{"id":9502,"date":"2023-12-03T16:01:35","date_gmt":"2023-12-03T10:31:35","guid":{"rendered":"https:\/\/razorpay.com\/learn\/?p=9502"},"modified":"2023-12-11T14:29:49","modified_gmt":"2023-12-11T08:59:49","slug":"rbi-co-lending-guidelines","status":"publish","type":"post","link":"https:\/\/razorpay.com\/learn\/business-banking\/rbi-co-lending-guidelines\/","title":{"rendered":"RBI Co-Lending Guidelines Explained"},"content":{"rendered":"<p><strong>Fact checked by Swaroop Kuruvadi, Product Manager of Escrow+ &amp; Lending Products at RazorpayX<\/strong><\/p>\n<p>The first RBI co-lending guidelines were published by the RBI in 2018. Back then, it was known as co-origination, but the underlying concept of the model is the same.<\/p>\n<p>Today, banks and NBFCs follow the latest RBI guidelines on co-lending, as published in the circular dated November 5th, 2020.<\/p>\n<p>Here&#8217;s a breakdown of all the regulations around the co-lending industry.<\/p>\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_80 counter-hierarchy ez-toc-counter ez-toc-transparent ez-toc-container-direction\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-69e649dd83a38\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-69e649dd83a38\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/rbi-co-lending-guidelines\/#What-is-Co-Lending\" >What is Co-Lending?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/rbi-co-lending-guidelines\/#How-Does-Co-Lending-Work\" >How Does Co-Lending Work?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/rbi-co-lending-guidelines\/#RBI-Co-Lending-Guidelines\" >RBI Co-Lending Guidelines<\/a><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/rbi-co-lending-guidelines\/#Scope-of-Co-Lending\" >Scope of Co-Lending<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/rbi-co-lending-guidelines\/#Customer-related-issues\" >Customer-related issues<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/rbi-co-lending-guidelines\/#Other-Operational-Aspects\" >Other Operational Aspects<\/a><\/li><\/ul><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/rbi-co-lending-guidelines\/#Escrow-Accounts-for-Co-Lending-Partnerships\" >Escrow Accounts for Co-Lending Partnerships<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/rbi-co-lending-guidelines\/#Future-of-Co-Lending\" >Future of Co-Lending<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/rbi-co-lending-guidelines\/#FAQs\" >FAQs<\/a><\/li><\/ul><\/nav><\/div>\n<h2><span class=\"ez-toc-section\" id=\"What-is-Co-Lending\"><\/span>What is Co-Lending?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><a href=\"https:\/\/razorpay.com\/learn\/business-banking\/co-lending-ultimate-guide\/\">Co-lending<\/a> is a bank-NBFC partnership model of lending while reducing the risk of non-repayment. Co-lending is most widely used by banks and NBFCs when lending to high-risk <strong>priority sector<\/strong> industries like agriculture and SMEs.<\/p>\n<p>With co-lending, NBFCs can partner with bigger NBFCs or banks to unlock larger markets that they may not have access to due to a lack of resources.<\/p>\n<p>Banks benefit from co-lending because it enables them to easily fulfil their <strong>priority sector lending requirements<\/strong> with minimal overhead expenses.<\/p>\n<p>What is a priority sector? The RBI defines a priority sector as any sector which is <strong>crucial for the development of the country<\/strong>. These sectors are <strong>not always the most profitable investments<\/strong>, and so banks and other financial institutions might be <strong>reluctant<\/strong> to provide loans to businesses in these sectors.<\/p>\n<p>The RBI mandates that commercial banks in India must dedicate <strong>40% of their net credit<\/strong> to these priority sectors, which include agriculture, education, rural housing, social infrastructure and more.<\/p>\n<p style=\"text-align: center;\"><a style=\"border-radius: 3px; background: #528FF0; padding: 15px; font-weight: 600; cursor: pointer; text-decoration: none; color: white;\" href=\"https:\/\/razorpay.com\/x\/digital-lending\/?r=rbi_colending_guidelines_blog&amp;utm_source=google&amp;utm_medium=organic\" target=\"_blank\" rel=\"noopener\" data-schema-attribute=\"\">What is RazorpayX Escrow+?<\/a><\/p>\n<h2><span class=\"ez-toc-section\" id=\"How-Does-Co-Lending-Work\"><\/span>How Does Co-Lending Work?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>In the co-lending model, banks and NBFCs tie up to provide credit to borrowers. They share the risks and the rewards of lending.