RBI Clarifies Uniform Asset Classification Under Co-Lending Confined to the Co-Lent Exposure Only

Background

The Co-Lending Arrangements Directions, 2025 (now subsumed within Para B of the RBI (Non-Banking Financial Companies — Transfer and Distribution of Credit Risk) Directions, 2025) introduced a requirement for uniform borrower-level asset classification across co-lending partners. Paragraph 124 of the Directions provides:

“NBFCs shall apply a borrower-level asset classification for their respective exposures to a borrower under CLA, implying that if either of the REs classifies its exposure to a borrower under CLA as SMA / NPA on account of default in the CLA exposure, the same classification shall be applicable to the exposure of the other RE to the borrower under CLA. NBFCs shall put in place a robust mechanism for sharing relevant information in this regard on a near-real time basis, and in any case latest by end of the next working day. “

The intent of this provision, read alongside RBI’s long-standing IRACP framework, was clear: credit stress is a condition of the borrower, not of a specific loan. Once any co-lender classified its share of the co-lent exposure as SMA or NPA, the other co-lender was required to mirror that classification for its own share.

The Interpretive Question

The phrase “under the CLA” in paragraph 124 gives rise to 2 divergent methods:

1. Borrower-level classification applies across all exposures of a co-lender to the borrower, including non-co-lent loans, once any default arises in the co-lent exposure; or
2. The uniform classification obligation is confined to the co-lent exposure itself. A default in the co-lent loan does not compel reclassification of the co-lender’s non-colent loans to the same borrower, nor does a default in an independent loan trigger any obligation under paragraph 124.

We had earlier made a case for interpretation 1 above in our write-up Does Co-lending Make Default a Communicable Disease? keeping in mind the principle of borrower-level asset classification under IRACP norms. However, an RBI clarification received by a regulated entity provides otherwise. 

The RBI Clarification

RBI has clarified that the uniform asset classification requirement under paragraph 124 is limited to the exposure under the co-lending arrangement. It does not extend to independent loans of a co-lender to the same borrower that are outside the CLA.

The implications of this clarification are as follows:

• Co-lent loan defaults:
  • If Co-Lender 1 classifies its share of the co-lent loan as SMA/NPA, Co-Lender 2 must apply the same classification to its share of that loan. However, Co-Lender 2 is not required, solely on account of the co-lent loan defaulting, to reclassify any separate, independent loan it holds to the same borrower outside the CLA.
• Standalone loan of Co-Lender 2 defaults i.e. default in an independent loan:
  • A default or downgrade by Co-Lender 2 on a non-CLA loan to the same borrower does not, of itself, trigger any information-sharing obligation or classification consequence for Co-Lender 1 under paragraph 124.

It is, however, also worthwhile to mention that REs continue to remain independently subject to their own borrower-level classification obligations under the IRACP norms. Where a co-lender has knowledge of default in a borrower’s other obligations, its own prudential framework may require appropriate classification of its standalone exposures. Further, with fortnightly CIC reporting coming in effect from July 2026, co-lenders will have near-regular visibility into a borrower’s credit profile across lenders. It would therefore be increasingly difficult for a co-lender to retain a favourable asset classification on a standalone exposure where the borrower’s credit record reflects a default on other loans. 

Impact on Ind AS entities is also worth noting. While the RBI clarification limits the uniform asset classification requirement to the co-lent exposure, entities following Ind AS may still need to evaluate whether a default on the co-lent loan constitutes a Significant Increase in Credit Risk (SICR) for the borrower. The occurrence of default on any material obligation may indicate deterioration in the borrower’s creditworthiness and could be a relevant factor in assessing the staging of other exposures to the same borrower. Accordingly, even though asset classification consequences may not extend beyond the co-lent exposure, the information regarding such default may influence the ECL assessment and provisioning for other loans held by the lender, depending on its ECL framework.