New co-lending guidelines may dampen bank, NBFCs' volumes in near term

The new rules could increase operational costs for lenders, who will need to maintain mandatory escrow accounts, comply with stricter KYC norms, and invest in upgraded tech integration

Bankers and non-banking financial companies (NBFCs) fear that the Reserve Bank of India’s (RBI) new guidelines on co-lending may reduce volumes in the near term due to operational challenges, one of which is the requirement to transfer a loan within 15 days of its origination.

 

Market participants said that, in the short run, the size of co-lending books is expected to shrink sharply, particularly for smaller non-banking financial companies (NBFC). They also warned that the new rules could increase operational costs for lenders, who will now need to maintain mandatory escrow accounts, comply with stricter know-your-customer (KYC) norms, and invest in upgraded tech integration. Smaller NBFCs have urged the RBI to extend the compliance deadline beyond January 2026.

 

On August 6, the RBI issued guidelines on co-lending arrangements, expanding the framework to all regulated entities and to non-priority sector lending segments. According to the guidelines, each lender in such an arrangement must retain at least 10 per cent of the loan on its own books. In addition, the loan originator must transfer the loan to the co-lender within 15 days of origination, failing which it will no longer qualify as a co-lending arrangement.

 

“If there is no clarity on the calculation of the blended rate, and if lenders are unable to process and disburse loans within 15 days, then volumes may drop,” said Gaurav Gupta, founder, managing director (MD) and chief executive officer (CEO) at Tyger Capital.

 

 “The guidelines widen co-lending arrangements beyond banks and priority sector lending, which will enable greater partnerships. However, the calculation of the ‘blended rate’ needs clarification. At present, there is little difference between the RoI (rate of interest) at which banks lend for on-lending and for co-lending. If the blended rate concept is not clarified or removed, entities may find it more beneficial to raise funds for on-lending and then pursue portfolio assignments, as they did in the past.”

 

The guidelines also mandate the use of escrow accounts for all transactions, adherence to KYC norms, and the inclusion of loans under co-lending arrangements in audits. Market participants said escrow-based disbursements and collections create operational hurdles, especially for smaller NBFCs and in segments like micro, small, and medium enterprises (MSMEs) and microfinance, where cash collections are common.

 

“Tech integration is usually done in advance, but that may not always be the case. Moderation occurs either when a bank decides to go slow or when an NBFC is not fully prepared for such co-lending arrangements,” said Umesh Revankar, executive vice-chairman, Shriram Finance.

 

Senior banking officials acknowledged that the transition period could see a dip in co-lending volumes. However, they expect volumes to rise over the long term. “During the transition, technology integration will be critical, especially for smaller NBFCs and fintechs that must develop proper systems to enable co-lending with banks. But in the long term, these guidelines will expand the co-lending books of regulated entities,” said a senior executive at a public sector bank.

 

Fintech players such as Fintifi and Switch My Loan also said the sector is likely to face short-term disruptions, as lenders adjust to the new compliance and operational requirements. They warned that businesses may incur higher costs and require process overhauls. Partners will need to ensure that their technology systems are efficient and capable of seamless integration.

 

“In the short term, the sector is likely to face moderation in growth as lenders adapt to the new compliance and operational requirements. Increased governance checks, more rigorous documentation, and tighter processes could slow deal execution and disbursements—particularly impacting smaller NBFCs with limited tech and compliance infrastructure,” said Aryan Makwana, founder, Fintifi.

 

“On the face of it, co-lending should expand, but operational aspects such as the 15-day transfer rule may pose challenges. There could be short-term hiccups in the form of moderation in volumes due to these operational issues. However, if tech integration happens on time, volumes should recover,” said Anil Gupta, senior vice-president and co-group head (financial sector ratings), ICRA.

 

With the final guidelines taking effect in January, lenders will need to recalibrate their systems, strengthen governance protocols, and reassess partner selection strategies to ensure compliance and maintain competitiveness under the revised regime.