<\/p>\n<p>There are two models of co-lending. While RBI co-lending guidelines don&#8217;t specifically mention these two models separately, the industry has adopted the following structure:<\/p>\n<p><strong><img decoding=\"async\" class=\"alignnone wp-image-9653 size-full\" src=\"https:\/\/d6xcmfyh68wv8.cloudfront.net\/learn-content\/uploads\/2023\/12\/Co-Lending-Model.png\" alt=\"co lending models\" width=\"2400\" height=\"2932\" srcset=\"https:\/\/d6xcmfyh68wv8.cloudfront.net\/learn-content\/uploads\/2023\/12\/Co-Lending-Model.png 2400w, https:\/\/d6xcmfyh68wv8.cloudfront.net\/learn-content\/uploads\/2023\/12\/Co-Lending-Model-246x300.png 246w, https:\/\/d6xcmfyh68wv8.cloudfront.net\/learn-content\/uploads\/2023\/12\/Co-Lending-Model-838x1024.png 838w, https:\/\/d6xcmfyh68wv8.cloudfront.net\/learn-content\/uploads\/2023\/12\/Co-Lending-Model-1257x1536.png 1257w, https:\/\/d6xcmfyh68wv8.cloudfront.net\/learn-content\/uploads\/2023\/12\/Co-Lending-Model-1676x2048.png 1676w\" sizes=\"(max-width: 2400px) 100vw, 2400px\" \/>CLM 1 (Co-Lending Model 1)<\/strong>: Under this model, both parties divide and disburse the loan at the same time. The loan is originated and maintained on both sides.<\/p>\n<p><strong>CLM 2 (Co-Lending Model 2):\u00a0<\/strong>Under this model, the NBFC originates and disburses the loan, after which the bank reimburses up to 80% of the loan to the NBFC.<\/p>\n<p>The bank then retains its share of the loan in its balance sheet on a back-to-back basis enabling it to count towards the bank&#8217;s priority sector lending targets.<\/p>\n<p>In this way, banks can expand priority sector lending without directly engaging in the origination and servicing of these loans; NBFCs can expand their reach and service sections of the economy previously reserved for the more robust banks and NBFCs.<\/p>\n<div class=\"markdown markdown-main-panel\" dir=\"ltr\">\n<h2 data-sourcepos=\"23:1-23:61\"><span class=\"ez-toc-section\" id=\"RBI-Co-Lending-Guidelines\"><\/span>RBI Co-Lending Guidelines<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p data-sourcepos=\"23:1-23:61\">Here is a simplified breakdown of the RBI co-lending <a href=\"https:\/\/www.rbi.org.in\/Scripts\/NotificationUser.aspx?Id=11991&amp;Mode=0\" target=\"_blank\" rel=\"noopener\">guidelines<\/a>.<\/p>\n<h4 data-sourcepos=\"23:1-23:61\"><span class=\"ez-toc-section\" id=\"Scope-of-Co-Lending\"><\/span>Scope of Co-Lending<span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p>The NBFC and the bank must establish a mechanism to check creditworthiness since the RBI mandates that credit sanctioning cannot be outsourced. <strong>Ex-ante due diligence must be carried out by the bank and the NBFC directly.\u00a0<\/strong><\/p>\n<p><strong>The bank must ensure<a href=\"https:\/\/www.rbi.org.in\/Scripts\/BS_ViewMasDirections.aspx?id=11566\" target=\"_blank\" rel=\"noopener\"> KYC compliance<\/a> as per the RBI mandate.<\/strong> This KYC due diligence can be carried out by a third party, subject to conditions like the third party not being based in a country assessed as high risk.<\/p>\n<p>The bank must <strong>ensure compliance with the <a href=\"https:\/\/www.rbi.org.in\/scripts\/NotificationUser.aspx?Id=7184\" target=\"_blank\" rel=\"noopener\">Revision to the Guidelines on Securitisation Transactions<\/a><\/strong> circular issued by the RBI in 2012.<\/p>\n<p>The guidelines also cover the<strong> Minimum Holding Period (MHP)<\/strong>, which stipulates that banks <strong>must retain a certain portion of co-lending loans for a certain period<\/strong>. For example, for loans to the non-priority sector, the minimum holding period is 3 months in case of loans of up to 2 years.<\/p>\n<p>The MHP is waived in certain cases, like when the agreement between the NBFC and the bank contains a back-to-back clause.<\/p>\n<p>The bank also <strong>cannot enter into a co-lending agreement with an NBFC owned by the promoter group.\u00a0<\/strong><\/p>\n<h4><span class=\"ez-toc-section\" id=\"Customer-related-issues\"><\/span>Customer-related issues<span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p><strong>The NBFC is the single interface point for customers<\/strong> &#8211; the roles and responsibilities of all parties involved must be detailed in an <strong>agreement<\/strong>.<\/p>\n<p>The final borrower is to be charged an <strong>all-inclusive interest<\/strong> <strong>rate<\/strong> that is agreed upon by both the NBFC and the bank.<\/p>\n<p>The NBFC should have enough information to generate the customer&#8217;s account statement. To do this, the NBFC and banks can enter into<strong> information-sharing agreements.\u00a0<\/strong><\/p>\n<p>The NBFC should ensure a <strong>grievance redressal system<\/strong> is in place to resolve any complaint the borrower raises.