BORROWED STRENGTH: Co-lending by public and private NBFCs can aid last-mile credit delivery to small businesses | Photo Credit: triloks

India’s credit architecture is transforming significantly under the directions of the Reserve Bank of India’s 2025 Co-Lending Arrangements (CLA). For the first time, co-lending has been permitted from one regulated entity (RE) to another, paving the way for government-owned non-banking financial companies (NBFCs) to collaborate directly with private lenders. This reform could revolutionise credit flow in sectors such as micro, small and medium enterprises (MSMEs), renewable energy, and rural infrastructure.

Rules of engagement

The new co-lending guidelines introduce several structural reforms. RE-to-RE co-lending now extends beyond banks, allowing NBFC-to-NBFC and other regulated entity partnerships.

A 10 per cent minimum loan-by-loan retention ensures every lender retains “skin in the game”, while a 5 per cent cap on the ‘first loss default guarantee’ (FLDG) limits credit risk exposure. Borrowers benefit from a blended rate structure, through reduced costs, when public sector NBFCs participate. Additionally, defaults will be recognised at the borrower level, ensuring transparency and aligned risk-sharing among lenders.

Retail reach

Government-owned NBFCs such as Power Finance Corporation (PFC), REC, Indian Renewable Energy Development Agency Ltd (IREDA), Housing and Urban Development Corporation Ltd (HUDCO), India Infrastructure Finance Company Ltd (IIFC), Indian Railway Finance Corporation (IRFC), Exim Bank, NABARD, and Sagarmala Finance Corporation Ltd (SMFCL) have traditionally focused on wholesale lending.

Similarly, State-level institutions like Kerala Financial Corporation, Haryana Financial Corporation, Tamil Nadu Industrial Investment Corporation (TIIC), and Andhra Pradesh State Financial Corporation (APSFC) play a vital role in local development financing.

While these entities benefit from low-cost capital, due to their ownership structure, they lack the distribution reach of private NBFCs and fintechs. Co-lending partnerships between PSU and private NBFCs can bridge this divide, combining cheap funding with last-mile delivery, especially in rural and MSME segments.

Co-lending potential

The co-lending framework can unlock massive value across multiple sectors. In industrial clusters, REC or TIIC could partner with MSME-focused NBFCs to provide low-cost loans, reducing rates from nearly 20 per cent to 14–15 per cent. IREDA and HUDCO can collaborate with fintechs to finance rooftop solar systems, making green energy more affordable. Similarly, HUDCO could co-lend with equipment finance NBFCs to support SMEs in acquiring energy-efficient machinery. NABARD and APSFC can expand rural credit through agri-NBFCs and microfinance institutions (MFIs), financing solar pumps and dairy units, while SMFCL and Exim Bank can boost maritime logistics and export MSME financing, respectively.

Proven model

India’s co-lending model has evolved rapidly in recent years. Private NBFCs and fintechs have co-originated more than ₹1.8 lakh crore of loans with banks, primarily targeting MSMEs and affordable housing. Data from the RBI and the Small Industries Development Bank of India (SIDBI) indicate that co-lending’s share in incremental MSME credit has doubled since FY22, with improved credit performance and faster turnaround times. The 2025 CLA strengthens this ecosystem further.

Scale of opportunity

Government NBFCs collectively manage ₹35–40 lakh crore in assets, with State-level NBFCs adding thousands of crores more. Diverting just 10 per cent of these balance sheets into co-lending could channel ₹3.5–4 lakh crore annually into MSMEs, renewable energy, and rural infrastructure — addressing up to 15 per cent of India’s MSME credit gap. This has the potential to finance millions of small loans, create employment, and fuel grassroots growth across the nation.

Why it works

The co-lending framework ensures that PSU and State NBFCs maintain their wholesale lending model while sharing minimal risk through capped FLDG and mandatory loan retention. Operational costs remain low, as private NBFCs handle origination, underwriting, and collections. Borrowers benefit from affordable blended rates, while policymakers can direct capital toward national priorities like MSME development, renewable energy, and rural upliftment. This model transforms competition into collaboration, scaling up financial inclusion faster than ever before.

To accelerate adoption, PSU and State NBFCs should publish co-lending policies within six months and set clear disbursal targets for key sectors like MSME, rooftop solar, and agriculture. Standardised FLDG templates and shared digitised monitoring would enhance governance and efficiency. Federal models — where national NBFCs provide capital and State or private NBFCs deliver last-mile reach should be encouraged to ensure scalability.

Credit network

India faces a paradox: while public sector NBFCs hold vast pools of low-cost capital, small borrowers continue to depend on high-cost private lenders. The RBI’s RE-to-RE co-lending framework offers a pragmatic solution by linking public capital with private efficiency. With PSU NBFCs like PFC, REC, and NABARD joining forces with State and private NBFCs, India can establish a powerful public–private credit delivery network.

This is not merely a regulatory reform — it’s a national opportunity to democratise credit and power inclusive, sustainable economic growth.

(The writer is Founder and Managing Director, UGRO Capital)

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Published on October 27, 2025