Co-lending partnerships have become an effective model in India’s lending landscape. By collaborating, banks and non-banking financial companies (NBFCs) can reach more borrowers, share credit risks, and grow lending portfolios. However, while this model has significant potential, it also faces challenges. From operational mismatches to regulatory issues, many partnerships struggle to gain real scale.

If you are considering entering or improving a co-lending partnership, it's crucial to recognize both the obstacles and the solutions. This article will outline the most common challenges in co-lending partnerships and discuss how lenders can address them with clarity and confidence.

What is Co-Lending and Why Does It Matter?

At its core, co-lending allows banks and NBFCs to lend together. The RBI’s co-lending model (CLM) framework enables banks to access low-cost funds, while NBFCs provide customer reach and flexibility. Typically, loans are disbursed in an 80:20 ratio, with the bank taking the larger portion and the NBFC managing customer acquisition and service.

This structure aims to leverage the strengths of both players. Banks gain access to underserved markets without expanding their distribution networks, while NBFCs benefit from bank-level funding at a lower cost. For borrowers, this means easier access to loans, especially in rural or semi-urban areas where formal credit has been limited.

It sounds ideal, but co-lending isn’t just about pooling funds. It requires agreement on underwriting, risk management, technology, compliance, and payouts. That’s where the challenges arise.

The Major Challenges in Co-Lending Partnerships

1. Misaligned Credit Policies

One significant challenge in co-lending is the alignment of credit policies. Banks often have a conservative risk appetite, while NBFCs are designed to act quickly and serve customers that banks might see as borderline. This difference can lead to disagreements over loan approvals, underwriting standards, and rejection rates.

When partners do not agree on credit qualifications, it slows the process and creates tension.

2. Technology Integration Gaps

Co-lending only works if both parties can share data in real time. However, banks and NBFCs often use very different technology systems. A lack of API integration or delays in syncing loan management systems leads to reconciliation problems, delays in disbursements, and even compliance issues.

If a borrower’s loan details aren’t updated simultaneously on both sides, it causes confusion over repayments, interest, or loan status.

3. Regulatory and Compliance Complexities

The RBI’s co-lending model includes strict compliance requirements. For example, both partners must keep transparency in loan terms, share information with borrowers, and ensure joint documentation.

The challenge is that compliance requirements aren't always enforced uniformly between banks and NBFCs. While banks face stricter scrutiny, NBFCs might have more lenient internal processes. This mismatch can create delays in meeting regulatory standards.

Source: RBI Co-Lending Guidelines

4. Disputes Over Loan Servicing

Who is responsible for collections? Who follows up on defaults? These are important but often contentious questions. Many co-lending partnerships falter when borrowers default because banks and NBFCs may have different recovery strategies. Banks might prefer formal legal action, while NBFCs may choose on-ground collections. Without clarity, disputes can arise, damaging trust between partners.

5. Fund Flow and Settlement Issues

Managing money flow in co-lending can be complex. Since loan disbursements and repayments involve multiple parties, overseeing escrow accounts, automated payouts, and reconciliations can become challenging. Delays in settlements often lead to disputes and can erode customer trust.

6. Customer Experience Gaps

Borrowers don't care about the underlying mechanics of co-lending they want a smooth loan experience. If communication between the bank and NBFC isn’t consistent, borrowers may become confused about repayment schedules, points of contact, or resolving disputes. A fragmented experience can harm the credibility of both partners.

7. Lack of Transparency in Risk Sharing

While the standard 80:20 split seems clear on paper, the actual sharing of risk is more complex. Default management, provisioning, and loss recognition can lead to disagreements. If partners are not open about these issues, it can create ongoing tension and even lead to legal disputes.

How to Overcome Challenges in Co-Lending Partnerships

The good news is that while these challenges are real, they are not impossible to overcome. Here’s how banks and NBFCs can tackle each hurdle.

Aligning Credit Policies from the Start

The solution starts with building a shared credit framework. Instead of relying on each institution’s existing policies, partners should create a co-lending credit matrix that outlines eligibility criteria, documentation standards, and rejection thresholds. Regular joint reviews help refine the matrix as the portfolio expands.

This way, decision-making becomes more predictable and reduces friction.

Investing in Technology Integration

Technology is essential for successful co-lending. Both partners need to use systems that can share data in real time. API-based loan origination systems, escrow-backed settlement platforms, and shared dashboards make reconciling much easier.

For instance, integrating escrow-linked payouts ensures that repayment schedules are clear and disputes over collections are minimized.

Strengthening Compliance Frameworks

Compliance doesn’t need to be a burden if it is built into the process. Standardized documentation templates, automated KYC checks, and borrower communication protocols help keep both parties aligned with RBI requirements.

Periodic compliance audits between partners can also help prevent future disputes.

Defining Roles in Loan Servicing

Before launching a co-lending product, partners should clearly outline their roles in collections and customer service. Creating a joint servicing agreement that specifies escalation paths, default handling, and borrower communication channels eliminates ambiguity.

This clarity means borrowers know who to contact, and both partners avoid blaming each other.

Streamlining Fund Flows with Escrow

One effective solution is to route all co-lending transactions through escrow accounts. This provides transparency in disbursements and repayments, and using automated reconciliation tools reduces delays. Escrow-backed payouts also add a layer of trust since neither party controls the funds independently.

Prioritizing Borrower Experience

Ultimately, co-lending works only if borrowers trust the system. Offering a single point of contact, clear communication, and straightforward repayment schedules helps maintain the borrower experience. Technology can assist in this area shared customer portals or dashboards minimize confusion.

Ensuring Transparency in Risk Sharing

Lastly, partners must go beyond the 80:20 model and explicitly document how risks will be handled in various scenarios defaults, prepayments, or restructuring. A joint governance framework with regular portfolio reviews helps keep both sides aligned.

The Future of Co-Lending in India

India’s lending market is changing rapidly. With the RBI promoting financial inclusion and digital platforms allowing for quicker integrations, co-lending is likely to play a major role in filling the credit gap. A recent report by PwC noted that co-lending partnerships could unlock billions of dollars in credit to underserved segments in the coming years.

But the bottom line is this: the model will only thrive if banks and NBFCs can overcome the challenges we've discussed by building trust, using the right technology, and keeping borrowers at the center.

Conclusion

Co-lending isn’t solely about pooling funds; it’s about aligning operations, compliance, and customer experience. The challenges whether concerning misaligned credit policies, technology gaps, or settlement disputes can hinder growth if left unaddressed. However, with the appropriate frameworks and tools, lenders can convert these challenges into opportunities.

That's where Castler comes in. By offering escrow-backed transaction banking solutions, Castler ensures transparency, timely settlements, and streamlined fund flows for co-lending partnerships. With Castler, lenders can spend less time on reconciliation issues and focus more on building a sustainable lending portfolio.

Ready to simplify your co-lending partnerships? Explore Castler’s escrow solutions today.