Small and Medium Enterprises (SMEs) have long been recognized as the backbone of economic growth, innovation, and employment. Yet, despite their contribution, SMEs consistently struggle to access adequate and affordable credit. High risk perceptions, insufficient collateral, and high transaction costs often discourage banks from lending to this sector, while Non-Banking Financial Companies (NBFCs) and fintechs, despite their reach and agility, face the disadvantage of high funding costs. The result is a persistent financing gap that continues to hold back the growth of thousands of promising enterprises.
One promising way to bridge this gap is through co-lending, a model that combines the strengths of banks and non-banks to deliver credit more effectively. In simple terms, co-lending allows banks and NBFCs or fintechs to jointly fund SME loans in a pre-agreed proportion. Banks bring in low-cost capital and regulatory stability, while NBFCs and fintechs contribute their strong origination networks, credit assessment innovations, and last-mile servicing capabilities. For SMEs, this partnership means easier access to formal finance, better pricing compared to pure NBFC loans, and a more responsive customer experience.
The Reserve Bank of India (RBI) has recognized this potential and, in August 2025, issued the Co-Lending Arrangements (CLA) Directions, 2025. These revised rules expand the scope of co-lending beyond priority sector lending and provide much-needed regulatory clarity. Among the key features are requirements for each lender to retain a minimum share of every loan, transparent disclosure of responsibilities to borrowers, blended pricing of loans based on the funding mix, and operational safeguards such as the use of escrow accounts. Importantly, co-lending exposures also qualify for priority sector lending (PSL) recognition, giving banks an added incentive to expand SME credit. The framework even allows originating lenders to provide a default loss guarantee of up to five percent, strengthening confidence in risk-sharing.
For SMEs, the benefits are tangible. Co-lending can increase the overall volume of credit flowing to the sector, since banks gain confidence from the local expertise of NBFCs and fintechs. The blended interest rate ensures that the cost of credit is lower than what NBFCs could offer alone, making finance more affordable for small businesses. Servicing too becomes more efficient, with technology-driven NBFCs providing digital-first, last-mile customer interactions. The model also encourages the design of tailored credit products, whether for working capital, term finance, or supply chain needs, reflecting the diversity of SME requirements.
Equally important is the synergy between banks and non-banks. Banks, with their low-cost deposits, find it difficult to reach high-risk, small-ticket borrowers profitably, while NBFCs and fintechs excel at exactly that but lack cheap funding sources. Co-lending marries these strengths, creating a model that is both scalable and sustainable. By sharing risks and rewards, lenders can serve more SMEs without compromising their balance sheets.
Looking ahead, policymakers can play a catalytic role in expanding the co-lending ecosystem for SME finance. Regulatory encouragement through standardization of agreements, streamlined blended pricing mechanisms, and enhanced credit infrastructure such as improved credit bureaus and collateral registries will further strengthen the model. Incentives like lighter capital treatment for SME co-lending exposures could also nudge banks to participate more actively.
The bottom line is clear: co-lending is not just a technical framework, but a potential game-changer for SME finance. With RBI’s updated Directions providing a strong regulatory foundation, this approach can create the positive synergies needed to unlock affordable, timely, and inclusive credit for small businesses. In doing so, co-lending can help SMEs thrive, and with them, power a more dynamic and resilient economy.
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