Co- Lending Arrangements- Directions and Requirements
Background:
Regulated entities (REs) perform various roles in
co-lending transactions from sourcing activities to extension of loan
facilities to borrowers, and RBI has issued separate guidelines covering
co-lending by banks with NBFCs to priority sector, guidelines on outsourcing of
financial services, however, the regulatory frameworks do not cover all
possible categories of co-lending arrangements (CLA).
On 9th April, 2025, the Reserve Bank of
India has issued comprehensive draft framework[1] to cover all market trends
related to different types of CLA entered
by financial entities. The said directions stipulate regulatory norms and
guidance for REs, and also seek to address prudential issues.
Post receipt of comments from industry experts,
financial sector, legal professionals, academicians, etc, RBI has proposed to
issue directions that will govern co-lending arrangements by REs, which shall
come into force from date of its publication.
Applicability of CLA directions:
1. RBI has proposed to include all commercial banks (excluding small finance banks, local area banks and regional rural banks), All-India Financial Institutions, non-banking financial companies (including housing finance companies) under the ambit of “Regulated Entity”, without any categorisation or limit on networth/ turnover.
2. It has been proposed that CLA directions shall be applicable to all types of CLA transactions, including digital CLA, which means that CLA can be provided by way of digital lending apps or platforms as well.
3. CLA directions shall however not apply to loans exceeding ₹100 Crores, sanctioned under multiple banking, consortium lending, or syndication.
Definition:
CLA has been defined in draft directions as an “arrangement, formalised through an ex ante
legal agreement, among the permitted REs to jointly fund a loan portfolio in a
pre-agreed proportion, involving revenue and risk sharing with or without
sourcing and management arrangement”.
In common practice, it is distinguishable from various other lending modes as follows:
1. Multiple banking is where a borrower obtains funds separately via separate transactions from multiple REs. Here, there is no inter se agreement between REs like in co-lending.
2. Co- lending is more akin to loan syndication; both involve multiple REs pooling in funds to provide credit to borrower; however, in syndicated lending, there is always a lead lender, but in co-lending there is no leader, REs may agree to either independently act for itself or may authorise any one RE to act on behalf of all.
3. The term “consortium lending” is often interchangeably used with “syndicate lending”. Both involve obtaining loan from multiple REs and in both the lending types, there are lead lenders (generally RE who has taken highest exposure). The only difference being that in consortium lending there may be different terms with different REs and there may be a case of default on one RE without default on the other, but in case of syndication, since there is only one loan, a default by borrower in repayment of loan is a default on all REs.
Pre-requisites and documentation:
1. As per the aforementioned definition, execution of CLA agreement between REs is quint essential prior to funding. Further, draft directions mention that the following should be written explicitly:
a) proportion agreed to be funded;
b) revenue and risk sharing ratio of REs;
c) whether there is any sourcing or management arrangement?
d) criteria for selection of borrowers;
e) specific product lines and areas of operation;
f) fees payable for lending services;
g) segregation of responsibilities;
h) customer interface and customer protection issues.
In practice, the following terms are also included in a CLA agreement:
a) While REs are required to enumerate the services to be provided by each of them, details of services which are proposed to be outsourced, and to whom it can be outsourced should also be specified.
b)A time frame has to be agreed between the REs for sanction or rejection of loan application.
c) REs shall agree on revenue receivable by each of them, and should also list down specifically that neither of them will not demand, collect/ recover any commission/ service charges or other monies from the customers, except as mutually agreed.
d)The manner in which receivables are to be appropriated has to be stipulated in the CLA agreement.
e) REs are required to comply with fair practice code and other directions/ guidelines issued by RBI from time to time. In case of breach, for instance in case of breach of confidentiality regarding customer information, there may be repercussions on all the REs, including on the non- defaulting RE, therefore, the remedy for the same, say by way of an indemnity or termination of CLA may be stipulated.
f) The CLA agreement may restrict REs from refinancing loans of customer without prior written consent of co-lender.
g) REs shall make their independent assessment on credibility of borrower, and shall take their own decision approving or rejecting the loan application.
h)REs to ensure that accounting of all transactions related to loan are entered into their respective books of accounts at regular intervals and, the same is also reconciled with the entries in their co-lender’s books.
i) Upon termination of the CLA, REs may mutually agree to remove the defaulting RE as co-lender by taking over the co-lender’s portion of loan, in full and the non- defaulting RE may assume all rights, duties and obligations of the co-lender’s loan amount directly. Accordingly, REs to agree on disengagement process to ensure appropriate exit and final settlement without impacting the customer or the loan.
j) REs may reserve certain rights such as inspection of books of account of co-lender, sharing of information relating to any audit or review reports and findings made by co-lenders with respect to borrower or their account amongst others.
k) Any one RE may be delegated with the power to appoint collection agents, initiate recovery proceedings, including filing of cases under Section 138 of the Negotiable Instruments Act, 1881 and any avail other remedies under applicable laws.
l) General representations and warranties to be included- such as sourcing should not be based on fraudulent documents in connivance with the customer.
m) Arrangement entered into between REs may be on non-exclusive basis and REs may not be restricted from entering into similar arrangements with third parties.
n) Other important clauses like governing law, jurisdiction, indemnity, notices, severability, waiver, force majeure, and the like should also be appropriately put.
