The Reserve Bank of India (RBI) has introduced revised co-lending guidelines effective from January 1, 2026, marking a significant overhaul in India’s credit delivery system under the co-lending framework. These norms are designed to increase transparency, share risks responsibly, and broaden participation beyond priority sector lending to cover all types of loans. However, the immediate aftermath may see a reduction in lending volumes for both banks and Non-Banking Financial Companies (NBFCs) as they adapt to new operational challenges.
Key Highlights: Structural and Regulatory Changes
The revised regulations mandate that each co-lending partner (banks and NBFCs) must retain a minimum 10% share of every loan on its own books, a reduction from the previous 20% minimum exposure for NBFCs, aiming to boost their lending capacity.
Irrevocable and back-to-back fund commitments are required from all parties, replacing the earlier discretionary loan transfer approvals, ensuring both lenders share credit risk explicitly and simultaneously.
Lending agreements must specify detailed borrower criteria, due diligence processes, fee structures, grievance redressal mechanisms, and service obligations, injecting greater discipline and clarity into co-lending operations.
Co-lenders must synchronize borrower-level asset classification to reflect defaults uniformly, preventing one party’s non-performance from being obscured or shifted.
Introduction of a Default Loss Guarantee (DLG) mechanism allows the originating regulated entity to provide up to 5% guarantee to the funding partner, enhancing risk sharing but limiting reliance on credit enhancements.
Operational Impact and Near-Term Challenges
The elimination of the flexible loan assignment window (within 15 days of disbursement) and the joint credit policy requirement add complexity to the origination and ongoing management processes.
Technology integration between banks’ and NBFCs’ lending and risk systems is essential to comply with real-time borrower monitoring and data sharing, potentially slowing down loan processing and disbursement.
NBFCs operating under previous CLM-2 models face heightened compliance burdens, possibly reducing their ability to quickly scale loan book volumes in the short term.
Originators may need to invest in system upgrades, policy harmonization, and enhanced credit assessment frameworks before efficient full-scale implementation can resume.
Broader Implications for the Lending Ecosystem
By expanding the framework beyond priority sector loans, the directions democratize co-lending across various sectors, including secured and unsecured credit, promoting more inclusive credit access.
The transparency and regulatory oversight brought by the new norms aim to protect borrowers better, reducing predatory lending and fostering responsible credit extension.
Smaller and mid-sized NBFCs stand to gain from the easing of risk retention requirements from 20% to 10%, potentially unlocking more capital for lending despite near-term operational hurdles.
Banks gain clarity in roles and risk sharing, fostering healthier partnerships with NBFCs and strengthening the cooperative credit ecosystem.
Rating agencies and market experts anticipate a ‘reset’ period where co-lending volumes may dip temporarily but stabilize with improved systemic integrity and sustainable growth.
Future Outlook and Strategic Recommendations
Early adoption of the new framework is encouraged, supplemented by strategic investments in technological solutions for loan origination, credit appraisal, and risk management.
Developing interoperable platforms and standardized borrower data repositories will mitigate transaction frictions and ensure compliance.
The Mandatory DLG mechanism designed to promote transparent risk-sharing frameworks could evolve into broader securitization or credit risk transfer models over time.
Policymakers may consider phased implementations or regulatory support to ease transition pains, especially for smaller NBFCs adapting to the new landscape.
Conclusion
The Reserve Bank of India’s revised co-lending directions represent a milestone in evolving India’s credit markets toward greater risk sharing, transparency, and fairness. While the norms promise long-term sectoral benefits and improved financial inclusion, the near term may witness operational headwinds, including slower loan origination and increased compliance costs. Stakeholders who proactively realign systems, policies, and partnerships can navigate these changes successfully, leveraging the new framework to catalyze inclusive credit expansion and secure borrower interests.
Sources: Vinod Kothari Consultants, Financial Express, Crisil Ratings, RBI official notifications
