Implementing RBI’s Co‑Lending Directions 2025 Using M2P’s Core Lending Suite

The Reserve Bank of India’s Co-Lending Directions, 2025 (effective January 1, 2026) mark a major evolution in India’s co-lending landscape. They expand the framework beyond priority sector credit, open doors to wider participation, and replace previous pricing and procedural ambiguities with clear, standardized rules.

In practice, this means a single blended borrower rate, irrevocable partner commitments, a minimum 10% loan exposure for each Regulated Entity (RE), tighter KFS/APR disclosures, escrow-routed cashflows, 15-day partner booking deadline, borrower-level NPA synchronization, CIC reporting by each RE, and an optional Default Loss Guarantee (DLG) of up to 5%.

In this blog, we decode what the new directions entail, explore the operational challenges they introduce, assess their impact on LOS & LMS systems, and explain how M2P’s co-lending module will help lenders operationalize every clause with ease.

Let’s dive into the key highlights of the revised Co-Lending Directions.

Key Highlights of the Revised Co-Lending Directions

The latest Co-Lending Directions have introduced significant changes aimed at increasing participation, ensuring fairness for borrowers, and providing greater regulatory clarity. Below is an overview of the most important updates.

Broader Scope & Participation

The Directions now apply to both priority and non-priority sector credit, enabling broader market engagement. Any regulated entity can participate including

o   Commercial banks

o   All-India Financial Institutions such as NABARD, SIDBI, etc.

o   NBFCs

Notably,  Small Finance Banks (SFBs) have been excluded. However, the expansion of scope  allows for more diverse and innovative lender combinations.

Flexibility in Origination

The revised framework permits a co-lending agreement between two regulated entities (REs) to jointly finance loans in predetermined proportions, with both parties sharing the associated revenue and credit risk.

Notably, the framework does not prescribe which party must originate the loan, marking a clear shift from the 2020 guidelines, which had implicitly positioned NBFCs as default originators.

Minimum 10% Own Book Exposure

Every co-lender must retain at least 10% of each loan on its own books (reduced from 20% previously). While this may lessen the originator’s direct financial exposure, safeguards such as Default Loss Guarantee (DLG) and borrower-level provisioning help maintain aligned incentives.

CLM2 Sunset with Irrevocable Partner Commitment

The earlier CLM2 discretionary approval has been withdrawn. Under the revised framework, a lending partner must provide an irrevocable commitment to fund its agreed share of the loan on a back-to-back basis. Any selective or post-disbursement loan acquisitions will instead be governed by the Transfer of Loan Exposures (TLE) Directions rather than the co-lending framework.

Single Customer Interface (CI)

Only one lender can act as the Customer Interface (CI) for each loan position. This must be clearly stated in the loan agreement. Borrowers must be informed in advance if there is any change in the CI during the loan’s tenure.

Blended Borrower Rate

Borrowers are now charged a single blended interest rate which removes the scope for subsidy, a practice where an NBFC could overprice the loan and retain the margin derived from a bank’s ‑lower cost of funds. This approach is both borrower‑centric and strengthens regulatory oversight, replacing the earlier Hurdle Rate model that had allowed for overly flexible or opaque pricing practices.

To illustrate the shift in pricing logic, let’s compare the borrower cost and lender earnings under the old and new models using a ₹10 lakh loan example.

Old vs New Interest Rate: Comparison (₹10L example)

Assumptions: Bank share 80% (₹8L) 9%, NBFC share 20% (₹2L) @ 14%

APR & KFS Transparency

All borrower-payable fees and charges must be included in the Annual Percentage Rate (APR) and clearly disclosed through a Key Facts Statement (KFS). This aligns with the RBI’s emphasis on full disclosure of the total cost of credit and enables borrowers to make well-informed decisions.

Inter-Partner Fee Discipline

‘Lending service’ fees exchanged between partners must be determined strictly in line with each regulated entity’s documented policy and based on objective parameters such as service costs and loan size. Importantly, no such fee may indirectly act as a substitute for credit enhancement or a guarantee.

