Non-Banking Financial Companies (NBFCs) and banks tend to have varied strengths. Banks are usually well endowed with access to funds and regulatory support, while NBFCs are usually better positioned in terms of market reach, customer access, and borrower assessment capabilities. To bring these strengths together, the co-lending model has become increasingly relevant in the lending ecosystem.
This article outlines the meaning of co-lending model, its functionality, and what lenders need to understand regarding risk, regulation, and technology-driven collaboration.
What Is the Co-Lending Model?
The co-lending meaning implies a lending type built on a partnership basis, where a bank and an NBFC are joint lenders to borrowers. The loan exposure and funding contribution are usually agreed upon in advance. In most cases, banks finance approximately 80% of the loan, with the other 20% being financed by the NBFC. This may vary as per the agreement. This is only for illustrative purposed; this is not standard regulatory practice.
Within this framework, lenders can jointly offer loans to borrowers without affecting compliance standards, efficiency, and risk measures. These structured loan partnerships may benefit many borrowers, particularly those in the priority sector lending (PSL) categories.
A key objective is to promote financial inclusion, as it allows lenders to reach remote or underserved areas while balancing risk sharing in co-lending and understanding co-lending guidelines. The RBI framework is PSL-focused, while other segments depend on each lender’s policy.
How Does the Co-Lending Model Work?
Generally, in a joint loan origination model, the NBFC is responsible for lead generation, customer contact, initial eligibility screening, and credit underwriting. The bank can provide funds and conduct final verification until disbursement.
Simplified loan disbursement structure:
NBFCs usually lead day-to-day recovery and borrower interaction, while banks and NBFCs both remain responsible for regulatory compliance and periodic reviews as per RBI and internal policies. This is usually subject to applicable RBI guidelines and Know Your Customer (KYC) and Anti-Money Laundering (AML) norms.
Types of Co-Lending Models
Co-lending partnerships between banks and NBFCs are usually executed in two formats, depending on the mode of sourcing loans, processing, and servicing of the loan. The RBI has issued a co-lending framework for banks and NBFCs, primarily for priority-sector lending. Within this, lenders commonly adopt either a conventional (offline-heavy) or digital co-lending approach based on their operating capacity and borrower profile.
1. Traditional Co-Lending
Under this structure, across many arrangements, banks fund the larger share (for example, 80:20), though the actual ratio is agreed jointly.
- The NBFC is usually the first line of contact and manages sourcing, KYC, documentation, and operational coordination of disbursement and collections as per the co-lending agreement.
- The proportion of credit risk and repayments is proportional to the amount contributed by either party.
- The structure finds extensive application in MSME and priority sector lending, in which NBFCs provide extensive regional coverage and customer knowledge.
2. Digital Co-Lending
This approach leverages co-lending platforms in India and lending APIs to automate the entire co-lending workflow.
- Onboarding, credit evaluation, documentation, loan issuance, and servicing are done using integrated systems with little human intervention.
- Fintech platforms are used in order to facilitate processes, so that real-time sharing of data and better turnaround times are achieved.
- Perfect when lenders are focused on scale, speed, and online-first borrower experiences.
Through such co lending arrangements, the lenders are able to interactively via the physical and online channels to provide loans.
Digital Co-Lending vs Traditional Lending
For example, under Model 2, a fintech platform can auto-onboard MSME borrowers by capturing KYC documents and validating credit scores. It can also assign risk proportions between the bank and NBFC and disburse funds within a few hours, instead of the longer turnaround times typically seen in fully manual processing, while still complying with applicable RBI co-lending guidelines.
What Are the RBI Guidelines on Co-Lending?
In the co-lending framework, NBFCs and banks are required to enter into a Master Agreement with each other that details their duties under the co-lending framework.
- Loans provided on co-origination of loans should be provided in accordance with Priority Sector Lending (PSL) norms wherever they exist.
- Disbursements are generally made to the borrower’s account, unless the loan terms specify a third-party beneficiary.
- The repayments should be shared proportionately.
- Audit records and detailed reporting should be kept.
RBI also demands that lenders be transparent, particularly when conducting credit underwriting and servicing loans. For instance, if the bank holds an 80% share and the NBFC holds 20%, repayments may be automatically credited to each partner in the same proportion, according to the co lending policy.
Related Reading: If you’re preparing for loan applications, our guide on “How to Apply and Get a Business PAN Card” can help you complete one of the most essential compliance steps.
Final Thoughts on Co-Lending Model
The co-lending model offers a practical framework for collaboration between banks, NBFCs, and fintech partners, helping expand access to credit, especially for underserved segments. It can assist in the optimum use of capital, risk distribution, and enhanced coverage of customers. As long as technology is incorporated and there are strict RBI guidelines on co lending, this model can still further promote financial inclusion without affecting compliance and lending efficiency.
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FAQs
What are the different types of co-lending models?
In practice, lenders often talk about ‘Model 1’ (more traditional, offline-heavy co-lending) and ‘Model 2’ (more digital, platform-led co-lending). The exact structure depends on the co-lending agreement and RBI-compliant policies.
How does the co-lending model help the lender?
It can assist lenders in increasing the reach of borrowers, improving risk management by sharing, ensuring PSL compliance, and integrating digital technology with regulatory direction.
What is an example of co-lending?
In a typical co-lending arrangement, a bank and an NBFC jointly extend a loan to a borrower. For instance, if the total loan amount is ₹10 lakh, the bank may contribute ₹8 lakh while the NBFC provides ₹2 lakh. Both lenders share the income and credit risk in proportion to their respective contributions.
Is co-lending limited only to housing finance?
No, it could involve MSME lending, personal lending, vehicle lending, education finance, and priority sector lending.
What is the rate of interest in co-lending?
The interest rates can be based on the cost of funds the lending institution faces, the borrower's profile, and the risk analysis. The blended interest rate of co-lending can at times prove advantageous compared to conventional NBFC-only loans, since banks tend to be financed at lower rates. For example, if a bank lends at 10% and an NBFC lends at 14%, and their risk-sharing ratio is 80:20, the blended interest rate for the borrower may be around 10.8%, which is lower than taking a loan directly from the NBFC.