RBI issues Co-lending Directions, 2025

Team Finserv | finserv@vinodkothari.com

At a Glance 

The Reserve Bank of India (Co-Lending Arrangements) Directions, 2025 (‘Directions’), effective January 1, 2026, with early adoption permitted, represents a significant evolution in India’s co-lending regulatory framework. 

The Directions definitively eliminate discretionary co-lending arrangements (CLM-2 model), mandating that any cherry-picking or selective loan purchase arrangements must comply with Transfer of Loan Exposures (TLE) Directions rather than co-lending provisions. The Directions are uniformly applicable to priority sector lending as well as any other lending, thereby having a harmonised regulatory framework. 

In each case, a minimum funding share of fundamental restructuring requires each co-lending partner to maintain a minimum 10% (lowered from the previous requirement of 20% in case of the PSL co-lending arrangement) risk retention, ensuring genuine skin-in-the-game for all participants. In addition to the minimum 10% funding share, the Originating RE (even in non-digital lending cases) may also provide a Default Loss Guarantee (DLG) up to 5% of the “outstanding loans” (see discussion below – this expression has to be read in consonance with DLG framework). The Directions, however, explicitly prohibit subordination, waiver, or deferral of servicing fees thereby limiting credit enhancements in any other manner, but the flavour of the regulations seems to restrict credit support to DLG, for promoting transparent DLG structures only. 

Unpacking the Highlights

As is always the case, some operational complexities have been addressed, while some have been created. There are  also enhanced disclosure requirements, mandating clear segregation of roles and responsibilities in loan agreements, identification of single customer interface points and comprehensive Key Facts Statement (KFS) disclosures. 

The Directions introduce borrower-level asset classification synchronization, requiring real-time information sharing (latest by next working day) when either lender classifies an exposure as SMA/NPA, creating significant operational challenges for lenders’ systems and processes. While KYC requirements have been streamlined to allow partner REs to rely on originating REs for customer identification as per the provisions of the KYC Master Directions, 2016, Credit Information Company (CIC) reporting is explicitly stipulated for each lender, which, in our view, is both unnecessary and undesirable. This results in continuing operational complexities for multiple reporting mechanisms. 

Website disclosure requirements now mandate listing all active CLA partners (removing previous blended rate disclosure obligations), while financial statement disclosures shift to quarterly/annual basis aligned with applicable RE reporting cycles. The framework retains provisions for unrealized profit recognition “if applicable,” though, in our view, being pre-agreed and non-discretionary, the transfer of the Partner RE’s share is merely a consummation of what was anyways concluded, and therefore, there is no case of “transfer” in case of co-lending. If there is no sale, there is no case for booking of a gain on sale. And in our view, Co-lending structures typically wouldn’t trigger gain-on-sale accounting.  

Customer protection is enhanced through mandatory prior intimation requirements for any changes in customer interface, ensuring continuity and transparency throughout the loan lifecycle.  These comprehensive changes reflect RBI’s intent to create a more transparent, operationally robust, and prudentially sound co-lending ecosystem while addressing past regulatory ambiguities and market practices.

Please find below our highlights for an easy read. 

For a detailed study, refer to our FAQs here: https://vinodkothari.com/2025/08/faqs-on-co-lending-directions-2025/

For a more immersive learning experience, see also our Shastrartha on the same here: https://www.youtube.com/watch?v=pkcnVJhNQaM

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