Unifying the Framework & Strengthening Oversight: RBI’s Draft 2025 Directions on Co-Lending Arrangements Explained

Introduction

The Reserve Bank of India (‘RBI’) recently released the draft RBI (Co-Lending Arrangements) Directions, 2025[i] (‘CLA Directions’), proposing a comprehensive regulatory framework to govern all forms of co-lending arrangements (‘CLAs’) entered into by regulated entities (‘REs’) for extending credit, including but not limited to traditional sourcing models.

While certain aspects of co-lending – such as digital lending, bank-NBFC collaborations for priority sector lending, and outsourcing of financial services – are currently governed by specific RBI frameworks, there was been no unified regulatory treatment for the full spectrum of co-lending structures. The proposed CLA Directions aim to address this regulatory vacuum by establishing a harmonized, market-enabling, and prudentially sound regime. Once notified, the CLA Directions will supersede the existing Guidelines on Co-Lending[ii], thereby eliminating the earlier bifurcation of co-lending models and bringing loan sourcing and servicing arrangements under a single umbrella framework.

Scope, Applicability and Definitions

The CLA Directions apply to all CLAs entered into by the following permitted REs:

• All commercial banks, excluding small finance banks, local area banks, and regional rural banks (RRBs),

• All All-India Financial Institutions (AIFIs),

• All Non-Banking Financial Companies (NBFCs), including Housing Finance Companies (HFCs).

However, these Directions do not apply to loans exceeding Rs. 100 crores sanctioned under multiple banking, consortium lending, or syndication arrangements. Digital Lending (‘DL’) arrangements will continue to be governed by the DL Guidelines[iii], but any DL transactions will be subject to both frameworks.

Additionally, unless otherwise permitted by the RBI or under existing regulatory frameworks, permitted REs cannot enter into CLAs that do not conform to these Directions. Importantly, the CLA Directions shall also apply mutatis mutandis to arrangements where REs source loans from other REs or non-REs under outsourcing agreements, even if no fund or non-fund exposure is involved.

The CLA Directions also define two key terms:

• CLA: a legally binding agreement among permitted REs to jointly fund a loan portfolio in pre-agreed proportions, involving risk and revenue sharing, with or without sourcing or servicing roles.

• Sourcing Arrangement: where a RE or non-RE sources funding for a RE on a fee basis, with the entire exposure booked by the funding RE from inception.

Key Regulatory Framework

As part of general governance and risk management measures, REs are required to revise their credit policies to include internal exposure limits for CLAs, identify target borrower segments, and establish due diligence criteria for prospective partners. Each RE must also implement a grievance redressal mechanism and maintain adequate documentation to demonstrate compliance with the Directions.

Each CLA must be supported by a formal legal agreement detailing eligibility norms, product categories, serviceable geographies, the role of each partner RE (including sourcing and servicing responsibilities), and fee arrangements. Additionally, the loan agreement between the borrower and the funding RE must disclose each RE’s role, specify the customer-facing RE (which may not be changed without borrower consent), and include provisions relating to borrower protection and grievance escalation mechanisms.

The Directions clarify that in eligible cases, commercial banks can claim their share of credit exposure under a CLA as part of their priority sector lending (PSL) targets. NBFCs, meanwhile, are required to adhere to applicable accounting standards and must deduct any unrealised profits from their Common Equity Tier 1 (CET1) capital or Net Owned Funds (NOF), until the maturity of the underlying loans.

Regarding pricing, the CLA Directions stipulate that borrowers must be charged a blended interest rate, which must align with each RE’s internal credit pricing policy and the borrower's risk profile. Any fees or charges payable to the sourcing or servicing entity must be determined based on objective, Board-approved criteria, should be separated from the blended interest rate, and should be free of any embedded default loss guarantee or credit enhancement unless specifically permitted by the RBI.

Such fees must also be included in the calculation of the Annual Percentage Rate (APR) and clearly disclosed in the Key Facts Statement (KFS) in accordance with the RBI circular dated 15.04.2024[iv].

Operational Conditions in the CLA Directions

On operational mechanics, all borrower-related transactions - disbursements and repayments – shall be routed through an escrow account maintained with a scheduled commercial bank (which can be one of the REs). In case of sourcing-only arrangements, borrowers must directly remit repayments to the funding RE’s account without routing through any third-party or pool accounts.

Each loan must be jointly funded by the REs from the first disbursement, under a non-discretionary Inter Creditor Agreement (‘ICA’) that clearly outlines each RE’s rights and responsibilities. Participating REs are also required to cover all CLA transactions under their internal or statutory audit framework.