2. The draft directions provide for escrow mechanism in case of CLA, and in practice, REs abide by the following:
a) Two escrow accounts- disbursement escrow account and collection escrow account- are opened jointly by co- lenders, wherein all amounts to be disbursed by each RE, as per agreed ratio, are disbursed in disbursement escrow account only, and all receivables are collected only in collection escrow account.
b) Amounts lying to credit of disbursement escrow account is not be utilised for any purpose other than for disbursement towards loans.
c) REs are not entitled to independently collect monies from customer towards repayment of loans directly into their individual accounts.
d) Manner of apportionment of amounts received in collection escrow account is also specified in escrow agreement entered into with escrow bank.
3. A loan agreement has to be executed between borrower and all the REs, which shall, in addition to general loan terms, include the following:
a) segregation of roles and responsibilities (such as sourcing, funding, and servicing) of REs, including RE having customer interface. Any subsequent change in customer interface shall only be done after taking explicit consent from borrower;
b) customer protection and grievance redress mechanism;
c) details in line with RBI Circular on Key Facts Statement (KFS) for Loans & Advances[2].
4. Credit policies of REs shall suitably incorporate following provisions relating to CLAs:
a) internal limit for the proportion of their lending portfolio;
b) target borrower segments;
c) due diligence of partner entities;
d) customer service and grievance redressal mechanisms.
REs can lend to only those customers who meet the eligibility criteria as per the mutually agreed credit policy.
Interest and Charges:
Draft directions further stipulate that:
1. Interest rate and any other fees/ charges charged to borrower shall be as per CLA agreement.
2. Interest rate charged shall be blended interest rate calculated as average rate of interest derived from interest rates charged by funding REs, as per their internal lending policies and risk profile of borrower, weighted by proportionate funding share of concerned REs under CLA.
3. Any fee/charges payable to sourcing or servicing entity shall be part of a separate arrangement and shall not be included in calculation of blended interest rate.
4. All additional charges, together with blended interest rate, shall be incorporated in computation of annual percentage rate and disclosed in KFS.
Existing provisions to apply:
1. Banks engaging in CLA for loans eligible to be classified under priority sector lending in terms of Master Directions- Priority Sector Lending[3] can claim priority sector status in respect of their share of credit under the said arrangement.
2. Loans under CLA shall be included in the scope of internal/statutory audit within the REs to ensure adherence to internal guidelines, terms of agreement and regulatory requirements.
3. REs involved in CLA shall be individually responsible for compliance with Master Direction - Know Your Customer (KYC) Direction, 2016[4] as amended from time to time.
5. Any complaint registered by borrower shall be dealt with within 30 days, failing which borrower shall have the option to escalate the same with RBI’s Complaint Management System/ Centralised Receipt and Processing Centre.
6. Each RE shall adhere to the provisions relating to reporting to Credit Information Companies for their share of the loan account.
7. Asset classification by REs for their exposure shall be applicable at borrower level, i.e. if any RE classifies their exposure as SMA/NPA, the same classification shall be applicable to exposure of other REs as well.
8. Any subsequent transfer of loan exposures originated under CLA to third parties, or any inter-se transfer of such loan exposures between REs, shall be in compliance with Master Direction on Transfer of Loan Exposures[5].
Additional Compliance:
1. REs shall implement a business continuity plan to ensure uninterrupted service to borrowers till repayment of loans, in the event of termination of CLA between REs.
2. REs shall prominently disclose on their website the following:
a) List of CLA partners for various arrangements;
b) Indicative range of blended interest rates and
fees/charges charged to borrowers under different CLAs.
3. REs are also required to make appropriate disclosures in financial statements, providing information relating to quantum of CLAs, weighted average rate of interest, fees charged/paid, broad sectors in which CLA was made, performance of loans under CLA, details related to default loss guarantee.
Observations on
RBI Directions:
While the draft directions is all-encompassing, and has in fact not touched upon commercials, which may structured based on comfort and understanding of REs, the following can be modified in the final directions:
1. KYC may be done by any one RE, and requisite KYC documents may be shared amongst all REs. Since all co-lenders are anyway regulated entities, regulated by RBI, requirement of individually carrying out separate KYC can be done away with.
2. While it is mentioned in the draft directions that any change in customer interface shall only be done after taking consent from borrower; it should be after intimation to borrower since in case of disputes between REs or termination of CLA between REs, there might takeover of loan and it might not be possible to obtain consent.
3. Instead of blended rate of interest, REs could agree for a rate of interest specific to CLA arrangements depending on factors such as borrower profile, amount of loan, security provided, etc.
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