RBI mandates 10% loan retention in final co-lending norms for banks, NBFCs

Mumbai: The Reserve Bank of India on Wednesday issued final guidelines on co-lending arrangements, mandating that each lender that is part of such a mechanism must keep at least 10% of the loan originated on their book.

The final norms also require the loan originator to transfer the loan to the co-lender within 15 days of the loan being originated, in the absence of which the loan will no longer be considered a co-lending arrangement, according to an RBI circular.

Currently, co-lending arrangements, as per the November 2020 norms, are allowed only between banks and NBFCs, wherein only NBFCs are allowed to originate priority sector loans for banks and are required to hold at least 20% of the loan on their book.

In the draft co-lending framework issued in April 2025, the RBI had proposed allowing co-lending arrangements between all regulated entitles, meaning that two NBFCs or two banks could enter into such co-loans across secured and unsecured loan segments.

Extended to all commercial banks

The final norms approved extending co-lending arrangements to all commercial banks (excluding small finance banks), financial institutions, and non-banking financial companies including housing finance companies. Digital lending arrangements shall continue to be governed by the Reserve Bank of India (Digital Lending) Directions, 2025. The new guidelines will come into effect from 1 January, 2026.

Given the significantly higher number of NBFCs in the country, this capital-light model is seen beneficial for small, mid-sized and digital NBFCs, which will now be able to work with larger or traditional NBFCs than waiting for a banking partner. It is also expected to open new avenues for lending to varied borrower segments such as retail, MSMEs (micro, small and medium enterprises) and consumption credit as banks are typically more conservative in the case of small-value loans, according to industry experts.

Each regulated entity under a co-lending arrangement (CLA) shall be required to retain a minimum 10% of the individual loans in its books, the RBI said in the final norms, in a deviation from the draft norms which mentioned no such minimum limit. Industry experts said this could possibly be to align co-lending norms with the regulator’s loan securitisation framework for standard assets, which requires retention of 10% of the loan.

“The 10% (loan retention) can be seen in relation to the previous co-lending guidelines, which mandated a 20% minimum limit for the originating partner,” said A.M. Karthik, senior vice-president and co-group head, financial sector ratings at ICRA. “This will improve flexibility for co-lending arrangements, going forward,” he told Mint.

Another addition to the draft norms was the requirement for the loan originating entity to transfer the loan to the co-lender within 15 days.

“The CLA shall ensure that the respective shares of the REs (regulated entities) are reflected in the books of both REs without delay after disbursement by the originating RE to the borrower, in any case not later than 15 calendar days from the date of disbursement,” the RBI circular said. 

The draft norms had said that each loan under the arrangement shall be shared among the funding entities right from the time of first disbursement. This means that the loan account to a borrower is simultaneously funded by both the co-lending partners on the day the loan is disbursed. With this requirement being removed, the final norms are more relaxed, allowing lenders 15 days to fund their share of the loan, industry experts said.

If the originating entity is unable to transfer the share of the exposure to the partner entity within 15 days, the loan/s shall remain on the books of the originating entity and can then only be transferred to other eligible lenders as per the provisions under Transfer of Loan Exposure norms of 2021, RBI said.

In a continuation of the draft norms, the final norms also specified that in case a borrower account becomes stressed or non-performing for one lender, it will have to be classified similarly for all lenders that are part of the arrangement.

“REs shall put in place a robust mechanism for sharing relevant information in this regard on a near-real time basis, and in any case latest by end of the next working day,” it said.

Blended interest rate

The final interest rate charged to the borrower shall be the blended interest rate, calculated as an average rate of interest derived from the rates charged by partner lenders, weighted by the proportionate funding share of concerned lenders under the arrangement.

“Any change in rates by respective REs under CLA will be made as per their credit policy and extant regulatory norms, and the same shall be reflected in the updated blended rate and communicated to the borrower,” the RBI said, adding that any additional fees or charges payable by the borrower will also need to be incorporated in computation of annual percentage rate (APR) and disclosed appropriately in the key fact statement of the loan.

“The requirement that it has to be a blended rate of two partners could make co-lending less lucrative. For example, banks would have a lower cost of funds compared with an NBFC, thus the blended rate could be lower than the current arrangements; this could impact the overall returns for the originating partner vis-a-vis the current levels,” ICRA’s Karthik said.

Any subsequent transfer of loan exposures to third parties, or between the lending entities will need to be compliant with the loan exposure directions and with mutual consent of both the originating and partner entities.

Lenders will need to implement a business continuity plan to ensure uninterrupted service to their borrowers till repayment of the loans, in the event of termination of the co-lending arrangement between the lenders. They will also need to disclose a list of all active co-lending partners on their websites.

Regulated entities will need to put in place a credit policy that incorporates provisions relating to co-lending arrangements, including the internal limit for the proportion of their lending portfolio, target borrower segments, due diligence of partner entities, customer service and grievance redressal mechanism.

Further, the co-lending agreement will need to include detailed terms and conditions of the arrangement, criteria for selection of borrowers, specific product lines and areas of operation, fees payable for lending services, segregation of responsibilities, timeframe for exchanging critical information, customer interface and customer protection issues and grievance redressal mechanism.