceed 5 per cent of the outstanding loan portfolio at that RE where one applies. This is to avoid disguising credit transfer or financial concessions that provide insufficient guarantees, thereby hiding a genuine risk transfer.

This cap also compels the parties to price risk correctly and against transactions that place all of the default risk on the balance sheet of just one party.

Key Principle 3: Asset-classification and engulfment on borrower-level

Another important change in operation: The level at which the assets will be classified is that they will be classified at a borrower level, and therefore, when someone becomes a default, the implication of the classification by itself would pass through to the exposure of the two co-lenders.

In their Directions, it is made clear that losses and NPA recognition cannot be cherry-picked, so special co-lending arrangements must coordinate on asset classification and provisioning, which can have knock-on effects on credit monitoring, reporting systems and the quality of books in both ends.

Key Principle 4: Reporting, transparency, and borrower disclosures are key principles

The RBI stipulates transparent borrower disclosures and clarity in the documentation of the proportion of funding, stipulation of responsibilities of each party and recourse. The lenders should ensure that they explicitly notify borrowers about their organization’s role in servicing, managing loan accounts, and addressing grievances.

Also, the Directions have made tighter timelines regarding reporting, such as loan shares having to be documented within certain days of their release, which has therefore made it easier to trace and avoid opaque reporting on the part of the accounting after such disbursement.

Key Principle 5: Variety of choice of cherry picking (CLM-2 elimination)

The last Directions remove the co-lending-discretionary co-lending (also termed as CLM-2) model. Concisely, structures that allow selective buy or cherry-picking loans without appropriate observation of the rules of transfer in the Transfer of Loan Exposures (TLE) framework should be integrated into the Transfer of Loan Exposures (TLE) structure instead of being declared as a co-lending.

This stops the co-lending of covering what is, in effect, the assignment of selected loans to give fairness and transparency.

Operational Structure -Escrow, Mixed Prices, and KYC Rationalization

Overall, the practical type of operation that the Directions envisage is that of escrow-based cash flow allocation, combined rates, which would smooth the borrowing rates, and a single-KYC procedure, which would reduce potential duplicates on the part of the borrower. The escrow mechanism ensures a waterfall of payments and the appreciation of interest/distributed principal among co-lenders. Although the elimination of double-KYC is borrower-friendly, it shifts the responsibility on the REs to arrange KYC, their records properly and maintain an audit trail.

What Transforms Banks’ Capital, Governance, and Control?

In banks, a 10 per cent retention rate and the classification of assets at the borrower level imply that they are re-examining their capital planning and governance. Banks must adjust the on-book share in capital allocation; strong internal controls related to origination and monitoring must be in place, and irrevocable funding commitments must be documented accurately. Banks might also be choosier on co-lending tie-ups, preferring good governance and good underwriting NBFCs to prevent the contagion from falling on their books.

Impact of New Directions on NBFC Economics, Origination, and Partnerships

In the case of NBFCs, the new Directions significantly reduce the arbitrage that previously made co-lending attractive. Factors such as the capping of FLDGs by the DFSD and restrictions on retention by NBFCs will narrow the lending margins on co-borrowed funds while increasing documentation requirements.

However, a regulated structure also brings advantages. It can strengthen existing bank relationships into medium- to long-term partnerships and promote the institutionalization of distribution, pricing, and risk management practices. This can particularly benefit well-established NBFCs that are positioned to expand stably and sustainably.

Effect on a Borrower, Exposure and on Safety

Borrowers will have more transparent information about the name of the person who lends it and whom they can contact to service or complain to. Single-KYC minimizes redundancy and friction, and escrow-led flows and clarified responsibilities also lead to fewer surprises in servicing and default events. Consequently, borrowers can expect tighter underwriting and documentation standards as REs can better coordinate the risk monitoring regime.

Staying Compliant: Legal Books to Update Now

The legal teams are required to revise co-lending agreements by the requirements of Directions, namely: retention percentages, FLDG caps and joint asset classification provisions; escrow provisions, reporting timelines, borrower disclosure language, and remedies. Documentation should also engage in audit rights, data sharing, allocation of liability and exit triggers. Companies are advised to comply with these documents to comply with the laws on outsourcing, data security laws, and the regulations concerning the Transfer of Loan Exposures in respective cases.

Provisioning, Practice Difficulties, and Accounting

This retention of 10 per cent is used to impact the presentation of the balance sheets and the pattern of provisioning. In case of asset classification at the borrower level, both the REs has to reach a consensus on what becomes stressed and the basis of the share of provisioning.

Accounting departments should project different default scenario conditions to understand the P&L and capital effect, ensuring that the IFRS/Ind AS or local GAAP accounting of the co-lending arrangement accurately reflects contractual economics. It is highly advisable to get aligned with auditors early enough.

Risk Management -Credit, Operational and Conduct Risk

Co-lending brings in a combination of credit and operational risks requiring end-to-end mitigation. Joint underwriting structures and a common watchlist are required in the case of credit risk.

Escrow reconciliations, early warning triggers and good IT integration are needed to address the operational risk. Conduct risk is mitigated through disclosures by borrowers, a grievance redressal system, and transparent pricing, as highlighted in the Directions to protect end consumers.

In the VR World, Integration will be a Game-Changer

The new Directions increase the bar implicitly on regulated use of technology: reconciliations, escrow management, ledger update, borrower notification and reporting should be timely and audit-ready.