Importantly, the Directions emphasize borrower protection: the customer service norms applicable to the RE with the higher funding share will be binding on all participating REs. Any borrower complaint must be resolved within 30 days, failing which it may be escalated to the RBI’s Complaint Management System (CMS) or Centralised Receipt and Processing Centre (CRPC).

Further, each RE must independently report its share of the exposure to credit information companies (CICs) in line with the Credit Information Companies (Regulation) Act, 2005.

In a key departure from the earlier 2020 co-lending model[v], the CLA Directions permit Default Loss Guarantees by a partner RE (either sourcing or funding RE), capped at 5% of the outstanding loan amount. However, this is subject to compliance with the RBI Guidelines on Default Loss Guarantees in DL[vi], and no other REs or non-REs may extend such guarantees unless specifically permitted by the RBI.

Compliance, Transfer, Outsourcing & Disclosure Norms

On asset classification, since the borrower is common across REs in a CLA, classification of exposure as Standard, SMA[vii], or Non-Performing Asset (NPA) by one RE must be replicated by all partner REs. Furthermore, all REs must strictly comply with the RBI’s Circular on Automation of IRACP[viii]. Any delay in recognizing stress or recovery due to operational inefficiencies will be treated as regulatory non-compliance.

If any RE wishes to transfer its exposure in a CLA loan to a third-party (or to another RE), such transfer must comply with the Master Directions on Transfer of Loan Exposures[ix]. Transfers to third parties are only permitted with the mutual consent of all original CLA participants.

REs may engage other REs or non-REs for loan sourcing or servicing. Still, such outsourcing must meet several additional safeguards: formal documentation, arm’s length terms, market-linked pricing, no deferred payments that could imply credit enhancement or support, and strict limits on the servicer’s liability. The servicer is not required to remit any funds unless and until it has received collections from the underlying borrowers.

Finally, the CLA Directions introduce comprehensive disclosure requirements. REs must publicly disclose the list of all their CLA partners, the indicative range of blended interest rates and applicable fees on their websites. They must also make quarterly disclosures in the Notes to Accounts of their financial statements, covering volume of loans under CLAs, weighted average interest rates, fees paid/received, sectors funded, performance of such loans, and any default loss guarantees extended.

Conclusion

The CLA Directions represent a significant regulatory overhaul aimed at providing a unified, clear, enforceable framework with a broader scope for co-lending transactions. By introducing mandatory ICAs, escrow account mechanisms, borrower disclosure norms, and blended interest rate pricing, the RBI has brought greater standardisation, transparency, and accountability into co-lending operations.

The express integration of consumer protection standards, grievance redress timelines, and KYC compliance ensures that borrower interests are not compromised in multi-entity lending structures. The Directions also reinforce prudential norms by prescribing uniform asset classification rules and ensuring that Default Loss Guarantees remain within a capped, regulated framework. Overall, this initiative is a welcome step towards building a resilient, well-regulated, and inclusive co-lending ecosystem that balances innovation with institutional safeguards and consumer trust.

End Notes

[i] RBI (Co-Lending Arrangements) Directions, 2025 – Draft for Comments – No. RBI/2025-26 released vide Statement on Developmental and Regulatory Policies, RBI Press Release No. 2025-26/63 dated 09.04.2025.

[ii] RBI Circular No. FIDD.CO.Plan.BC.No.8/04.09.01/2020-21 dated 05.11.2020.

[iii] RBI Circular No. RBI/2025-26/36 – DOR.STR.REC.19/21.07.001/2025-26 dated 08.05.2025.

[iv] RBI Circular No. RBI/2024-25/18 – DOR.STR.REC.13/13.03.00/2024-25 dated 15.04.2024.

[v] Supra Note ii.

[vi] Supra Note iii.

[vii] SMA refers to Special Mention Account, a classification used by the RBI to identify incipient stress in loan accounts prior to them becoming NPAs.

[viii] RBI Circular titled Automation of Income Recognition, Asset Classification and Provisioning Processes in Banks, bearing No. RBI/2020-21/37 dated 14.09.2020.

[ix] RBI Circular No. RBI/DOR/2021-22/86 – DOR.STR.REC.51/21.04.048/2021-22 dated 24.09.2021 (Updated on 28.12.2023).

Related Articles

As part of the same set of draft directions issued by the Reserve Bank of India, the following companion analyses are also available:

• RBI’s Draft Directions on Lending Against Gold Collateral, 2025: A Step Toward Harmonised and Responsible Credit Practices by Shivangi Bhardwaj

• RBI Issues Draft Directions on Non-Fund Based Credit Facilities: Bridging the Regulatory Gap by Nitish Solanki

These articles are part of our ongoing coverage of the RBI’s recent regulatory consultations aimed at building a unified, transparent, and risk-sensitive credit ecosystem.

Authored by Srishty Jaura, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.