RBI's Double Play: Digital Lending Guidelines & Co-Lending Tightened
RBI has been busy lately. Last week saw the release of the comprehensive Digital Lending Guidelines (DLG) 2025, and before that, the draft Co-Lending Arrangements Directions hit the market. While they may seem like separate initiatives, they're actually two sides of the same coin, RBI's master plan to reorganize how lending partnerships work in India.
But why should we care? Because together, these regulations will fundamentally change how credit flows to millions of Indians, especially those underserved by traditional banking.
The Big Picture: What's RBI Really Trying to Do?
At its core, RBI is addressing a simple problem: India has a massive credit gap, and solving it requires partnerships between different types of lenders. But these partnerships have created new risks, from questionable recovery practices to unclear accountability when things go wrong.
RBI's solution? Create clear rules of engagement for every type of lending partnership. The DLG 2025 covers the tech side (apps, platforms, data handling), while the co-lending framework covers the money side (who funds what, how risks are shared).
Co-Lending: The End of "Originate and Sell"
The most significant change in the draft co-lending rules is simple but profound: banks and NBFCs must now disburse loans together from day one.
What this means in plain language: NBFCs can no longer give out loans from their own pocket and quickly sell them to banks. Instead, both must put money in the pot from the very beginning.
For smaller NBFCs, this is a big deal. Many operate on a model where they quickly recycle their limited capital, give loans, transfer them to banks, and use the freed-up money to give more loans. That model is now effectively dead.
As Federal Bank's Executive Director Harsh Dugar put it bluntly: "CLM-2 deals may now transition to direct assignment," which means waiting out minimum holding periods before transferring loans.
The result? Smaller NBFCs might pull back from certain markets, especially in rural areas, potentially reducing credit access in places that need it most.
The "One Default = Default Everywhere" Problem
Another major change sounds technical but has real-world consequences: if a borrower is marked as defaulting with one lender, they're automatically considered defaulting with all partners.
Think about what this means for borrowers: Imagine someone facing a temporary cash crunch who decides to prioritize paying one lender over another. Under the new rules, they'd be tagged as defaulters by both lenders, potentially harming their credit score and future borrowing ability.
For lenders, this creates an urgent need for better coordination. If an NBFC sees that a customer might miss a payment to their bank partner, they'll want to step in immediately to prevent a cascading default situation.
Digital Lending: New Rules for the Tech Players
While the co-lending changes affect the financial plumbing, the Digital Lending Guidelines reshape how tech interfaces with borrowers. The key changes here are more consumer-focused:
Digital lending platforms working with multiple lenders must now show borrowers all matching loan offers without bias. The rule states: "LSP shall provide a digital view of all the loan offers matching the borrower's request."
In simpler terms: No more pushing certain lenders' products because they pay higher commissions. Marketplace platforms will need to become genuinely neutral.
For fintech companies whose entire business model revolved around lender prioritization deals, this means rethinking their revenue structure entirely.
Default Guarantees Limited to 5%
Both frameworks limit risk-sharing arrangements to 5% of the loan portfolio. This means technology partners can only guarantee to cover up to 5% of defaults.
Why this matters: Many digital lending partnerships were built on arrangements where tech partners covered 10-15% of defaults. This higher coverage made banks comfortable working with less proven partners and riskier borrower segments. With the 5% cap, banks might become more conservative about which partnerships they enter.
The DLG 2025 requires all borrower data to be stored in Indian servers, with minimal storage by lending service providers (LSPs). Any processing outside India requires the data to be deleted within 24 hours.
For global players using cloud infrastructure or centralized risk models, this means significant re-architecture of their systems. But for borrowers, it offers stronger protection against data misuse.
How These Changes Connect
Here's where things get interesting. Many lending partnerships operate at the intersection of both frameworks, they're both digital and involve multiple lenders sharing risk.
The regulations acknowledge this overlap. The co-lending guidelines specifically state that digital lending arrangements involving multiple lenders must follow both sets of rules simultaneously.
This creates a layered compliance requirement that will be complex to navigate. Lenders will need to make sure their partnerships satisfy both the financial structuring requirements of co-lending and the consumer protection elements of digital lending.
What This Means for Different Players
For Banks
These changes are in some way favorable to the banks. It can help banks gain better control and visibility from day one in any lending partnership. However, they will need to develop robust integration capabilities. Bank may also lose some of the volume that came from NBFCs quickly recycling capital.
For Large NBFCs
The impact on large NBFC seems manageable but significant. While they do have the balance sheet strength to hold loans for a longer period, they will need to invest in better coordination with bank partners, especially around EWS for potential defaults.
For Small NBFCs
The real challenge is for small NBFCs. Their capital efficient “originate and sell” model is dead. Many of the small NBFCs will be forced to shift from the direct assignment model with longer holding periods that they may not be able to afford. They could also be left seeking additional capital to maintain their usual lending volume.
For Fintech Platforms
The neutral marketplace requirement fundamentally changes their business model. They'll need to find new revenue streams beyond preferred lender commissions, potentially through more transparent fees or value-added services.
The Tech Opportunity: Building Bridges in a Fragmented World
These changes create substantial opportunities for technology providers who can solve the new coordination challenges:
1. Default Prevention Systems
With the synchronized default classification, early warning systems become critical. Technology that can monitor borrower health across multiple lenders and enable coordinated intervention could be game-changing.
2. Neutral Recommendation Engines
Platforms need new algorithms that can present loan offers in an unbiased way while still creating a viable business model. This will likely involve more transparent ranking methods and clearer disclosure of comparison metrics.
3. Seamless Co-Disbursement Infrastructure
The requirement for day-one joint disbursement creates demand for systems that can handle complex fund flows, reconciliation, and record-keeping across multiple partners.
The Bottom Line
RBI's dual regulatory approach reflects a sophisticated understanding of modern lending. They recognize that lending partnerships happen through both financial structures (co-lending) and technological interfaces (digital lending), and both require clear guardrails.
While the short-term impact may be some contraction in lending to underserved segments, the long-term result should be a more stable, transparent lending ecosystem. The question is whether innovation can overcome the new operational hurdles to keep expanding credit access.
At FinBox, we're focused on building the technology bridges that can make these new frameworks work for all participants. The lenders who adapt fastest to this new reality, developing the right partnerships, systems, and approaches, will ultimately capture the massive opportunity that India's credit gap continues to represent.
What's your take on these changes? Is RBI creating a necessary structure or overcomplicating lending? I'd love to hear your thoughts.
Until next time,
Rajat Deshpande