Co-Lending Model Under RBI Guidelines: How Banks and NBFCs Share Risk
Banks have the low-cost capital but often lack last-mile reach into underserved borrower segments; NBFCs have the reach and underwriting agility but a higher cost of funds. RBI's co-lending framework exists specifically to let the two combine forces on the same loan.
The basic structure
Under the co-lending model, a bank and an NBFC jointly extend a loan to a borrower, with each participant funding a portion of the loan and sharing in the risk and returns proportionately. The NBFC — typically closer to the borrower given its distribution reach, particularly in underserved and semi-urban/rural markets — generally handles origination, initial due diligence, and ongoing customer-facing servicing, while the bank provides the larger share of funding.
Why this structure exists — the priority sector lending driver
How the funding split typically works
Earlier co-lending guidance commonly referenced an 80:20 structure — the bank funding roughly 80% of the loan, the NBFC retaining roughly 20% on its own books — giving the NBFC meaningful "skin in the game" in each loan it originates (addressing a moral-hazard concern where an originator with no retained exposure might under-diligence borrowers). Subsequent regulatory guidance has allowed more flexible funding-split structures between the bank and NBFC partners, so the specific ratio in a given arrangement should be confirmed against the current applicable framework rather than assumed to always be 80:20.
Interest rate and borrower experience
The borrower typically deals with a single blended interest rate and a single point of contact (usually the NBFC, given its customer-facing role) despite the loan being jointly funded — the co-lending arrangement is meant to be largely invisible to the end borrower, who experiences it as a single loan from a single visible lender rather than a split obligation to two separate entities.
Risk-sharing and default handling
Both the bank and NBFC share credit risk proportionate to their respective funding share in the underlying loan — a default is not simply passed entirely to one party; each co-lender bears loss proportionate to their share, which is the core risk-sharing design (as opposed to a pure origination-and-sell-down model where the originator retains no ongoing risk).
Why NBFCs value this arrangement
Co-lending gives NBFCs access to bank-scale, lower-cost capital to fund a larger loan book than their own balance sheet and cost of funds would otherwise support — letting a well-run NBFC with strong underwriting/origination capability scale lending volume without needing to raise equivalent additional equity or expensive wholesale debt to fund the full loan amount independently.