News: The Reserve Bank of India (RBI) has issued revised guidelines to strengthen the co-lending framework between banks and non-bank financial companies (NBFCs).
RBI Tightens Co-lending Norms
- Co-lending: It is a brilliant example of financial teamwork where two financial institutions, like a big bank and an NBFC, team up to give out loans together.
- It refers to the collaborative loan service where two lending institutions jointly fund loans to borrowers.
- This partnership allows both entities to distribute their resources more efficiently, providing customers with the combined expertise and financial muscle of both lenders.
Revised Guidelines of RBI
- The new framework will supersede the co-lending guidelines issued in 2020, which were limited to priority sector lending.
- The revised rules will come into force from 1 January 2026, though lenders may choose to implement them earlier based on their internal policy.
- Under the new Co-lending Arrangements (CLA) Directions, 2025, all regulated entities—including commercial banks (excluding small finance banks, regional rural banks, and local area banks), all-India financial institutions, and NBFCs (including housing finance companies)—must retain a minimum of 10 per cent of every loan on their books.
- Uniform NPA Tagging To Prevent Arbitrage
- To address regulatory gaps, the RBI has introduced borrower-level asset classification.
- If a loan is classified as a Special Mention Account (SMA) or Non-performing Asset (NPA) by one lending partner, the same classification must be adopted by the other
- This information must be shared on a near real-time basis to avoid regulatory arbitrage.
- Borrowers’ Charges
- Borrowers will now be charged a blended interest rate, calculated as the weighted average of each partner’s internal rate based on their share of funding.
- All other charges must be disclosed in the Key Facts Statement (KFS) and factored into the Annual Percentage Rate (APR).
- Borrower Protection and Operational Clarity
- The new rules mandate detailed loan agreements specifying borrower eligibility criteria, product structure, partner roles, and fee arrangements.
- A single point of contact must be designated for the borrower throughout the loan lifecycle, and any change must be communicated in advance.
- Dedicated Escrow Account.
- Disbursements and repayments are to be routed exclusively through a dedicated escrow account.
- Partner lenders must reflect their loan share within 15 days of disbursal; failure to do so will result in the loan remaining on the originating lender’s books, with transfer allowed only under RBI’s Transfer of Loan Exposure guidelines.
- Transparency and Timeline
- Lenders are now required to publicly disclose co-lending arrangements on their websites and in their financial statements.
- These disclosures must cover loan amounts, sectors served, interest rates, fees, and partner names.
- Credit policies must be updated accordingly, and institutions must devise business continuity plans to safeguard borrowers in case of partnership termination.
