Co-lending has become one of the main ways Indian banks reach MSME, affordable housing, gold and small-ticket retail borrowers through the distribution reach of NBFCs. The commercial logic is simple: the NBFC brings origination, local knowledge and servicing; the bank brings lower-cost funds. The harder question, and the one regulators, auditors and credit committees keep returning to, is who actually owns the underwriting decision and the credit risk.
This guide walks through the RBI's co-lending framework as it has evolved, how risk is shared under the typical 80:20 structure, what "independent underwriting" means in practice for the bank, and the data, escrow and audit arrangements that make a co-lending programme hold up under scrutiny. It is a practitioner overview, not legal advice; always read the current RBI text before designing or renewing an arrangement.
The Co-Lending Model at a Glance
- 2020 CLM framework — Banks and NBFCs/HFCs co-lend to priority sector borrowers, with the NBFC retaining at least 20%
- Later directions — RBI has since issued broader co-lending directions covering more regulated entities and loan types
- Two take-up routes — Pre-agreed mandatory take-up, or case-by-case at the bank's discretion
- Risk sharing — Pro-rata to each lender's share of the loan, not concentrated in one party
- Fund flow — Through an escrow account, not through either lender's operating account
- Accountability — Each lender remains responsible for its own credit policy, KYC, classification and reporting
Regulatory details summarised here are indicative. Check the RBI Master Directions and notifications pages for the current position.
How the RBI Co-Lending Model Evolved
From co-origination to the 2020 CLM
The RBI first allowed banks and NBFCs to co-originate priority sector loans in 2018. In November 2020 it replaced that arrangement with the Co-Lending Model (CLM) for priority sector lending, extended to housing finance companies. Under the CLM, the bank and the NBFC jointly fund loans to eligible priority sector borrowers on the basis of a board-approved master agreement, with the NBFC retaining a minimum share of the individual loan on its own books, which the framework set at 20%.
The 2020 circular described two routes. Under the first, the bank commits in advance to take its share of loans originated by the NBFC, which makes the arrangement operationally close to joint lending and requires the bank to satisfy itself that the NBFC's underwriting meets its own standards. Under the second, the bank retains discretion to accept or reject each loan after its own due diligence, an arrangement the RBI treated as similar to a direct assignment transaction for regulatory purposes, with certain relaxations.
The broader co-lending directions
In 2025 the RBI issued updated directions on co-lending arrangements that, as generally understood by the industry, extend the framework beyond priority sector loans and beyond the bank-NBFC pair to a wider set of regulated entities, while tightening expectations on minimum retention by each lender, the timeline for the partner to take its share, consistent asset classification across partners, borrower disclosures and default loss guarantee arrangements. The RBI has also been consolidating its circulars into entity-wise Master Directions. Because exact thresholds, effective dates and scope can change, lenders should take the specific numbers from the current RBI text on the Master Directions page and recent RBI notifications, rather than from summaries such as this one.
Risk Sharing: What 80:20 Really Means
In the classic CLM structure, the bank funds 80% of each loan and the NBFC funds 20%. The intent is that the originator has meaningful skin in the game on every loan, so it does not originate risk it would not hold itself. Credit losses, interest income and prepayments are shared in proportion to each lender's share.
| Element | Typical treatment in co-lending | Underwriting implication |
|---|---|---|
| Funding share | Bank majority (commonly 80%), NBFC minority retained on its own books | Bank carries most of the credit exposure and must be able to justify each loan under its own policy |
| Loss sharing | Pro-rata to share; any first-loss or default loss guarantee only within limits RBI permits | A guarantee does not substitute for the bank's own credit assessment |
| Interest rate | Single blended, all-inclusive rate disclosed to the borrower | Pricing must be consistent with both lenders' risk-based pricing policies |
| Asset classification | Each lender classifies its share; frameworks increasingly expect consistent borrower-level classification across partners | Shared, near real-time repayment data becomes essential |
| Customer interface | Usually the NBFC as single point of contact, with roles disclosed upfront | Both lenders remain accountable for fair practices and grievance redressal |
Who Owns Co-Lending Underwriting?
The short answer is both lenders, independently. The NBFC originates and underwrites under its own board-approved credit policy, because it holds its share on its own book. The bank is expected to apply its own credit policy and due diligence to its share, either loan by loan (in the discretionary route) or by agreeing underwriting criteria upfront and verifying that the NBFC applies them (in the pre-committed route). A bank that simply funds whatever the NBFC approves, without its own assessment, risks having its share treated as an unmanaged outsourced exposure.
