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What is Co-Lending? An Ultimate Guide

P2P Lending

Due to the fusion of finance and technology, or fintech, the lending business is continually developing and adapting to the shifting global market. Opportunities to provide financial aid to previously unbanked segments of society have been made possible by this transformation. The lending business experienced a brief setback during the pandemic, but it is anticipated to bounce back quickly and expand at a healthy CAGR of 5.5% to reach $7,929 billion by 2023, supported by factors like the recovery of emerging countries, fintech, greater internet access, an increase in building activity, and public investment.

The lending industry has seen several trends, including alternative lending, which has given small firms and individuals access to loans that were previously unattainable through traditional banking. By providing alternative lenders with data-driven insights to make profitable and scalable lending decisions, fintech has opened up areas that traditional banks had previously deemed too hazardous and unprofitable. Fintech presents many opportunities, including cost savings, increased productivity and efficiency, and access to underserved and inaccessible markets. Co-lending, which offers financial services to previously unbanked segments of society and stimulates growth in the loan industry, is one of the most recent fintech techniques gaining traction. In this blog, we will understand the concept of co-lending, its meaning, benefits, how it works and more.

What is Co-Lending?

Let’s first understand what lending is. Lending is the act of transferring funds from one party to another for a predetermined amount of time in exchange for the future promise that the lendee will repay the lender with interest.

Co is an abbreviation for collaboration, which is defined as the association of two or more parties for a given goal or project. Typically, it is used as a prefix to the actual project title and in its abbreviated form, “Co,” to demonstrate the collaboration between the parties.

So, based on the aforementioned criteria, we can conclude that co-lending refers to the collaboration of two or more lenders to make loans to their targeted beneficiaries.

Co-lending has been practised in India from 2012 to 2014; however, with the emergence of fintech and new-generation non-banking financial companies(NBFCs), co-lending has just lately begun to demonstrate its potential in the Indian context. Lending has become an affluent industry, and every major corporation desires a stake in it. Yet to grant loans, two conditions must be met:

1. Funds

These are not cheap for smaller and newer players because they have to get the money themselves from a larger entity, which comes with its interest liability.

 2. Ready customers

One of the most important parts of giving credit is finding customers who can pay it back. This is because you want to reduce the chance that your loan will turn into a bad debt.

Fintech and NBFCs, which are newer players, usually offer loans to a wider range of people because they focus on the customer and use social media and digital marketing to find potential customers. However, they don’t have easy access to large amounts of cheap money to lend to their customers.

On the other hand, established businesses (banks) have a sizeable amount of money available to be invested in the proper clients, but their customer acquisition strategies are largely still based on offline methods and do not consider the extent of digital penetration.

To create a comprehensive experience that benefits all parties involved in the agreement, co-lending enables both of these types of companies to collaborate under a single lender umbrella.


How does Co-Lending work?

Earlier in 2018, the RBI established the co-origination framework, allowing banks and NBFCs to co-originate loans. However, the CLM-Co-Lending Models were introduced in 2020 after further changes to the RBI Co-Lending Guidelines. Its framework underwent some changes, and Housing Finance Companies were added.

The goal of CLM is to increase credit flow to the underserved and unserved sectors of the economy at a reasonable price. The concept is based on the premise that banks have lower costs of funding and NBFCs have broader access to markets outside of tier-2 locations.

According to RBI regulations, a minimum of 20% of the credit risk from direct exposure must remain on NBFCs’ books to maturity, while the remaining 80% must remain on banks’ books. By their respective shares of the credit and interest at maturity, the bank and NBFC split the repayment and recovery of interest.

Simply put, here’s how co-lending works:

  • Banks lend money to NBFCs, who then distribute it to the priority sectors because they have a wider reach.
  • Customers deal with NBFCs as their sole point of contact, and an agreement is signed by the customers, banks, and NBFCs.

Benefits of Co-Lending

Co-lending models enable traditional banks to use the fintech business model to distribute larger sums of money with a wider digital reach. NBFCs have the reach while banks have the resources. Hence, a co-lending model seems to be beneficial to both parties. This approach is successful because it makes use of reliable technology to ease the operational difficulties associated with conventional lending arrangements. A co-lending arrangement has various advantages, including the following:

1. Improvements in quality and speed

As financial institutions have become more digital, the quality of their services has gotten better. Effective use of technology has sped up every process, from application to disbursal to real-time service delivery.

