In today’s rapidly evolving financial landscape, co-lending has emerged as a key enabler of credit expansion in India, facilitating partnerships between banks and non-banking financial companies (NBFCs) to extend credit more efficiently to underserved segments. By fostering collaboration between banks and NBFCs, this model is enhancing credit accessibility, particularly for micro, small and medium enterprises (MSMEs), entrepreneurs, agriculture, and affordable housing. 

Our report provides an analysis of the evolution and current state of co-lending in India, as well as trends, challenges and outlook.

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Key trends in the co-lending sector

1.

Macroeconomic and credit growth trends

  • India’s GDP is projected to grow at 6.4% in FY25, supported by strong domestic demand and policy reforms. This growth reflects India’s resilience and the government’s commitment to economic stability.

  • The Reserve Bank of India’s (RBI) repo rate cut to 6.25% in February 2025 aims to stimulate credit expansion, with a focus on MSMEs and infrastructure. Lower interest rates are expected to reduce borrowing costs, encouraging capital investments.
  • The Credit-Deposit Ratio (CDR) reached 78.6% in early 2025, reflecting high credit demand despite slower deposit growth.

  • Personal loans and retail lending have become significant drivers of credit growth in India, reflecting increased consumption demand.
2.

Lending and credit expansion measures in Union Budget 2025-26

The Union Budget 2025-26 reinforces the government’s commitment to financial inclusion and economic growth by expanding credit access across key sectors. With a focus on empowering MSMEs, supporting street vendors, and strengthening rural lending, the budget introduces enhanced credit guarantee schemes, increased loan limits, and innovative financial tools. These measures aim to reduce financial barriers, promote entrepreneurship, and ensure that underserved communities have greater access to formal credit systems.

  • Co-lending in India has seen substantial growth, especially in the MSME sector, as banks and NBFCs have formed strategic partnerships.

  • The Union Budget 2025-26 has doubled the credit guarantee cover for micro and small enterprises from INR 5 crore to INR 10 crore, unlocking INR 1.5 lakh crore in additional credit over five years.

  • Start-ups will benefit from enhanced credit guarantee coverage of up to INR 20 crore, with a reduced guarantee fee of 1% for loans in 27 Atmanirbhar Bharat focus sectors, encouraging innovation and entrepreneurship. 
  • The revamped PM SVANidhi scheme will provide street vendors with enhanced bank loans and introduce UPI-linked credit cards with a limit of INR 30,000, promoting digital payments and financial inclusion.

  • Capacity-building support under the scheme will empower vendors to transition from informal to formal financial systems, fostering long-term economic resilience. 
  • Agriculture credit expanded steadily, reaching a peak of 19.4% in 2022 before stabilising at 12.5% in 2024.

  • The loan limit under the Kisan Credit Card (KCC) scheme has been increased from INR 3 lakh to INR 5 lakh, benefiting 7.7 crore farmers, fishermen, and dairy farmers with improved access to credit.

  • A ‘Grameen Credit Score’ framework will be developed by public sector banks to assess the creditworthiness of rural borrowers, facilitating easier access to formal credit for self-help group (SHG) members and other rural communities.
3.

NBFCs: A growing force in credit expansion

Non-banking financial companies (NBFCs) have emerged as a formidable force in credit expansion, particularly in the personal and retail loan segments. They now account for 46.2% of these loans, demonstrating their agility in responding to evolving consumer needs. The sector’s increasing reliance on bank borrowings, which have risen from 19.8% to 22.6%, also underscores the deepening collaboration between NBFCs and traditional banks. This symbiotic relationship has facilitated greater liquidity access, enabling NBFCs to extend credit to underserved groups more effectively.

Moreover, NBFCs have played a pivotal role in bridging financial gaps by extending credit to individuals and businesses traditionally excluded from the formal banking sector. Their adaptability, coupled with a targeted focus on personal and retail lending, has made them indispensable in driving financial inclusion. With advanced AI-powered risk management systems in place, these institutions have also seen a significant improvement in asset quality. Gross Non-Performing Asset (GNPA) levels have reduced to 3.5%, reflecting the sector’s commitment to maintaining financial discipline while expanding its reach.

