In a significant move to add strength and transparency to co-lending transactions, the Reserve Bank of India (RBI) issued the Draft Co-Lending Arrangements Directions, 2025. The draft guidelines seek to bring homogeneity in co-lending transactions by regulated entities (REs) and propose mandatory escrow accounts for all fund flows. This blog discusses the main points of the draft directions, why mandatory escrow accounts are being considered, and how companies like Castler can enable compliance and operational effectiveness.

Understanding Co-Lending and Its Evolution

Co-lending is an arrangement where two or more lenders collectively finance a pool of loans, with the sharing of both risks and benefits. In the past, RBI guidelines for co-lending were especially aimed at collaborations between banks and non-banking financial companies (NBFCs) for priority sector lending (PSL). With the changing financial landscape and demands to democratize credit access, the RBI understood the urgency to extend the scope of co-lending arrangements.

The Draft Directions, 2025, seek to expand co-lending from PSL to cover all segments to facilitate collaboration between all regulated institutions, i.e., banks, NBFCs, and housing finance companies (HFCs). This expansion is to improve the delivery of credit to under-serviced segments, refine the risk-sharing mechanisms, and expand operational transparency.

Key Provisions of the Draft Directions

Scope and Applicability

The Draft Directions are applicable to the following regulated entities:

• Commercial Banks (except Small Finance Banks, Local Area Banks, and Regional Rural Banks)

• India Financial Institutions

• NBFCs including Housing Finance Companies

These entities, "Permitted REs," may enter into co-lending arrangements (CLAs) documented by ex-ante legal agreements. The CLAs entail joint financing of loan portfolios in pre-agreed proportions with revenue and risk-sharing arrangements.

Mandatory Escrow Accounts

A key aspect of the Draft Directions is that all repayments and disbursements under CLAs must be channeled through escrow accounts with a bank. This provision seeks to provide transparency, avoid diversion of funds, and enable proper monitoring of fund flows. The escrow account can be held with the bank that is party to the CLA

Operational Guidelines

The Draft Directions also mandate that each RE would keep separate exposure records and carry out independent credit appraisal and Know Your Customer (KYC) processes. Moreover, the interest rate to be charged from borrowers should be a composite rate calculated as the weighted average of each RE's lending rate. All charges and fees should be disclosed as per RBI's Key Facts Statement (KFS) guidelines.

Default Loss Guarantee (DLG)

Allowed REs can provide a Default Loss Guarantee up to 5% of the loan portfolio in CLAs, according to RBI's June 2023 digital lending guidelines. This facility boosts credit enhancement with the maintenance of prudential protection.

Uniform Asset Classification and Disclosures

Asset quality classification (e.g., Special Mention Accounts/Non-Performing Assets) shall be applied in the same way across all co-lending transaction partner REs, imposing mutual credit discipline and discouraging arbitrage. Partner CLA parties are required to disclose on websites CLA partners, blended rate ranges, and product categories, and report CLA information quarterly in financial reports.

The rationale behind mandatory escrow accounts

Mandatory escrow accounts introduced in co-lending arrangements play several roles:

• Transparency: Routing all transactions through escrow accounts makes fund flows transparent and traceable to all parties involved.

• Accountability: Escrow accounts leave a clear audit trail, making it easier to ensure accountability among co-lenders and minimize the risk of fund diversion.

• Risk Mitigation: Centralizing fund flows through escrow accounts mitigates operational risks and eliminates potential fraud or mismanagement.

• Regulatory Compliance: Escrow account usage fits RBI's focus on sound risk management and operational transparency in co-lending deals.

Castler's Role in Facilitating Compliance and Efficiency

Operating and maintaining escrow accounts may be tricky, particularly for organizations that are new to co-lending deals. This is where Castler comes in. Castler provides online escrow solutions that ease the process of setting up and maintaining escrow accounts, aligning with regulatory needs and streamlining operations.

The main aspects of Castler's escrow services are:

• Customizable Escrow Structures: Personalized escrow account setups to suit the unique requirements of co-lending deals.

• Real-Time Monitoring: Real-time access to transaction data and tracking of fund flows.

• Automated Workflows: Automated processes for repayment and disbursement of funds, minimizing manual intervention.

• Regulatory Compliance: Integrated compliance checks to guarantee RBI guidelines and other regulatory compliance.

Through the use of Castler's escrow solutions, REs can concentrate on their core lending business while guaranteeing that their co-lending arrangements are transparent, secure, and compliant.

Conclusion

The RBI Draft Co-Lending Arrangements Directions, 2025, are an important milestone toward building a more developed co-lending environment in India. Mandatory escrow accounts brought in the Directions highlight the essence of risk management, transparency, and accountability in co-lending operations.

With the financial industry conforming to these new regulations, organizations that participate in co-lending have to be more compliant and efficient. Such platforms as Castler provide the equipment and the experience needed to traverse this new terrain so that co-lending deals are not just compliant but optimized for achievement.

Note: RBI's Draft Co-Lending Arrangements Directions, 2025, are available for stakeholder comments until May 12, 2025. Organizations are invited to go through the draft and submit their suggestions to influence the final guidelines.