Small Finance Banks are pushing for inclusion in co-lending arrangements with banks and non-banking financial companies to enhance credit delivery and diversify loan portfolios. According to reports from The Hindu BusinessLine, currently, the Reserve Bank of India allows lenders such as Commercial Banks, All-India Financial Institutions, and Non-Banking Financial Companies (including Housing Finance Companies) to enter into co-lending arrangements. However, within the commercial banks category, Small Finance Banks, Local Area Banks and Regional Rural Banks are excluded from this framework.
As reported by The Hindu BusinessLine, Baskar Babu R, MD & CEO of Suryoday Small Finance Bank and Chairman of Association of SFBs of India (ASFBI), emphasized that extending CLA facility to SFBs would strengthen credit delivery, improve capital efficiency and enable partnerships that leverage respective lenders' strengths without compromising customer relationships. The biggest advantage would be the ability to enter specialized lending segments without building entirely new businesses from scratch, as highlighted by Babu in his statement to The Hindu BusinessLine.
According to The Hindu BusinessLine report, Babu provided a practical example using gold loans, stating that rather than investing heavily in creating a nationwide gold loan franchise, an SFB could partner with an NBFC that already has deep expertise, trained personnel and extensive branch network. He explained that in Maharashtra, SFBs may have about 100 branches whereas a specialized gold loan NBFC may have 1,000 touchpoints, making it economically unviable for SFBs to open hundreds of branches for a single product. Co-lending allows each institution to play to its strengths while maintaining customer relationships.
As reported by The Hindu BusinessLine, the RBI had lowered the priority sector lending (PSL) target for SFBs with effect from April 01, 2026, reducing the overall target from 75 per cent to 60 per cent of their Adjusted Net Bank Credit or Credit Equivalent of Off-Balance Sheet Exposures, whichever is higher. This reduction was aimed at helping SFBs diversify their portfolio into secured lending business amid asset quality issues in the unsecured microfinance lending business.
According to The Hindu BusinessLine, beyond partnerships with NBFCs, SFBs are also urging the RBI to consider allowing co-lending between banks. The ASFBI Chairman stated that such a co-lending framework could simplify lending for customers while lowering operating costs. For instance, if a customer requires a ₹2 lakh microfinance loan but an SFB is comfortable lending only ₹1 lakh under its internal risk framework, another bank could fund the remaining amount under a single co-lending arrangement instead of forcing the borrower to approach multiple institutions. Bankers want the CLA framework to work in both directions—allowing SFBs to originate loans for larger banks while also participating in loans sourced by other institutions.
