In a significant shift aimed at boosting credit access and strengthening financial partnerships, the Reserve Bank of India (RBI) on April 9, 2025, announced plans to revamp the co-lending guidelines, expanding their applicability beyond priority sector lending (PSL). This change will now cover all regulated entities (REs) and all categories of loans, marking a departure from the current narrow focus.

The announcement was made during the first monetary policy review of FY26, presided over by RBI Governor Sanjay Malhotra, where the central bank also reduced the repo rate by 25 basis points, bringing it down to 6%.

From Restricted to Universal Co-Lending

At present, India’s co-lending framework is limited to partnerships between banks and non-banking financial companies (NBFCs). The regulation restricts lending only to the priority sectors, such as:

• Agriculture

• Micro-enterprises

• Loans to weaker sections

However, under the newly proposed changes, all regulated entities, including various non-bank players, will be permitted to participate in co-lending arrangements across all loan categories—not just PSL.

This move aims to liberalise the credit ecosystem, enabling wider and more flexible lending models. According to Malhotra, the RBI is currently in the process of drafting detailed guidelines, which will be made public soon.

Why the Shift in Co-Lending Matters

The co-lending model was originally designed to boost credit outreach in underserved segments, especially in rural India. However, critics have pointed out that the existing framework is too narrow and leaves out many sectors that are equally credit-starved.

With the updated policy:

• More types of loans will be covered, including consumer loans, education loans, housing loans, etc.

• More players like fintechs, smaller NBFCs, and regulated digital lenders will be brought into the fold.

• It could significantly improve financial inclusion and credit disbursement efficiency.

This reform aligns with RBI's vision to create a diversified and tech-enabled lending ecosystem, especially amid India's growing fintech sector.

Governor Sanjay Malhotra's Remarks

During the press conference, Governor Sanjay Malhotra highlighted the importance of creating flexible financial channels. He stated that the current policy environment needs evolution, and inclusive co-lending norms would help expand access to credit across all sectors.

He also noted that the specific structure and mechanics of the new framework would be carefully designed to ensure risk management, compliance, and accountability across all lending institutions.

Repo Rate Cut: A Move to Support Economic Growth

In addition to the co-lending announcement, the RBI’s Monetary Policy Committee (MPC) decided to cut the key repo rate by 25 basis points, reducing it from 6.25% to 6%.

This marks the second consecutive rate cut, following a similar reduction in February 2025, and the first rate cuts since May 2020, when rates were held steady due to the pandemic-era recovery strategy.

The repo rate cut is expected to:

• Lower borrowing costs for both consumers and businesses

• Encourage banks to lend more, especially under the new co-lending structure

• Stimulate demand and investment in the economy

Market Reactions and Expert Opinions

The market responded positively to both announcements. Experts see this dual move—the repo rate cut and the co-lending expansion—as a strategic push to democratise credit access and stimulate private consumption.

Financial analysts believe that the RBI is creating space for innovative credit partnerships that can benefit MSMEs, startups, and urban consumers who may not be covered under traditional PSL lending.

According to RBL Bank’s chief economist, the new framework could "usher in a new era of financial collaboration, particularly with fintech and NBFC sectors growing at record pace."

Impact on NBFCs and Fintech Players

NBFCs have long depended on co-lending partnerships with banks to extend their reach. The proposed reforms will now enable:

• Greater operational freedom for NBFCs

• Better terms for risk-sharing

• Entry into previously restricted loan categories

Fintech firms, too, stand to benefit immensely, as they will now be able to co-lend in consumer finance, education, real estate, and more.

Inclusive Framework Could Bridge the Urban-Rural Credit Divide

The broadened co-lending rules could act as a catalyst in solving one of India's key financial challenges: credit accessibility in semi-urban and rural areas.

By empowering smaller regulated entities, especially those with deep penetration in remote regions, this initiative may reduce dependency on informal credit systems, which often burden borrowers with higher interest rates and poor grievance mechanisms.

Awaited Guidelines Will Shape the Future

While the RBI has yet to release the final guidelines, stakeholders are keenly awaiting the following clarifications:

• Eligibility criteria for new regulated entities

• Risk-sharing ratios between lenders

• Grievance redressal systems

• Compliance and reporting mechanisms

These elements will be crucial in ensuring the success and sustainability of the inclusive co-lending model.

Conclusion: A Pivotal Step in India's Lending Landscape

The RBI’s decision to restructure the co-lending policy and cut the repo rate is seen as a bold and much-needed move to realign India’s credit architecture.

By allowing greater participation of varied lenders and expanding the scope of loan categories, the central bank is laying the groundwork for a resilient, inclusive, and diversified credit market.

As India eyes rapid growth in the coming years, credit accessibility will play a key role—and this policy revamp could very well be the pivot that fuels the next phase of economic and financial inclusion.

The Upcoming IPOs in this week and coming weeks are Aten Papers & Foam.

Start your Stock Market Journey and Apply in IPO by Opening Free Demat Account in Choice Broking FinX

Join our Trading with CA Abhay Telegram Channel for regular Stock Market Trading and Investment Calls by CA Abhay Varn - SEBI Registered Research Analyst.