Escrow-Routed Cashflows

All loan disbursements and repayments are required to flow through an escrow account. The Master Agreement between co-lenders must clearly define the order of appropriation of these funds. While real-time fund transfers are ideal for operational efficiency, practical arrangements may adopt periodic sweeps from escrow, or originator-first disbursals followed by partner reimbursement.

Dual CIC Reporting

Each regulated entity must independently report its share of the loan exposure to credit bureaus in compliance with CIC regulations. As a result, the same underlying loan will generate two separate bureau tradelines, making accurate reconciliation essential to avoid mismatches in reported data.

Default Loss Guarantee (DLG)

The originating regulated entity may extend a Default Loss Guarantee of up to 5% of the outstanding portfolio under the co-lending arrangement, providing an additional risk-sharing safeguard for the partner lender.

Borrower-Level NPA Synchronization

Asset classification must be carried out at the borrower level across all co-lenders. If any lending partner classifies a borrower as SMA or NPA due to repayment defaults, the other partner is required to mirror that classification for its corresponding exposure.

Operational Challenges – Where Lenders May Stumble in Co-Lending

While the revised co-lending framework creates opportunities for wider participation and better borrower outcomes, it also introduces operational complexities that can trip up even experienced lenders.

Below are some of the key challenges and why they matter.

The 15-Day Partner Booking Window

The partner lender’s share of the loan must be booked into its own system within 15 days of disbursement. This period is not discretionary; it exists solely for logistical processes, including fund transfers and onboarding in the funding partner’s core system, especially where tech integrations might not be fully robust.

Consequences of Missing the 15-Day Deadline

If this deadline is missed, the loan remains fully on the originator’s books. Any subsequent transfer would then have to comply with the Master Directions on Transfer of Loan Exposures (MDTLE, 2021), just like a regular assignment or securitization. In such cases, the sourcing partner must:

• Inform the borrower in writing of the change in loan ownership structure

• Issue a fresh Key Facts Statement (KFS) now without a blended ROI

• Cancel the earlier loan agreement, where applicable.

Clear Documentation of Roles, Customer Interface, and Protections

The loan agreement must unambiguously define:

• The division of responsibilities for sourcing, servicing, and other functions

• The single designated Customer Interface (CI)

• Customer protection protocols and grievance-redress mechanisms

Independent Credit Due Diligence

Banks must still perform their own credit due diligence before sanctioning a co-lent loan.

In practice, this is often implemented through shared Loan Origination Systems (LOS) or API level co-approval workflows aligned to pre-agreed credit criteria.

Escrow Reconciliation

While routing all cashflows through an escrow account improves compliance and transparency, it also demands reconciliation between escrow statements and both lenders’ internal regular ledgers. This is a critical but labor-intensive operational step.

Two-Party Credit Bureau Reporting Risks

Since both co-lenders must report their respective exposures to Credit Information Companies (CICs), there is an inherent risk of mismatches in reported trade lines unless the partners undertake regular and thorough reconciliations.

Borrower-Level Delinquency Synchronization

If one lender classifies an account as SMA or NPA, the partner must immediately update its own records to reflect the same status. Near real-time data exchange is therefore critical. While daily SFTP or email file exchanges can serve as temporary solutions, the long term goal should be API-driven real-time synchronization between partners.

This synchronization mandate elevates the importance of LOS-LMS integration, turning it into a critical compliance enabler.

Systems Impact – Integrating LOS and LMS for Co-Lending

The revised co-lending framework not only changes contractual and operational dynamics but also places significant demands on the technology stack, particularly the Loan Origination System (LOS) and Loan Management System (LMS) of both lenders. Seamless integration across these systems is essential for compliance, operational efficiency, and borrower transparency.

Loan Origination System (LOS) – Deeper Integration & Transparent Pricing

• Credit Process Integration: Move towards common application processing or a sequential approval workflow. For example, an NBFC could upload applications to a shared portal for bank credit officers to review and approve in parallel within committed turnaround times. This may require API-level integration between the LOS platforms of both institutions, or the adoption of a common co-lending platform accessible to both.