2. Reduced interest rates

The co-lending concept enables a variety of products to be provided to priority clients at lower interest rates. Owing to digital lenders, the cost of customer acquisition has decreased significantly, which, when combined with the low cost of capital provided by banks, reduces the overall cost. The cost savings can be passed on to the borrowers.

3. Automatic and paperless processes

Because the entire process is automated, borrowers can apply for and receive funds from the convenience of their homes. Moreover, e-KYC has been used by new-age lenders, and Video KYC has further streamlined the procedure.

4. Instant loan disbursement

Nowadays, loans are accessible through user-friendly, smartphone apps with a single click. The best of both worlds—digital channels and physical branches—are available under a co-lending model, which is advantageous to consumers.

5. Huge customer base

Fintech uses digital platforms to expand its customer reach, which helps them meet the needs of borrowers from all over the world. Also, a co-lending model aids in supplying the economically weaker strata with the money they require.

How to choose the right partner?

Like with any other commercial relationship, co-lending arrangements should be entered into with extreme caution, because in addition to the apparent financial risk, the conduct of the other party could make or destroy your brand’s reputation.

These are some considerations prospective partners should keep in mind:

1. Focus area

Whereas many lenders also have a specific concentration on one or more specific target groups, such as working professionals, some are sector-agnostic, while others have a more narrow focus on a certain area of the economy. So, the similarity of priority areas becomes essential when entering into an agreement.

2. Risk appetite

It is crucial that the risk-taking skills and willingness of a possible partner match your own, as future disagreements about restructuring and bad debts could turn ugly if things do not go according to plan.

3. Ticket size

When two or more people agree to co-lend money, they need to agree on the average loan amount, which has a wide range. If they don’t, there could be problems in the future.

4. Process nuances

In terms of documentation, customer interaction, customer service, etc., some lenders operate in a specific manner. So, both parties must have total information before the co-lending agreement begins.

The future of Co-Lending 

Co-lending is a relatively new form of lending that is becoming more and more popular in the financial sector. As more financial institutions use this method, it is likely to become more popular in the future. The advantages of co-lending are numerous, and as more lenders and borrowers become aware of these advantages, co-lending is projected to grow more popular.

The usage of blockchain technology is one potential future development in co-lending. Blockchain can offer a safe and open platform for co-lending, improving its effectiveness and cost-efficiency. The usage of blockchain technology can also aid in lowering the possibility of fraud and boosting confidence among lenders and borrowers.

Another potential future advancement in co-lending is the application of Artificial Intelligence (AI). With AI, lenders may more correctly assess borrowers’ creditworthiness, lowering the chance of default. AI can also assist lenders in identifying potential dangers during the financing process and proactively addressing those issues.



Co-lending is a model that benefits all concerned stakeholders, including banks, NBFCs, and the end customer. Fintech is key to this concept, which renders it foolproof and scalable. To deliver seamless services to end users, it is essential to make sure that information moves smoothly and accurately between the two lenders. Although the co-lending approach reduces operational difficulties, certain issues must be resolved to maintain a seamless workflow for both parties. They include reconciling repayment schedules, hypothecation, bureau reporting, and concurrent credit assessments. Co-lending benefits all parties engaged in the lending process, making it a win-win situation.


1. What is Co-Lending in India?

Ans: Co is an abbreviation for collaboration, which is defined as the association of two or more parties for a given goal or project. Typically, it is used as a prefix to the actual project title and in its abbreviated form, “Co,” to demonstrate the collaboration between the parties. So, based on the aforementioned criteria, we can conclude that co-lending refers to the collaboration of two or more lenders to make loans to their targeted beneficiaries.

2. How will NBFC benefit from the Co-Lending scheme?

Ans: Non-Banking Financial Companies (NBFCs) are expected to benefit significantly from the co-lending scheme introduced by the Reserve Bank of India (RBI) in 2020. Under the scheme, banks and NBFCs can jointly lend to priority sectors, such as agriculture, micro, small and medium enterprises (MSMEs), and housing, among others. The co-lending scheme can help NBFCs access funds at a lower cost, reduce their risk, and expand their lending activities, thereby enhancing their profitability and growth prospects.   

3. How does the model of Co-Lending benefit the lender?

Ans: The “Co-Lending Model” (CLM) improves the credit flow to the unserved and underserved sectors of the economy and makes funds accessible at a cheap cost. This strategy combines the advantages of banks’ cheaper cost of funding and NBFCs’ extensive reach.

4. Are banks able to lend to NBFCs?

Ans: Yes, banks can lend money to NBFCs so that they can give the money to certain sectors that need it most.

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