{"id":51177,"date":"2025-11-26T19:53:34","date_gmt":"2025-11-26T14:23:34","guid":{"rendered":"https:\/\/www.tatacapital.com\/blog\/?p=51177"},"modified":"2026-04-02T19:24:53","modified_gmt":"2026-04-02T13:54:53","slug":"what-is-co-lending","status":"publish","type":"post","link":"https:\/\/www.tatacapital.com\/blog\/personal-use-loan\/what-is-co-lending\/","title":{"rendered":"What is co-lending? Meaning & how it works"},"content":{"rendered":"\n

<\/p>\n\n\n\n

What is lending in banking?<\/strong><\/h2>\n\n\n\n

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 \u201clender\u201d, whereas the individual or business that receives money is known as the \u201cborrower\u201d.<\/p>\n\n\n\n

This typical arrangement of \u201clending\u201d 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.<\/p>\n\n\n\n

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.<\/p>\n\n\n\n

What is a co-lending model?<\/strong><\/h2>\n\n\n\n

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)<\/strong><\/a>, 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.<\/p>\n\n\n\n

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)<\/strong> 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<\/strong><\/a>.<\/p>\n\n\n\n

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.<\/p>\n\n\n\n

A co-lending model typically involves the following procedures:<\/p>\n\n\n\n

Loan origination<\/strong><\/h3>\n\n\n\n

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.<\/p>\n\n\n\n

Loan funding and risk sharing<\/strong><\/h3>\n\n\n\n

The primary lender checks the borrower\u2019s credit score<\/strong><\/a>, 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%.<\/p>\n\n\n\n

Loan disbursement and servicing<\/strong><\/h3>\n\n\n\n

The primary lender handles loan disbursement and servicing. The responsibilities include collecting EMIs, sending reminders, and handling customer grievances (if any).<\/p>\n\n\n\n

Loan recovery<\/strong><\/h3>\n\n\n\n

The primary lender recovers the loan through EMIs and distributes the co-lender\u2019s share. If the borrower defaults, the losses are shared in the 80:20 ratio.<\/p>\n\n\n\n

Also,read-What is a Personal Loan?<\/a><\/p>\n\n\n\n

How does co-lending work?<\/strong><\/h2>\n\n\n\n

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.<\/p>\n\n\n\n

Here\u2019s a simple step-by-step explanation of how a co-lending model works:<\/p>\n\n\n\n

1. A customer approaches the bank or NBFC<\/strong><\/p>\n\n\n\n

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\u2019s web page to complete the loan application<\/strong><\/a>.<\/p>\n\n\n\n

2. Joint evaluation of the borrower\u2019s eligibility<\/strong><\/p>\n\n\n\n

Once the application is completed, both the bank and the NBFC begin evaluating the borrower\u2019s loan eligibility<\/strong><\/a>. This is typically done by analyzing their credit score, income, employment stability, age, and several other factors.<\/p>\n\n\n\n

3. Risk sharing and loan amount split<\/strong><\/p>\n\n\n\n

Upon approval, the primary lender initiates the process of loan disbursal<\/strong><\/a>. 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.<\/p>\n\n\n\n

4. Disbursement and servicing<\/strong><\/p>\n\n\n\n

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.<\/p>\n\n\n\n

5. Repayment and recovery<\/strong><\/p>\n\n\n\n

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).<\/p>\n\n\n\n

Types of co-lending<\/strong><\/h2>\n\n\n\n

Different co-lending models may have different structures and partnership norms. Here\u2019s a breakdown of the common types of co-lending models in India:<\/p>\n\n\n\n

Single primary lender<\/strong><\/h3>\n\n\n\n

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.<\/p>\n\n\n\n

Multiple co-lenders<\/strong><\/h3>\n\n\n\n

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.<\/p>\n\n\n\n

Joint venture<\/strong><\/h3>\n\n\n\n

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.<\/p>\n\n\n\n

Syndicated co-lending<\/strong><\/h3>\n\n\n\n

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.<\/p>\n\n\n\n

Partnership model<\/strong><\/h3>\n\n\n\n

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.<\/p>\n\n\n\n

Key benefits of co-lending<\/strong><\/h2>\n\n\n\n

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\u2019s explore the major co-lending benefits for each stakeholder:<\/p>\n\n\n\n

Benefits to banks<\/strong><\/h3>\n\n\n\n