Co-Lending Model
The Co-Lending Model (CLM) is an RBI-regulated framework enabling banks and NBFCs to jointly originate and fund priority sector loans, typically in an 80:20 risk-sharing ratio, combining the NBFC's last-mile reach with the bank's lower-cost funds to extend credit to underserved segments.
The Co-Lending Model was formalised by the RBI through guidelines issued in November 2020, superseding the earlier Co-origination framework of 2018. The underlying objective is to leverage the comparative advantages of the two institution types: banks have access to low-cost deposits and stronger capital buffers, while NBFCs and microfinance institutions have granular distribution networks, credit underwriting capabilities for informal sector borrowers, and operational flexibility in remote or underserved markets.
The standard co-lending structure requires the NBFC to retain a minimum of 20 percent of each loan on its own balance sheet at all times, while the bank takes the remaining 80 percent. This shared risk structure aligns the incentives of both parties — the NBFC has 'skin in the game' and cannot simply originate and pass all risk to the bank. The bank retains the NBFC's origination for priority sector lending classification purposes, helping banks meet their PSL targets without building their own last-mile networks.
The co-lending arrangement operates under a Master Agreement between the bank and NBFC specifying loan eligibility criteria, credit underwriting standards, portfolio monitoring, and servicing responsibilities. The NBFC typically handles the customer-facing origination and collections, while the bank funds 80 percent of each eligible loan. The interest rate charged to the borrower reflects a blended rate determined by the weighted average of the bank's and NBFC's funding costs plus margin.
Beyond priority sector lending, the co-lending framework's risk-sharing model gained applicability in segments like MSME loans, home loans in tier-3 and tier-4 cities, agricultural and allied activity loans, and microfinance. By 2023–24, co-lending partnerships between major banks (SBI, Bank of Baroda, Axis Bank, Kotak Bank) and NBFCs (Cholamandalam, Mahindra Finance, Five-Star Business Finance, and others) had built co-lending books of significant scale.
The RBI also introduced the concept of 'co-lending to the MFI sector' for unsecured microfinance loans, where the bank's 80 percent portion qualifies for priority sector lending under the small and marginal farmer or weaker sections sub-targets. This unlocked a new refinancing avenue for MFIs, supplementing their traditional resource-raising through term loans and securitisation.
For equity analysts covering banking and NBFC stocks, co-lending books introduce complexity in balance sheet analysis — the NBFC retains 20 percent exposure but services 100 percent of the portfolio, creating off-balance-sheet management obligations. The quality of the co-lending book (delinquencies, write-offs) is not always transparently disclosed, making due diligence on co-lending partnerships an important element of NBFC credit analysis.