• Blended Rate Computation: Pull pricing data from both entities and compute a weighted average based on the funding split to present a single borrower rate that meets RBI’s guidelines.

• KFS Automation: Automate the generation of the Key Facts Statement (KFS) with detailed lender share disclosure, e.g., Bank – 80% @ X%; NBFC – 20% @ Y%; Blended – Z%, along with the APR inclusive of all borrower charges, loan tenor, and EMI details.

Loan Management System (LMS) – Partial Books, Dynamic Schedules, and Escrow Automation

• Loan Records for Each Lender - Each co-lender must maintain separate loan accounts for its share, using a common loan reference number across systems to simplify reconciliation and CIC reporting.

• Dynamic Rate Adjustments - Any change in one lender’s rate automatically impacts the blended loan rate. Servicing modules must recalculate the EMI and repayment schedule accordingly, with each LMS

• mirroring the updated structure.

• Escrow Allocation Engine - Automate daily sweeps from the escrow account and the appropriation of principal, interest, and fee components to each lender’s ledger as per the agreed split

• Delinquency and Collections - Maintain shared Days Past Due (DPD) tracking across partners, with daily synchronization at a minimum and a long term objective of real time event updates through system integration.

• Credit Information Company (CIC) Reporting Discipline - Since each lender reports its share of the loan separately, two distinct trade lines will appear for the same borrower in bureau records. This calls for monthly alignment and proactive reconciliation to prevent discrepancies that could affect borrower credit scores and portfolio reporting accuracy.

This is where technology must step in, not just to comply, but to streamline.

Let’s explore how M2P makes it happen.

How M2P Enables Seamless Compliance with RBI’s New Co-Lending Regulations?

The evolving regulatory landscape for co-lending brings heightened operational and compliance requirements for regulated entities (REs). M2P offers an integrated technology solution designed to address these complexities seamlessly, enabling lenders to stay fully compliant while delivering a smooth borrower experience.

Blended-Rate Management

M2P maintains separate amortization schedules for each regulated entity while presenting borrowers with a single consolidated EMI. The solution automatically recalculates the blended interest rate whenever either partner’s rate changes, instantly regenerating updated Key Facts Statements (KFS) and Annual Percentage Rate (APR) disclosures to ensure ongoing compliance and transparency.

Automated Escrow Sweeps & Ledger Allocation

The platform automates escrow account sweeps, allocating principal, interest, and fee components according to each lender’s agreed funding share. Corresponding journal entries are posted directly into each RE’s books, enabling accurate accounting and smooth reconciliation.

Borrower-Level Delinquency Synchronization

M2P publishes Days Past Due (DPD) events to partner systems in near real-time, ensuring Special Mention Account (SMA) and Non-Performing Asset (NPA) classifications are mirrored across lenders within prescribed regulatory timelines. This guarantees consistent asset classification and risk recognition across the co-lending arrangement

Automated KFS & APR Generation

The system calculates the APR inclusive of all borrowers payable charges and automatically generates regulatory compliant KFS documents, always giving borrowers a transparent view of the total loan cost.

Dual-Party Credit Information Company (CIC) Reporting

M2P produces per-RE bureau reporting files tagged with a shared loan identifier, reducing the risk of tradeline mismatches. This structure simplifies monthly reconciliation workflows and ensures accurate, up-to-date borrower credit profiles across both lenders

Conclusion

The Co-Lending Directions 2025 are more than just a regulatory update, they serve as a comprehensive new playbook for partnership-based lending. The framework sets out clearer rules, tighter execution timelines, and enhanced borrower protection measures, raising the bar for collaboration between regulated entities.

With M2P’s LOS/LMS, lenders gain a unified technology backbone that enables them to meet every provision of the Directions, transforming compliance obligations into operational efficiency, accelerated go-to-market delivery, and stronger borrower confidence.

Discover how M2P streamlines co-lending compliance and boosts efficiency across your lending operations.

Schedule a Demo today.

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