<\/p>\n<h4><span class=\"ez-toc-section\" id=\"Other-Operational-Aspects\"><\/span>Other Operational Aspects<span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p>The bank and NBFC must maintain individual borrower&#8217;s accounts for their respective share of the loan. However, all transactions between the NBFC and the bank must be routed through an <strong>escrow account<\/strong> to avoid the inter-mingling of funds.<\/p>\n<p style=\"text-align: center;\"><a style=\"border-radius: 3px; background: #528FF0; padding: 15px; font-weight: 600; cursor: pointer; text-decoration: none; color: white;\" href=\"https:\/\/razorpay.com\/x\/digital-lending\/?r=rbi_colending_guidelines_blog&amp;utm_source=google&amp;utm_medium=organic\" target=\"_blank\" rel=\"noopener\" data-schema-attribute=\"\">Escrow Accounts for Co-Lending<\/a><\/p>\n<p>The NBFC and bank shall decide on a <strong>framework to monitor and recover the loan and<\/strong>\u00a0details of <strong>security and charges.\u00a0<\/strong><\/p>\n<p><strong>Any third-party involvement requires consent of both NBFC and the bank.\u00a0<\/strong><\/p>\n<p>Finally, the NBFC and the bank must decide on a <strong>business continuity plan<\/strong> to ensure that borrowers get uninterrupted service despite terminating the co-lending agreement between the co-lenders.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Escrow-Accounts-for-Co-Lending-Partnerships\"><\/span>Escrow Accounts for Co-Lending Partnerships<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>An important part of the co-lending infrastructure is the <strong>escrow account<\/strong>. All transactions related to the co-lending partnership have to go through an escrow account, which is held by the operating partner.<\/p>\n<p>An escrow account ensures <strong>transparency and compliance with regulations<\/strong>. While traditional banks do provide robust escrow infrastructure for co-lending partnerships, the ease of use and user experience are severely lacking.<\/p>\n<p>Fintech-enabled solutions like RazorpayX Escrow+ allow for incredible transparency and visibility for both parties.<\/p>\n<p style=\"text-align: center;\"><a style=\"border-radius: 3px; background: #528FF0; padding: 15px; font-weight: 600; cursor: pointer; text-decoration: none; color: white;\" href=\"https:\/\/razorpay.com\/x\/digital-lending\/?r=rbi_colending_guidelines_blog&amp;utm_source=google&amp;utm_medium=organic\" target=\"_blank\" rel=\"noopener\" data-schema-attribute=\"\">Learn more about RazorpayX Escrow+<\/a><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Future-of-Co-Lending\"><\/span>Future of Co-Lending<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Co-lending is the future of digital lending, thanks to RBI co-lending guidelines. The guidelines motivate both banks and NBFCs to enter into co-lending partnerships, making this sector likely to grow significantly in the coming decade.<\/p>\n<p>As fintechs like Smartcoin and Rupeek enter the co-lending space, this sector is bound to witness unprecedented innovation in the years to come.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"FAQs\"><\/span>FAQs<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\t\t\t<div id=\"rank-math-rich-snippet-wrapper\" class=\"\">\n\n\t\t\t\t\n\t\t\t<\/div>\n\t\t\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Fact checked by Swaroop Kuruvadi, Product Manager of Escrow+ &amp; Lending Products at RazorpayX The first RBI co-lending guidelines were published by the RBI in 2018. Back then, it was known as co-origination, but the underlying concept of the model is the same. Today, banks and NBFCs follow the latest RBI guidelines on co-lending, as<\/p>\n","protected":false},"author":151156542,"featured_media":9514,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3437],"tags":[3724,3723,3750],"class_list":{"0":"post-9502","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-banking","8":"tag-co-lending","9":"tag-digital-lending","10":"tag-rbi-co-lending-guidelines"},"_links":{"self":[{"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/posts\/9502","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/users\/151156542"}],"replies":[{"embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/comments?post=9502"}],"version-history":[{"count":9,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/posts\/9502\/revisions"}],"predecessor-version":[{"id":9664,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/posts\/9502\/revisions\/9664"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/media\/9514"}],"wp:attachment":[{"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/media?parent=9502"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/categories?post=9502"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/tags?post=9502"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}