Co-Lending Model- Key points and Advantages

By Sudheer Kumar K|Updated : November 9th, 2020

Banks and NBFCs are important topics for UPSC IAS Prelims & Mains GS Paper-III (ECONOMY). NBFCs witnessed a huge decline in credit growth and a liquidity crunch after the collapse of IL&FS about a year ago. In this context, the Co-Lending model by Banks and NBFCs for Priority Sector is very important for the IAS Mains Exam, because it is also envisioned to help NBFCs tide over the liquidity crunch. 

Co-Lending Model by Banks and NBFCs for Priority Sector

In a bid to the bring best of banks and NBFCs together, Reserve Bank of India (RBI) has issued guidelines under the Co-Lending Model that non-banking finance companies (NBFCs) and banks can jointly lend. The Co-Lending Model (CLM), which is an improvement over the co-origination of loan scheme announced in September 2018, seeks to provide greater flexibility to the lending institutions.


Key points of Co-Lending Model (CLM), as per the RBI guidelines:

  • Banks and NBFCs can provide loans to priority sector borrowers based on a prior agreement. 


  • Both Banks and NBFCs share risks and rewards according to the agreement.
  • NBFCs need to retain a minimum of 20% share of the loans on their books.
  • Grievance redressal mechanism: The co-lenders must put in place a suitable mechanism to resolve any complaint registered by a borrower with the NBFC within 30 days.
  • If the complaint is not resolved, the borrower can escalate the same with the concerned Banking Ombudsman or Customer Education and Protection Cell (CEPC) in RBI.

Advantages of Co-lending Model:

  • It provides greater operational flexibility to the lending institutions.
  • It provides an excellent opportunity to NBFCs to grow their assets under management.
  • It improves the flow of credit to the underserved sections of the economy.
  • It makes available funds to the PSL beneficiary at an affordable cost, given the lower cost of funds from banks and the greater reach of the NBFCs.
  • It will bring down interest rates and the borrowers of NBFCs like Housing Finance Companies (HFCs) will benefit.


The Co-lending Scheme of RBI is a welcome step especially when the economy is affected by Covid-19. Apart from stimulating Priority Sector lending and boosting NBFCs, the Co-Lending Model has the potential to kick-start the investment activity in the economy to “bring back better” from the Covid-19 crisis.


write a comment

Follow us for latest updates