Personal Use Loan

What is co-lending? Meaning & how it works

By Tata Capital
26 November 2025
8 mins read
2922

What is lending in banking?

Lending is one of the most fundamental functions of banking. It refers to the process where banks and financial institutions provide funds to individuals, businesses, or organizations with the agreement that the borrowed amount will be repaid over time, usually with interest. The institution that provides money is known as the “lender”, whereas the individual or business that receives money is known as the “borrower”.

This typical arrangement of “lending” benefits both parties involved. On one hand, it allows the borrower to get access to funds for buying a house, meeting educational expenses, expanding a business, and several other purposes. On the other hand, it helps lenders make profits through interest income and various fees. Additionally, lending helps in economic growth by increasing the money supply in the system.

Traditionally, lending was mainly handled by banks and individual lenders. However, with the rise of Fintech platforms and new credit models, a modern concept of co-lending has emerged.

What is a co-lending model?

The co-lending model is a financial model wherein a primary lender, typically a bank, partners with another lender, which can be a separate bank, NBFC (Non-Banking Financial Company), or a Fintech company, to offer loans together. The primary lender handles the loan application, eligibility check, and documentation process, while the co-lender shares the risk and rewards in a pre-determined ratio. The co-lender may also participate in funding a portion of the loan amount.

The Reserve Bank of India (RBI) introduced the concept of co-lending to improve the flow of credit to underserved sectors, such as individual entrepreneurs and MSME (micro, small, and medium-sized enterprises) owners. For banks, this arrangement helps them in widening their lending reach, whereas for NBFCs, it allows them to share risks and offer loans at competitive interest rates.

According to RBI guidelines, a typical co-lending structure involves an 80:20 partnership, which means the bank contributes 80% of the loan amount and the NBFC funds 20%. The risk is also shared between them in the same proportion.

A co-lending model typically involves the following procedures:

Loan origination

The primary lender initiates the loan, leveraging its strong local presence and customer relationships. It collects applications from borrowers and processes them for further verification.

Loan funding and risk sharing

The primary lender checks the borrower’s credit score, income, and other parameters to gauge loan eligibility. If all parameters are acceptable, it communicates with the co-lender for loan funding and risk sharing. As per the RBI guidelines, banks must fund 80% of the loan amount, while the NBFC funds the remaining 20%.

Loan disbursement and servicing

The primary lender handles loan disbursement and servicing. The responsibilities include collecting EMIs, sending reminders, and handling customer grievances (if any).

Loan recovery

The primary lender recovers the loan through EMIs and distributes the co-lender’s share. If the borrower defaults, the losses are shared in the 80:20 ratio.

Also,read-What is a Personal Loan?

How does co-lending work?

To understand what co-lending is, think of it as a collaboration between a bank and an NBFC. The co-lending model combines the financial strength and expertise of banks with the agility and reach of NBFCs to provide quick financing for underserved borrowers.

Here’s a simple step-by-step explanation of how a co-lending model works:

1. A customer approaches the bank or NBFC

The borrower, which can be an individual or a business, approaches any of the partners (bank or NBFC) for a loan. They are then redirected to the primary lender’s web page to complete the loan application.

2. Joint evaluation of the borrower’s eligibility

Once the application is completed, both the bank and the NBFC begin evaluating the borrower’s loan eligibility. This is typically done by analyzing their credit score, income, employment stability, age, and several other factors.

3. Risk sharing and loan amount split

Upon approval, the primary lender initiates the process of loan disbursal. The loan amount is funded by the bank and the NBFC in the 80:20 ratio. For example, if the loan amount is Rs. 10 lakhs, the bank funds Rs. 8 lakhs, and the NBFC contributes Rs. 2 lakhs. The risk is also shared in the same proportion.

4. Disbursement and servicing

The loan is disbursed after joint contributions. After disbursal, the primary lender or the bank provides services for the loan on behalf of both partners. These may include borrower communication, EMI collection, and customer service, among others.

5. Repayment and recovery

The borrower repays the EMIs as usual. If repayment issues arise, both lenders share the recovery process and any losses in the agreed ratio (80:20).

Types of co-lending

Different co-lending models may have different structures and partnership norms. Here’s a breakdown of the common types of co-lending models in India:

Single primary lender

When a single primary lender collaborates with an NBFC or a Fintech company to provide a loan, the arrangement is known as the single primary lender co-lending. It allows for a simplified lending process with transparent responsibility distribution.

Multiple co-lenders

When a primary lender collaborates with more than one co-lender to provide a loan, the arrangement is known as co-lending with multiple co-lenders. It enables more efficient risk distribution among multiple partners and disbursal of larger amounts.

Joint venture

When the two lending institutions collaborate to form a joint venture, it is known as the joint venture co-lending model. Instead of two separate companies, the loan is processed through a single company jointly headed by both partners.

Syndicated co-lending

Under the syndicate co-lending model, several lenders together create a syndicate to offer loans to borrowers. The risk is shared equally among all syndicate members. However, coordination and transparent communication between so many partners often becomes a challenge.