In practice, this usually breaks down into a clear allocation of responsibilities:
Originating NBFC
Partner bank
- • Board-approved co-lending policy and partner selection criteria
- • Approving the eligibility and underwriting criteria for its share
- • Independent checks: bureau, policy rules, sample or full file review
- • Ongoing monitoring of partner portfolio quality and audit
- • Its own asset classification, provisioning and regulatory reporting
What independent underwriting looks like in practice
Independent does not have to mean duplicated. Most banks do not send their own field executives to every address. Instead, they define a credit rulebook for the co-lending product and test every loan against it using the data the NBFC shares, plus their own bureau pull. Common elements include:
- Policy filters: Bureau score bands, existing delinquencies, age, ticket size, tenor, geography and sector exclusions
- Capacity checks: Recomputing FOIR for individuals and DSCR for businesses from shared income, bank statement and GST data rather than accepting the NBFC's figure
- Evidence review: Verifying that CPV, valuation and legal reports exist, are recent and carry proof of visit, such as geo-tagged photographs and time stamps
- Deviation control: Loans approved by the NBFC with deviations from the agreed policy are either rejected by the bank or routed to its own credit team
- Sampling and post-facto audit: Full file review for a sample of loans, plus periodic audits of the NBFC's underwriting process
This only works if the NBFC's underwriting output is structured. A free-text CAM and scanned reports are hard for a bank to test at volume. Reconciled GST figures (see our GST reconciliation guide), parsed bank statement metrics and digital CPV reports with defined fields make independent checks automatic. Our credit underwriting process guide describes the underlying workflow.
Data Sharing Between Co-Lenders
Co-lending runs on data. At origination, the bank needs enough information to make and evidence its own decision; after disbursal, both lenders need the same view of repayments to classify the loan consistently. Key design points:
- Borrower consent: Customers should be told that the loan is co-lent, who the lenders are and that their data will be shared between them, with consent captured in a way consistent with the RBI Digital Lending Directions and data protection law
- API-based exchange: Application, KYC, bureau, BSA, GST, CPV and CAM data shared through APIs into the bank's decision engine, rather than file uploads and emails
- Repayment and status feeds: Daily or near real-time sharing of collections, overdue status and restructuring, so that SMA and NPA classification stays aligned
- Audit trail: Every decision, deviation and override logged with user and timestamp, available to both lenders and their auditors
- Information security: Access controls and retention rules that meet both partners' outsourcing and IT governance requirements
Escrow and Fund Flow
The RBI framework requires that disbursals and collections in co-lending pass through an escrow account rather than through either lender's operating account, so that funds are not commingled and each partner's share is traceable. A typical structure:
- Both lenders fund their shares into the escrow account, from which the loan is disbursed directly to the borrower or seller, consistent with direct fund-flow expectations in digital lending
- Borrower repayments, usually collected through NACH or UPI mandates, are credited to the escrow account
- Collections are split according to the agreed waterfall: principal and interest by share, with the servicing fee to the NBFC as agreed
- Reconciliation between the escrow account, the NBFC's loan management system and the bank's books is performed at a defined frequency
Escrow reconciliation is where many co-lending programmes run into operational friction. A loan management system that holds each lender's share, interest computation and appropriation rules at loan level, such as CARMA Core, reduces manual reconciliation and the risk of classification mismatches.
Common Pitfalls in Co-Lending Underwriting
Rubber-stamp approvals
The bank approves nearly everything the NBFC sends without evidence of its own checks. This undermines the premise of shared risk and is a common audit observation.
Policy drift
The NBFC updates its credit policy for its own book, but the co-lending product continues to be underwritten against an older agreed version, or vice versa. Version-controlled rulebooks shared between partners prevent this.
Weak verification evidence
CPV and field reports exist but cannot be relied on independently: no photographs, no location, or visits completed suspiciously fast. Our CPV TAT benchmarks and agency vs digital CPV comparison cover how to make verification both fast and auditable.
Classification mismatches
Repayment data reaches the bank late, so the two lenders report different overdue status for the same borrower. This creates reporting inconsistencies and borrower grievances.
Unclear collection mandates
The agreement does not spell out who can take which recovery actions, including legal steps, so delinquent accounts stall. Both lenders must also ensure recovery practices follow RBI conduct expectations.
A Checklist for Bank and NBFC Credit Teams
- Board-approved co-lending policies at both entities, reviewed against the latest RBI directions
- A master agreement covering shares, take-up timelines, pricing, servicing, data sharing, escrow, recovery, exit and grievance redressal
- A jointly agreed, version-controlled underwriting rulebook for each co-lending product
- Automated independent checks by the bank on every loan, plus sample-based full file review
- Structured, shareable evidence for KYC, bureau, BSA, GST, CPV and CAM
- Escrow-based fund flow with daily reconciliation and loan-level share accounting
- Shared repayment feeds and consistent borrower-level classification
- Clear borrower disclosure of the co-lending arrangement and blended rate
CARMA Assess gives originators and partner banks a shared, rule-driven credit underwriting layer, with GST and bank statement analysis, CPV verification evidence and CAM output that each lender can test against its own policy. For background on GST-led assessment, see AI credit scoring with GST data; for capacity analysis, see bank statement analysis for MSME underwriting; and for verification basics, see what is CPV.
One Underwriting Record, Two Independent Decisions
Shared data, partner-specific rulebooks, auditable evidence and loan-level share accounting for co-lending programmes.
