When the Reserve Bank of India (RBI) introduced the co-lending framework, the goal was clear: combine the extensive credit reach of Non-Banking Financial Companies (NBFCs) with the financial strength of banks. However, without a reliable way to manage cash flow distribution, co-lending could lead to disputes, misreporting, or regulatory issues. Starting January 2026, RBI will require escrow accounts for cash flow distribution between co-lending partners.

This isn’t just a regulatory requirement. Escrow has become essential for building trust, ensuring that every rupee goes where it should. With digital tools like UPI Payout API and automated escrow management, the framework is not just practical but ready for the future. Let’s break it down.

What Is Co-Lending and Why Does It Matter?

Co-lending simply allows banks and NBFCs to jointly provide loans. Typically, they share the risk and reward, with the bank covering 80% and the NBFC covering 20%. This model helps extend credit to groups like MSMEs, rural borrowers, and individuals who often struggle to access traditional banking.

The benefits are evident: NBFCs offer speed and reach, while banks provide funding. The challenge lies in ensuring that repayments and interest are divided fairly and transparently. That’s where escrow plays a crucial role.

Escrow as the Anchor of Trust in Co-Lending

An escrow account acts as a neutral holding ground. Money goes into the account, stays locked until conditions are fulfilled, and then is distributed to the rightful party. For co-lending, this means:

• Loan repayments go into the escrow account, not directly to one partner.

• Funds are split and distributed automatically based on the agreed ratio.

• Every transaction is recorded, creating a clear audit trail.

Escrow functions like a referee in a football match it ensures the rules are followed without playing the game.

Why RBI’s Mandate Is a Big Deal

RBI’s decision to make escrow a must from January 2026 indicates two key points:

• Compliance is now mandatory. Co-lenders cannot rely on informal agreements or manual reconciliations. Escrow is part of the rules.

• Risk management is crucial. By enforcing escrow, RBI decreases the chances of one partner withholding funds, misreporting collections, or delaying payments.

This requirement could transform how co-lending operates. Instead of spending hours reconciling spreadsheets, both parties can focus on increasing credit access.

The Mechanics: How Escrow Works in Co-Lending

Here's how the process typically works:

• Borrowers send their EMI to a single escrow account.

• The escrow system calculates each partner’s share, including principal, interest, and fees.

• Funds are distributed automatically 80% to the bank and 20% to the NBFC without any manual steps.

• Both partners can see the escrow ledger in real time.

Now add automation and UPI Payout API to this process. Borrowers can repay instantly using UPI, and the system can trigger same-day payouts to partners. The result is quicker settlement cycles and better liquidity management.

Why Escrow Fits Perfectly with Co-Lending

1. Built-in Compliance: Since escrow is central, regulatory rules like data trails and fair distribution are automatically enforced. No need for fixes after the fact.

2. Clarity for Both Sides: Each partner can view their share without disputes. Escrow establishes a common source of truth.

3. Efficiency: Automated reconciliation reduces back-office work and minimizes errors.

4. Risk Reduction: If one partner faces financial issues, the escrow account ensures repayments are still distributed as agreed.

Digital Infrastructure: UPI, APIs, and Beyond

India’s digital infrastructure makes escrow more than just a compliance tool; it supports growth. With UPI Payout API, for example, repayments in escrow can be quickly distributed to banks, NBFCs, or even investors. There are no delays or bottlenecks.

Combine that with digital identifiers, automated reporting dashboards, and AI-driven fraud checks, and escrow evolves into a dynamic infrastructure for co-lending.

Co-Lending Without Escrow: What’s at Stake?

Imagine working without escrow. Borrowers repay one partner, who must then transfer the other partner’s share. If that transfer is delayed or miscalculated, trust is damaged. Over time, disputes can accumulate, reconciliation can become complicated, and regulators may intervene.

Escrow reduces these risks by acting as an unbiased middle layer. The funds don’t stay with one partner; they flow through a system everyone trusts.

Early discussions in the industry show that banks view this move positively because it cuts down on disputes and audit burdens. NBFCs also see escrow as a way to gain credibility when working with larger institutions.

Investors feel more secure knowing repayments go through a regulated, neutral system. This makes the whole co-lending ecosystem more appealing.

The Road Ahead

With RBI tightening the rules, the role of escrow will likely increase. We may even see escrow accounts linked directly with credit bureaus and AI-driven compliance systems, giving regulators real-time oversight of co-lending operations.

For banks and NBFCs, this shift means more than just compliance. It’s about developing scalable co-lending models that can manage thousands of transactions daily. Escrow, combined with tools like UPI Payout API, provides this vital foundation.

RBI’s co-lending framework is a significant step toward making credit accessible, but rules alone don’t build trust systems do. Escrow is that system. It ensures cash flows are fair, transparent, and compliant, reducing the friction that has hindered co-lending partnerships.

As January 2026 approaches, lenders that adopt escrow early will gain an advantage in compliance, credibility, and efficiency. This isn't just about meeting regulations; it's about creating a co-lending ecosystem that can operate successfully at scale.

At Castler, we’ve seen how escrow banking can change financial partnerships, reducing turnaround times, increasing efficiency, and fostering lasting trust. If you’re a bank, NBFC, or investment platform preparing for the new rules, now is the time to explore how escrow can fuel your growth.