Partnership model

Primary lenders, such as banks, partners with small Fintech companies or NBFCs to provide loans under the partnership co-lending model. The advantages include clear role sharing and enhanced customer reach.

Key benefits of co-lending

The co-lending model creates a win-win scenario for all parties involved, be it banks, NBFCs, or borrowers. It not only enhances credit availability but also promotes financial inclusion in semi-urban and rural markets. Let’s explore the major co-lending benefits for each stakeholder:

Benefits to banks

Access to underserved markets

Banks may have the financial might, but usually lack the reach of NBFCs. With the help of the co-lending model, banks can partner with NBFCs to cater to the customers they may not serve directly. These may include MSMEs and those belonging to the Tier II and Tier III cities.

Lower risk exposure

By opting for a co-lending model, banks can share the associated risks with an NBFC or a Fintech company. As per the RBI’s guidelines, the primary lender and the co-lender must follow an 80:20 risk-sharing model, where banks usually bear 80% and NBFCs 20%. This allows banks to reduce their overall credit risk while still earning interest income through lending.

Benefits to NBFCs

Access to low-cost funds

While banks take advantage of the NBFC’s reach in a co-lending model, the latter can benefit by getting access to low-cost bank capital. It’s because banks can borrow money from the RBI at much lower costs than NBFCs. This allows NBFCs to provide loans at competitive interest rates and scale their operations faster.

Wider customer base

By partnering with reputed banks, NBFCs can serve a broader customer segment. They can tap into the bank’s retail and urban customer base while maintaining their personalized service model.

Benefits to borrowers/consumers

Competitive interest rates

One of the biggest co-lending advantages is the availability of credit at highly competitive interest rates. Borrowers who may not qualify for low-interest bank loans can avail of credit through the co-lending facility without increasing their borrowing costs.

Easier loan access

Co-lending widens credit access, enabling borrowers with limited banking history to obtain formal loans through NBFC channels.

Faster loan processing

NBFCs and Fintech platforms are known for providing quick loans through mobile apps and web platforms. Coupled with the bank’s capital efficiency, they can offer a complete package to their customers, including lower interest rates and quick disbursals.

Also,read – Benefits of Taking Personal Loans from NBFCs

Co-lending vs traditional lending

While traditional lending has long been the foundation of India’s credit ecosystem, the co-lending model has emerged as a modern, collaborative alternative. Both serve a common goal of providing loans to customers, but differ significantly in structure, risk-sharing mechanism, loan accessibility, and approval time.

Interest rates: In traditional lending, banks offered higher interest rates due to higher perceived risks. Whereas interest rates are significantly lower in co-lending due to risk-sharing.
Loan accessibility: Traditional loans were limited to urban borrowers with strong credit profiles. However, the co-lending model widens access to underserved and semi-urban borrowers.
Processing time: Loans through co-lending models are processed and disbursed faster than those through traditional lending models. The combined framework of banks and NBFCs helps this cause.
Risk: Unlike traditional lending, where the primary lender is exposed to full credit risk, it is shared in the 80:20 ratio in the co-lending model.
Customer experience: Customers usually enjoy borrowing through the co-lending model due to the dual benefits of NBFC-level personalization and bank-level security.

Parameter	Traditional Lending	Co-lending
Interest rates	Generally higher	Lower due to shared funding
Number of lenders	One	Two or more
Loan accessibility	Limited to urban borrowers	Wider reach to underserved borrowers
Processing time	Slower due to strict regulations	Faster
Risk sharing	Borne by a single lender	Shared between co-lenders
Flexibility	Low	High

FAQs

Can co-lending benefit small business owners?

Yes. The co-lending model can significantly benefit small business owners by offering them easy access to credit, and that too, at competitive interest rates. This model can be a boon for MSMEs that often face difficulties in obtaining business loans from traditional banks.

How is the interest rate determined in co-lending loans?

The interest rates are typically lower in the co-lending model due to the risk-sharing mechanism. It is jointly determined by the bank and the NBFC based on their cost of funds and risk share.

What documents are required to apply for a co-lending loan?

The documents required to apply for a co-lending loan are usually the same as for a traditional loan. You may typically need to provide your KYC documents (an identity proof and an address proof), such as a PAN card, an Aadhaar card, etc., income proof (salary slips, bank statements, ITRs), photographs, and collateral papers (if any).

Are co-lending loans safer for borrowers compared to traditional loans?

It may not be a good thing to say that co-lending loans are safer than traditional loans. However, it’s true that co-lending loans combine the dual benefits offered by banks and NBFCs, and are usually more favorable for borrowers. However, borrowers must read the loan agreement carefully to understand repayment terms and responsibilities.

Can borrowers choose between a bank and an NBFC for loan servicing?

No. The borrowers usually do not have a choice to select between a bank and an NBFC when applying for a co-lending loan. The loan servicing is usually handled by the primary lender, which is a registered bank in most cases. However, some models may allow shared servicing.

How does co-lending impact loan approval time?

Co-lending loans are usually processed and approved faster than traditional loans. It’s because the two partners together handle credit evaluation and loan approval processes, often using faster digital tools. This facility helps borrowers get access to quick funding during times of need.

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