In a recent report by Crisil Ratings, the co-lending model is poised to reach Rs 1 lakh crore in assets under management (AUM). However, the landscape is evolving, with potential impacts from RBI regulations on personal loan growth.
As per Crisil's analysis, the co-lending portfolios across various asset classes are on the brink of significant expansion. Yet, the pace of personal loan growth may slow down due to regulatory constraints.
One key regulatory change is the revision in risk weights for unsecured consumer credit, increasing from 100 per cent to 125 per cent. This adjustment is expected to moderate the growth of unsecured loans in the upcoming fiscal year, potentially affecting personal loan growth rates.
Malvika Bhotika, Director at Crisil Ratings, suggests a potential shift in the composition of co-lending portfolios. She anticipates a decline in the share of personal loans, with a possible uptick in loans to micro, small, and medium enterprises (MSMEs) and home loans.
Ajit Velonie, Senior Director at Crisil Ratings, highlights the mutual benefits of the co-lending model for non-banking financial companies (NBFCs) and banks. NBFCs gain access to diverse funding sources, while banks meet priority sector lending requirements and tap into niche markets.
Looking ahead, industry participants may pivot towards MSME loans and home loans, considering the higher risk weights associated with personal loans. However, sustaining asset quality remains paramount for long-term success.
In conclusion, monitoring the evolving regulatory landscape and adapting strategies accordingly will be essential for navigating the co-lending space effectively.
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What Is Co-lending and Why It Matters
Co-lending is a model where a bank and an NBFC (Non-Banking Financial Company) jointly originate loans. The RBI introduced the Co-Origination of Loans framework in 2018 and revised it in 2020, allowing banks to partner with registered NBFCs to extend credit to priority sector borrowers - agriculture, MSMEs, housing, and similar segments.
The basic structure is straightforward: the NBFC uses its ground-level distribution reach to source and assess borrowers, while the bank co-lends a portion of the loan (at least 80%) and takes on that portion of the credit risk. The NBFC retains the remainder. Both earn interest income proportional to their share.
For banks, the benefit is priority sector lending compliance at lower operational cost. For NBFCs, it is access to cheaper funds compared to market borrowings, which directly improves their lending margins. For borrowers, the blended interest rate is typically lower than what a standalone NBFC would charge.
Why the Rs 1 Lakh Crore Milestone Is Significant
The co-lending AUM crossing Rs 1 lakh crore is not just a headline number. It signals that co-lending has moved from a regulatory experiment to a meaningful credit channel. In 2020, the market barely existed in formal tracked terms. Four years later, it is a lakh crore industry - a trajectory that few credit products achieve this quickly.
The growth reflects two structural tailwinds working simultaneously: the RBI push to channel formal credit into underserved segments, and the maturation of NBFCs as technology-enabled credit originators. The best NBFCs have built credit assessment models, mobile-first onboarding, and collections infrastructure that banks would take a decade to replicate independently.
The RBI Tightening and Its Impact
The RBI 2023 move to tighten risk weights on unsecured personal loans had a direct read-through on NBFCs operating in the consumer credit space. Higher risk weights require banks to hold more capital against these exposures, which raises the effective cost of co-lending arrangements in the unsecured segment.
The Crisil analysis referenced in this post quantifies the impact: personal loan growth through the co-lending route is expected to moderate, as the economics become less attractive for bank partners. The secured segments - home loans, gold loans, vehicle loans - are less affected because they carry lower risk weights regardless of tightening.
This means the mix within co-lending AUM is likely to shift over the next two to three years - away from unsecured personal credit and toward secured asset classes where the cost of capital remains manageable for both partners.
What This Means for NBFC Investors
For anyone watching NBFC stocks, co-lending exposure is increasingly a factor in thesis construction. NBFCs with high co-lending concentration in unsecured consumer credit face margin pressure as bank partners reprice the arrangement to account for higher capital costs. NBFCs with co-lending exposure in secured segments - particularly microfinance, affordable housing, and vehicle finance - are less exposed to this specific headwind.
The co-lending model is not going away. The structural logic - bank capital plus NBFC distribution - is sound and the RBI has repeatedly signalled support for the framework. But the regulatory environment is clearly shifting toward tighter oversight of consumer credit risk, and the segment mix of a co-lending book is becoming as important as the AUM headline.