Most market observers believe that the issue of tech integration should complicate the growth of co-lending to a certain extent, and some participants are considering going the route of direct assignment, where there is less operational complexity. However, well-built platforms are likely to become a competitive edge for the banks and NBFCs that aspire to expand co-lending.

Transition Data and Action Plan Schedule

The Directions are finalized in August 2025, and the RBI has given a transition window: key provisions, as imposing 10% retention and reporting norms, go into effect January 1, 2026. Lenders will thus have to spend the intervening months updating documentation, systems, and capital plans; liaising with counterparties; and testing escrow and reporting processes. Positive measures include legal redrafting, modifications to KYC flows, IT constructions, and stakeholder communication.

Market and Strategic Response (Co-lending and Direct Assignment)

The conclusion that closer regulation can render co-lending less appealing compared to direct assignment in certain situations, according to market observers, is due to operational friction and capital implications. Other lenders may like the ease of assigning exposures on loans; some lenders will go further, using co-lending as a strategic portfolio distribution tool. Moving forward, the Directions level the playing field: partnerships that are not operationally mature or whose economics do not sync will not do well.

Regulatory Intersections- Digital Lending, Outsourcing and TLE rules

The Directions exist independently of each other; they overlap with the digital lending framework, outsourcing guidelines and the Transfer of Loan Exposures (TLE) regulations organized by the RBI. To simultaneously comply with all rules, Organisations should ensure that co-lending models that involve digital origination, third-party sourcing or selective transfer are operated where all laws are observed. This should be accomplished through cross-functional skills among legal, compliance, operations, and product teams.

Checklist for Banks and NBFCs (Operational)

Under the review and amend co-lending, they agree to have a 10 per cent retention, FLDG caps, and asset classification.

• Goal early / build escrow format.
• Enquire about single-KYC flows and templates of disclosure by borrowers.
• Awarding CPA and supply recertifying; conversation away with auditors.
• Other tests of IT include integration with ledger update and reporting schedules.
• Be open with partners in the channels and borrowers much earlier about changes.

All of the above must be carried out with ownership, scheduling, and escalation procedures.

• Practical checklist for legal and compliance departments
• Restructure jurisprudential contracts in which the obligations and solutions are highly lucid.
• Draw up generic forms and scripts of consent buyer disclosure.
• Make sure that the rules of outsourcing and data security are observed.
• Docking FLDG and capture-structures at 5 %
• Update policy books, internal auditing programs and training papers.

Such actions mitigate against the possibility of friction with regulators and increase the confidence of the investors and partners.

How Advisors and Consultants May Assist?

Full-scale support by the advisors is anticipated to include documentation, operational process flow mapping, gap analysis and tabletop exercises in default situations. Financial modelling to demonstrate the effect on capital and P&L will be required, as well as up-skilling relationship managers and collections teams. The legal advisor should also evaluate cross-border implications in case money or partner firms are outside India.

As an NBFC promoter, institutionalizing underwriting is crucial, and you must establish disciplined reporting and a partnership with banks that share common governance standards. Consider re-assessing co-lending economics in this new world after Direction, where margins may come under pressure; could a premium offering or fee-based distribution, analytics, or customer interaction model be a solution? An open, easily compliant playbook will help you in negotiating superior partnership and financing terms. Our Enterslice experts assist in the registration of underwriters with SEBI.

 The Reasons Why Co-Lending Remains Relevant to Date

Nevertheless, co-lending is viable even with the latest rules: it can increase credit penetration, utilize strengths complementary to each other, and provide the wins to the borrowers once structured appropriately. By introducing increased clarity and standards, the Directions may, in turn, enhance investor confidence and minimize the illusory business risks through contractual procedures that previously left parties vulnerable to reputational and business risks. Concisely, careful implementation of disciplined co-lending could serve as an agent of inclusion in financial activities.

Challenges to watch- watchlist for the next 12 months

• Tech incorporation lags significantly, making it challenging for many other players to adopt escrow and reporting systems quickly.
• Originator capital strain- Given the on-book retention at the segment of 10 per cent, some originators are potentially going to face capital strain.

Whenever it comes to contractual matters, asset classification and the provisioning coordination may create some disagreements.

• Steering toward pure assignments- some lenders might even change the structure of co-lending models for others.

These challenges can be effectively handled and undertaken through proactive planning and coordination among stakeholders.

A Note on Public Policy and Financial Inclusion

The RBI’s Policy Combines Two Key Goals: Accountability, Lending, And Enhancing avenues of credit availability. Even designing well-thought-out co-lending can continue to facilitate formal credit to the under-banked segments, provided that banks, NBFCs, and regulators cooperate to make sure that the model remains transparent, sustainable, and borrower-friendly. Institutionalization of this balance is the goal of the Directions.

To Wrap Up

The Co-Lending Arrangements Directions, 2025, issued by the Reserve Bank of India, offer a clear, implementable framework for joint advances, such as those requiring more detailed documentation, explicit risk-sharing, and enhanced operational diligence. The effects of the 10 per cent on-book retention, first-loss guarantee capping, classification of assets at the borrower level and greater transparency will change the origination economics and drive the market to institutionalized practices.

In immediate consequence, updating legal agreements, investing in systems, and re-testing the business model is a practical exercise to be undertaken in the case of banks and NBFCs. When properly tailored, these Directions have the potential to keep co-lending as a productive source of broadening credit reach; when done badly, they will hasten a tilting toward more straightforward transfer processes.

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