Why in the news?

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

Co-Lending

  • What is Co-lending?: 
    • It is a collaborative mode of lending where two lending institutions jointly fund loans to borrowers
  • Benefits of Co-lending:
    • Increased credit flow to underserved segments such as MSMEs and helps in achieving financial inclusion
    • Ensures stronger customer protection measures
    • Help strengthen the lending ecosystem by uniform NPA classification and clear borrower level disclosures
    •  Partnering NBFCs in lending will help banks to meet their PSL targets
    • Near real-time credit information sharing helps detect stress in the ecosystem early
  • Highlights of the Co-lending Guidelines:
    • Mandatory loan retention: All regulated entities involved in co-lending such as the banks and NBFCs must retain at least 10% of each individual loan on their balance sheet.
    • Uniform Asset Classification: If one lender classifies a borrower as a Special Mention Account (SMA) or non-performing asset (NPA) due to default, the co-lending partner shall also assign the same status to the borrower.
    • Default Loss Guarantee Cap: The  lending entity can provide a default loss guarantee capped at 5% of the outstanding loan amount
    • Credit Information Sharing: Both entities must also share relevant credit information on a near real-time basis
    • Internal Policy Requirements: Regulated entities must update their credit policies and prepare dedicated internal guidelines covering aspects such as Internal portfolio limits, Target borrower segments, Fee structures, etc.
  • Challenges Faced
    • Operational Coordination: Achieving uniform asset classification standards across institutions will require meticulous process harmonisation and robust governance mechanisms.
    • Technology Integration: Establishing seamless, near real-time credit information sharing across multiple lenders’ systems will be both technologically complex and financially demanding.
    • Capital Constraints: Higher retention requirements could dampen lending appetite in certain sectors, particularly affecting the availability of small-ticket loans
    • Transition Risks: Renegotiation of existing agreements and potential ambiguity during the shift to new norms may disrupt operations and create compliance uncertainties.