Further propelling their growth is the widespread adoption of digital lending platforms. These platforms have revolutionised credit accessibility, offering seamless and efficient borrowing experiences to consumers.

4.

Microcredit and financial Inclusion: A critical lever for growth

Microcredit remains a crucial driver of financial inclusion and economic growth, particularly for micro-businesses and first-time entrepreneurs. The evolving nature of loans under the Mudra scheme, with a noticeable shift towards higher ticket sizes through Kishore and Tarun loans, reflects the increasing capital needs of expanding enterprises. This trend signifies a positive trajectory for micro-businesses, as they scale operations and contribute to the local economy. Additionally, self-help groups (SHGs) remain a cornerstone of microcredit delivery, with loan disbursements reaching INR 145 thousand crore in 2022-23, underscoring their continued relevance in empowering rural and semi-urban regions.

Co-lending partnerships have further enhanced financial inclusion by bridging the credit gap in underserved regions. Through such partnerships, rural entrepreneurs gain access to capital that supports their growth aspirations. First-time business owners from marginalised backgrounds benefit from specialised financial products designed to meet their unique needs, fostering inclusive growth and financial empowerment.

The rise of digital financial services has also revolutionised the microcredit landscape. Streamlined loan application and repayment processes are simplifying access to funds for micro-entrepreneurs, reducing the reliance on traditional financial institutions. Additionally, the introduction of tailored credit cards for micro-enterprises is providing seamless access to working capital.

5.

Role of co-lending for public sector banks

Public sector banks have significantly expanded their presence in the co-lending ecosystem, with their exposure reaching INR 11,497 crore in 2024. This remarkable surge highlights the growing reliance on co-lending partnerships to meet the credit demands of priority sectors. By collaborating with financial institutions, public sector banks are extending their reach to underserved segments of the population, ensuring greater financial inclusion. The model's success lies in its ability to combine the extensive networks of public sector banks with the agility and localised expertise of their partners.

The year-on-year growth of 134% in loan disbursements under co-lending agreements in FY24 further exemplifies the model’s efficacy. This impressive growth rate reflects the confidence public sector banks have in the co-lending framework as a tool for optimising credit flow. By leveraging these partnerships, banks are not only fulfilling their priority sector lending targets but also mitigating risks through shared responsibilities.

6.

Deepening of DPI in India and its role in co-lending

India’s digital public infrastructure (DPI) has emerged as a key enabler of financial inclusion, providing a solid foundation for the expansion of co-lending. With 97 crore internet subscribers and over 1,032 lakh FASTags issued, the widespread adoption of digital services has enhanced connectivity and streamlined financial transactions. Platforms like Unified Payments Interface (UPI), electronic Know Your Customer (e-KYC), and digital credit assessment systems are significantly lowering lending costs and improving operational efficiency. This digital transformation has made credit more accessible to a broader segment of the population, fostering inclusive economic growth.

The JAM Trinity — Jan Dhan, Aadhaar, and Mobile — has further reinforced the digital ecosystem, creating seamless channels for financial interactions. By integrating identity verification, banking access, and mobile connectivity, it has simplified the loan application and approval process. Additionally, the use of AI-powered risk assessment models has empowered lenders with real-time insights, boosting their confidence in extending credit. Borrowers, particularly those from underserved communities, benefit from faster credit approvals and reduced reliance on traditional documentation.

For MSMEs, the expansion of DPI has been particularly transformative, as digital platforms enable quicker credit disbursements, allowing businesses to access timely financial support for their operations and growth.

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Outlook

The co-lending sector is poised for continued expansion, driving inclusive growth and financial resilience in India. By leveraging technological advancements and collaborative models, banks and NBFCs can further bridge the credit gap, particularly for MSMEs and underserved communities. As the regulatory environment evolves and digital infrastructure matures, co-lending in India will play an increasingly vital role in shaping India’s financial landscape. Stakeholders must continue fostering innovation, collaboration, and financial literacy to ensure sustainable credit access for all segments of society.

Co-lending in India
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Co-lending in India

Expanding credit access for MSMEs

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