Co-lending in India has become a key part of the lending system. Banks and NBFCs (Non-Banking Financial Companies) are working together to improve credit access, especially for underserved groups. This model works because it combines the financial strength of banks with the reach and flexibility of NBFCs. While the concept is straightforward, implementing it at scale can be quite complex. Success in co-lending partnerships largely depends on technology, compliance, and risk management, which adds layers of complexity.

In this blog, we will explore what co-lending in India means, how RBI’s co-lending framework influences it, the technology that supports it, and why compliance and risk management are essential. By the end, you will see how escrow-led automation is becoming a vital part of modern co-lending partnerships.

What is Co-Lending in India?

Co-lending is a structured arrangement where a bank and an NBFC jointly provide loans to borrowers. According to the RBI’s Co-Lending Model (CLM) introduced in 2020, banks must contribute at least 80% of the loan, while NBFCs provide the remaining 20%. The goal is to utilize the strengths of both: banks’ access to low-cost funds and NBFCs’ ability to reach customers at the last mile.

However, there is a challenge. Unlike traditional lending, co-lending involves shared responsibilities for origination, underwriting, disbursement, repayment, and risk monitoring. Without the right digital systems, even basic tasks such as splitting repayments or reconciling interest can become operational nightmares.

For a detailed overview of the official framework, you can refer to the RBI’s guidelines on co-lending.

Why Co-Lending Took Off in India

The growth of co-lending was not random. It resulted from three major changes:

Financial Inclusion Push

India's credit penetration has been low historically. Co-lending allows banks to reach customers they couldn’t serve directly, particularly in semi-urban and rural areas where NBFCs have strong connections.

Capital Efficiency

NBFCs gain access to cheaper funds by collaborating with banks, and banks can diversify their portfolios without creating last-mile infrastructure.

Regulatory Backing

RBI’s clear co-lending framework removed uncertainty. With compliance rules established, institutions could try out partnerships, knowing the guidelines were in place.

This means that co-lending is not just about efficiency; it’s about transforming how credit moves across the country.

The Technology Backbone of Co-Lending

Co-lending at scale depends on automation. Each stage of the lending process needs systems that can manage complexity while keeping partners in sync.

APIs for Loan Origination and Repayment

APIs serve as the connector between bank systems, NBFC platforms, and third-party service providers. From exchanging loan application data to splitting repayments, APIs ensure real-time coordination. Without them, reconciliation could take days instead of seconds.

Escrow Infrastructure for Repayment Splits

Repayment in co-lending is complex. EMI collections need to be divided between the bank and the NBFC based on agreed ratios. Handling this manually risks errors, disputes, and compliance issues. Escrow accounts automate this process, ensuring funds are securely held and distributed fairly.

You can learn more about escrow banking solutions here to see how this system builds trust in intricate financial partnerships.

Compliance Automation

The co-lending model demands strict adherence to RBI guidelines, including documentation, KYC, and reporting. Compliance software linked with loan management systems reduces manual tasks and lessens risk exposure.

Data Security and Risk Analytics

With multiple institutions managing sensitive borrower information, encryption and risk analytics are essential. AI-driven credit scoring and early warning systems are increasingly used to ward off defaults and fraud.

Compliance in Co-Lending: The Non-Negotiable Factor

RBI’s co-lending guidelines are clear, but putting them into practice can be chaotic without the right technology. Here’s what to consider:

• Loan Agreement Structure: Agreements must clearly outline responsibilities and the risk-sharing proportions between partners.

• KYC and Documentation: Borrowers must go through compliant KYC processes, whether they interact with the bank or the NBFC.

• Reporting Requirements: Regular reporting to the RBI and internal compliance checks are necessary.

• Transparency to Borrowers: Borrowers need to understand that they are in a co-lending arrangement, ensuring there are no hidden clauses.

Institutions that fail to establish strong compliance frameworks risk regulatory penalties and damage to their reputation.

Risk Management in Co-Lending Partnerships

Risk is a major concern. Sharing credit risk between banks and NBFCs seems fair, but effective risk management is crucial for a successful partnership.

Credit Risk

The quality of loan origination affects the health of the loan portfolio. Since NBFCs typically originate loans, banks need real-time insight into credit decisions.

Operational Risk

Payment delays, mismatched repayment splits, or manual reconciliation can lead to disputes. Automated systems backed by escrow significantly reduce this risk.

Compliance Risk

Even one non-compliant transaction may trigger regulatory scrutiny. Automating compliance lowers the chances of human error.

Strategic Risk

Not all co-lending partnerships align with customer focus or long-term objectives. Clear agreements and transparent systems help reduce friction.

The Future of Co-Lending in India

Co-lending is now a significant initiative it is growing rapidly. With digital lending projected to exceed $1.3 trillion by 2030 (as per Boston Consulting Group), co-lending will be central to making credit access inclusive and efficient.

In the coming years, expect:

• Wider use of escrow-led automation.

• More standardized API frameworks for better interoperability.

• Improved analytics for joint credit assessments.

• Stricter regulatory oversight as volumes increase.

The takeaway is simple: technology will decide which co-lending partnerships succeed and which fail due to operational challenges.

Conclusion

Co-lending in India offers a chance to improve credit access and streamline lending. However, without the proper infrastructure, it can quickly turn into a compliance nightmare or a risk-laden process. Escrow automation, API-driven repayment splits, and compliance-focused digital platforms are essential.

This is where Castler’s escrow solutions come in. As a trusted intermediary, Castler simplifies repayment management, ensures compliance, and reduces risk for both banks and NBFCs. If your institution is considering co-lending partnerships, the next step is clear: explore Castler’s solutions and see how automation can enhance your strategy.