What Is Co-Lending Model?

The term “co-lending” refers to a joint operation of at least two or more than two financial sector entities. Generally, co-lending happens between banks and NBFCs, NBFCs and NBFCs, and NBFCs and banks.

There are numerous instances when financial interfaces between different financial sector entities happen in the form of co-lending, loan referencing, etc. The aforementioned practices have been popular in finance for quite some time now. However, the co-lending model is relatively new to this game. The Reserve Bank of India allowed and implemented the model under its regulations on “Co-origination of loans between banks and NBFC-SIs to grant a loan for private sectors.”

The Reserve Bank of India decided to widen the horizon of the co-lending model based on its Development and Regulatory Policies’ statement. Earlier, only certain NBFCs were permitted to implement the co-lending model. Now, all NBFCs have permission to implement and follow this model.

Moreover, RBI also established a new regulatory structure regarding the co-lending model. The notification, dated November 5, 2020, focuses on priority sector loans. This co-lending model displaces the up-and-coming norms regarding co-origination.

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Understand Co-lending Model

The Reserve Bank of India recently established a new framework regarding loans and their co-origination by non-banking financial companies or NBFCs, as well as private banks. Since the liquidity crisis has been a significant issue in most NBFCs, this system aims to neutralise the problem and enhance priority sectors’ credit flow. A famous model that has gained immense popularity in finance is known as the co-lending model or CLM.

What are Major Benefits of the Co-Lending Model?

Different entities enjoy different benefits when it comes to the co-lending model. Here is a detailed look at each of them:


  • Enhanced Reach

Since NBFCs have better reach when it comes to remote areas of the country, banks benefit from lending to a wider base of businesses and customers.

  • Reduced Underwriting Efforts

As per the rules and regulations regarding the co-lending model, NBFCs are required to put in a minimum capital of 20%. This condition significantly helps banks since the quality of customers that get forwarded to the bank is top-notch. Hence, banks’ underwriting efforts get reduced considerably.


  • Lower Rates of Interest

Since banks have the authority to access cheap funds in the financial sector, NBFCs have the perfect opportunity to benefit by indulging in a co-lending agreement.

Doing so facilitates them to extend loans featuring comparatively lower rates of interest. Hence, entities searching for a loan featuring an overall lower cost and robust financial backing significantly benefit from this.

  • Brand Credibility

One of the most effective ways following which new companies can build a sustainable reputation for themselves in the market is by coming in partnership with renowned banks.


  • Enhanced Customer Experience

Modern partners such as fintechs ensure a smooth and seamless customer experience when it comes to going through the co-lending procedure. This facilitates them to retain customers and have a beneficial professional relationship.

  • Lower Interest Rates

To go through a seamless co-lending procedure, consumers do not need to pay high interest rates. This is primarily due to the fact that multiple banks are on board and readily available for consumers who are looking for an affordable loan.

What Is the Potential Applicability of the Co-lending Model?

The co-lending model norms earlier used to encompass only transactions between banks and NBFCs-SI. However, the model now covers transactions between all banks and NBFCs.

Besides banks and NBFCs, modern Fintechs leverage multiple algo-based originations and use the web for originations. Moreover, they also spend considerable time and effort lending to either banks or NBFCs.

Thanks to its widened horizons, the co-lending model aims to improve its penetration into the market and ensure widespread reach. Besides this, its set of objectives also include meeting financial inclusion goals and minimising the cost for the beneficiary of loans.

Smaller NBFCs perform exceptionally well when it comes to distributing and operating efficiently, which is why, following the co-lending model is deemed a prudent move for them. Moreover, the Reserve Bank of India excludes foreign banks from the CLM ambit, including wholly-owned bank subsidiaries with less than 20 branches.

Furthermore, small finance banks and similar partner institutions, including urban cooperative banks, local area banks, etc., have also been meted out the same treatment.

Pre-Condition on Co-Lending Model

There are two ways to look at RBI’s CLM norms. It can either be seen as a limitation for financial sectors or as a relaxation from being a part of the CLM model. However, it should be kept in mind that the co-lending model is deemed a precondition for loans’ priority sector lending treatment.

As per the Reserve Bank’s CLM regulations, the aim is not to limit the CLM arrangement outside the co-lending model.

However, if the principal lender of the loan grants it to the borrower as a priority sector loan, the co-lender is allowed to treat the principal lender’s loan share as a priority sector loan to adhere to CLM norms.

In simpler terms, if the loan does not match CLM’s requirements, the bank in question may not grant a private sector loan or PSL status, even if the loan granted is, in actuality, a PSL loan.

As mentioned earlier, many financial institutions operate and act as co-lenders. However, PSL’s Master Directions features a different implication. It directly excludes certain entities like regional rural banks (RRBs), UCBs, LABs, etc., under the co-origination of loans by NBFCs and SCBs to PS.

Interest Rates on Loan Originated under Co-lending Model

The previously-issued guidelines regarding CLM focus on blended rate of interest calculations to determine the interest charged on any loan under the CLM norms. However, as per the new guidelines, the rate of interest will be estimated by assigning weights as per the risk exposure to the lender’s benchmark rate of interest.

This transition in the new CLM norms aims at imparting flexibility to lenders and also ensures that disbursal costs to the remote sector are fairly compensated. Moreover, the new norms also state that the interest rate must be an inclusive rate that both parties agree upon. However, the decided rate of interest must not be stringent since it would violate the established regulations under the fair practice code.

Role of NBFCs under the Co-lending Model

The older provisions of the CLM model stated that the co-lending NBFC’s share should be at least 20%. This aspect has not changed. Co-lending NBFCs are still required to maintain a minimum of 20% share in their official books when it comes to individual loans.

According to the co-lending model’s regulations, the co-lending NBFC is supposed to act as the primary and only interface point for its clients. Besides this, the grievance redressal function must also be set up and carried out accordingly throughout the entire process by the entities concerned.

What are the Operational Aspects of Co-lending Model?

Here is a detailed look at some of the operational aspects of the CLM as per the Reserve Bank of India’s notification:

Escrow Account

As per the CLM’s norms, financial entities must open an escrow account to serve the purpose of disbursing loans, collecting, etc. The creation of escrow accounts prevents the commingling of funds. The co-lending banks and NBFCs are bound to maintain every borrower’s account to ensure proper exposure assessment. The bank and the NBFC are supposed to sign a Master Agreement that encloses rights and duties regarding the maintained escrow account.


Each of the lenders involved in a CLM arrangement must keep a record of their respective exposures in their official books. To ensure the purpose of exposure is fulfilled, the involved entities should also classify their assets and provision them. To fulfill the goal, the escrow account’s monitoring may be done by either of the co-lenders, as stated in the conditions of the Master Agreement. In most cases, the monitoring duties are assigned to the NBFC since it is the entity that gets direct exposure from customers.

Creation of Security

The Master Agreement contains the method for creating a charge on the security for the loan disbursed. Based on the stated method, the involved parties need to create security for the co-lending arrangement.


The co-lending model holds potential to introduce a significant change in the country’s priority sector. Numerous involved entities, including MSMEs, play a vital role in enhancing the condition of India’s socio-economic development.

Similar to other partnerships, getting involved in co-lending arrangements should be entered into with utmost caution. There is a certain amount of risk involved, but the primary threat revolves around the brand’s image.

Entering into a co-lending arrangement could either make or break it, depending on the other party’s actions.