RBI’s Co-Lending Overhaul: Why This Could Reshape How India Borrows (and Lends)

Let’s not sugar-coat it—April 9, 2025, may not have made headlines for most people, but for anyone remotely connected to lending, banking, fintech, or even just trying to take out a home loan, what the RBI announced that day could end up changing the financial game altogether.

At the heart of it is a massive shift: the Reserve Bank of India wants to rewrite the rulebook on co-lending—and not just tweak a few lines. We're talking about a complete rework.

Let’s Talk About Co-Lending—What It Was vs What It’s About to Become

Here’s the old model in simple terms.

• Banks and NBFCs (non-banking financial companies) could team up.
• But they could only work together on priority sector loans (PSL). That includes things like farm loans, small-business financing, or housing for low-income families.
• If you were applying for a home loan in Delhi, a startup loan in Bangalore, or a gold loan in Jaipur—co-lending didn’t apply to you. It was off-limits.

The system wasn’t broken, but it was clunky.

Banks had the money but lacked local reach. NBFCs had the reach but not enough capital. That imbalance meant a lot of small businesses, especially in Tier II and Tier III cities, fell through the cracks.

So What Did RBI Do?

The RBI’s new proposal tears that old model down.

• All regulated entities can now co-lend. That includes not just banks and NBFCs, but also Small Finance Banks, Regional Rural Banks, Housing Finance Companies, MFIs, and even fintechs with lending licenses.

• All loan types are eligible. You name it—home loans, personal loans, SME loans, vehicle loans—they’re all on the table now.

• Risk-sharing is real and expected. Both parties in a co-lending partnership will need to bear the risk, not just push it onto the bank.

And yes—RBI will soon issue detailed guidelines. But this is the broad architecture that’s now being laid out.

Why This Change—and Why Now?

Truth is, the writing’s been on the wall since 2023.

Back then, RBI had started expressing concerns about how co-lending was quietly drifting into risky territory. Banks were entering deals where they carried the bulk of the credit risk but weren’t doing their own due diligence.

That’s a regulatory nightmare waiting to happen.

What’s more—non-PSL co-lending was already taking place. According to Kishore Lodha, CFO of UGRO Capital, around 75% of co-lending volumes were non-priority sector. This was happening under special approvals from the RBI. In a way, the RBI is now just legitimising and regulating what was already going on in practice.

Oh, and RBI Also Cut the Repo Rate

On the same day, the central bank also trimmed the repo rate by 25 basis points, bringing it down to 6.00%.

This was the second rate cut this year, following one in February. The message is clear: RBI wants credit to flow more freely—and cheaper. Especially with a broader co-lending framework now in place, this move adds tailwinds to lending activity.

Why RBI Was Concerned: A Few Harsh Truths

There’s a reason the RBI didn’t just give a free pass to co-lending earlier. They’ve seen the risks. Here’s what they were wary of:

• Banks were taking on too much risk without proper oversight, while NBFCs originated the loans.
• Due diligence was often shallow. Some banks were signing off on loans based purely on NBFC assessments.
• There was regulatory arbitrage—essentially, workarounds to avoid certain capital rules by exploiting the co-lending structure.

Winners, Watchouts, and the Real Impact

For Banks: A Bigger Loan Book—But More Scrutiny

You can now co-lend with a broader set of partners, which means faster credit growth. But don’t relax—you’ll need stronger compliance systems. RBI will expect deeper due diligence, not just rubber-stamping NBFC data.

For NBFCs & Fintechs: More Access to Bank Capital

This is big. You’re no longer restricted to PSL categories. Expect an explosion of new lending products, joint ventures, and fintech-bank partnerships. But again, this isn’t free money—regulators will keep a closer eye on risk models and governance.

For Borrowers: More Choice, Better Rates, Quicker Approvals

If competition works the way it should, borrowers could win big. Better interest rates, faster approvals, and possibly more customised loan products.

For MSMEs: A Real Lifeline

Small businesses in India often struggle with formal credit. With more co-lending options, they may finally see faster funding, fewer conditions, and simpler paperwork. This reform, if executed well, could fuel serious entrepreneurial momentum.

But Let’s Not Pretend It’ll Be Easy

Even with the green light, these partnerships don’t come together overnight.

Expect prolonged negotiations over:

• Who carries what percentage of the loan risk
• How borrower data is shared and protected
• What kind of monitoring systems are put in place

What Comes Next? Here’s What to Watch

• Detailed risk-sharing norms: Will RBI fix minimum thresholds? What happens when a borrower defaults?
• Borrower transparency: Will you know if your loan is co-lended? Will repayment rules be affected?
• Technology mandates: How will banks and NBFCs sync real-time loan data and manage servicing?

In Summary

RBI isn’t just changing a policy—it’s resetting the architecture of how credit flows through India’s financial system. By widening the co-lending umbrella to include all loan categories and all regulated lenders, the central bank is betting on smarter partnerships, stronger compliance, and deeper credit penetration.