National Institute of Securities of

Market

Topic

Co-Lending Model of RBI

Submitted By: Submitted To:

Md Rehaan Danish (3019) Dr. Ranjith Krishnan & Dr. S. Vyas

NISM (MNLU)

Banking Regulation
 Acknowledgment
At the outset, I would like to express my heartfelt gratitude and thank my mentor, Dr. R.
Krishnan and Dr. S. Vyas, (Professor, NISM), for installing confidence in me and entrusting
the task to carry out a study on Co-Lending Model of RBI. I am indeed privileged having
being groomed in a prestigious institution NISM. I would also like to express my gratitude to
my friends for their support and help. My gratitude also goes out to the staff and
administration of NISM for the virtual library infrastructure of MNLU which was a source of
great help for the completion of this project from even remote places.
 Contents
1. Law of co-lending..........................................................................................................4

2. Legal nature of co-lending.............................................................................................5

3. Co-lending: The scenario in India..................................................................................7

4. Co-lending for priority sector loans:..............................................................................7

5. Co-lending for non-priority sector loans........................................................................7

6. Co-lending versus transfer of loan exposures................................................................9

7. Loan participations.......................................................................................................12

8. Is loan participation the same as co-lending?..............................................................12

9. Transferability of Loan Participations..........................................................................14

10. Is syndicated lending distinct from loan participations?..............................................15

11. Conclusion....................................................................................................................16
Law of co-lending 

Two or more entities joining together for creating an asset, having a liability, carrying an
operating activity,  or doing a venture, whether for a limited period or purpose, or for longer
period, indefinite period, etc.,  have existed for times immemorial. In the context of lending,
there may be two or more (in the rest of this  work, the expression two may, where befitting
in context, include more than two as well) lenders joining  together for a loan, or two
borrowers joining together for a borrowing.  

The motivations for lenders to join as co-lenders may be numerous - either because of the
size of the loan,  exposure restrictions, risk management, differential origination capabilities,
differential level of franchise  with the borrower base, etc. 

The motivations for borrowers joining together for a borrowing may, likewise, be numerous -
spreading or  supporting of the liability, utilisation of the loan by the joint borrowers
depending on need at different  points of time, etc.  

In case of joint borrowing (also called co-obligation, co-borrowing, co-obligors, co-lendees,

etc), it is always  a question as to whether the so-called co-obligor is merely a guarantor, and
is joining merely for the  purpose of supporting the credit of the principal borrower, who is
actually utilising the loan. In case of co lending too, there are often questions as to whether
the funding co-lender (referring to the co-lender who  is not involved in origination and
servicing of the loan) is merely taking exposure on the originating co-lender, or both of them
are actually taking exposure on the borrowing. 

RBI introduced guidelines for co-origination of loans by Banks and NBFCs for lending to the
priority sector  in September, 2018.1 Subsequently, in November, 2020, RBI issued a revised
set of guidelines for co lending by banks and NBFCs to the priority sector. 2 These guidelines
recognised the concept of ‘co-lending’  in India, though co-lending arrangements between
financial entities have been in existence even before  the regulations were issued. While the
guidelines are restricted to co-lending by financial institutions to the  priority sector, co-
lending is a wider concept and is used outside of the priority sector context as well. There  is
1
Co-origination of loans by Banks and NBFCs for lending to priority sector
https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11376&Mode=0
2
Co-Lending by Banks and NBFCs to Priority Sector https://www.rbi.org.in/Scripts/NotificationUser.aspx?
Id=11991&Mode=0
a strong feeling that co-lending is being widely used as the device of bridging the origination
and funding  of retail loans by two entities, and essentially a reflection of entities trying to
make use of their  differentiated origination and servicing capabilities.

In the global context, the nomenclature may be different. There are similar connotations in
the credit market - to name a few, syndicated lending, loan participations, consortium
financing, etc. Participations may result into sale of participation notes, pari passu notes, etc.
Irrespective of whether these concepts are fundamentally different, they seem to be
contextually different. While in economic sense, it would be easy to say that, in each of these
scenarios, there are multiple lenders against one borrower (or jointborrowers, as the case may
be); however, it would be interesting to understand whether these create similar or different
lender-borrower and lender-lender relationships; and whether the usage and economic effect
of each of these transactions remain the same. This article delves into the fundamental
concept of co-lending, its usage in various contexts such as syndicated lending, loan
participations, etc. Our write-up is an attempt to develop the law on co-lending, as all that
practitioners currently have is the regulatory piece in the form of the CLM framework for
PSL loans.

Legal nature of co-lending

Co-lending has been explained as a horizontal network of lenders. Two or more lenders come
together to advance a loan. Normally, the due diligence will have been exercised by both the
co-lenders. It is a horizontal network to the extent the co-lenders take part in the process of
loan origination. If one lender originates a loan, and subsequently gets other participants to
participate in it, as would be the case of loan participations, it becomes a vertical network.

An article3 discusses the legal nature of co-lending as an arrangement where “there is often an
originating or agent lender, the co-lenders are usually direct parties to the credit agreement to
the borrower. The relative rights and obligations of the co-lenders amongst themselves are
governed by specific provisions in the credit agreement or in a separate co-lender
agreement.”

3
Christopher B. Price and Lauren T. Lebioda (2009), “Lender Defaults: The New Reality Facing Real Estate
Debt Investors” - https://www.goodwinlaw.com/-/media/files/publications/attorney-articles/2009/price-lebioda-
thejournal-of-stuctured-finance.pdf
The legal nature of the relationship between the co-lenders is defined by contract law. In
India, the Indian Contract Act, 1872 [‘Contract Act’] deals with joint rights under section 45 4
of the Contract Act. In case two parties lend to a borrower, the borrower is liable to both of
them jointly, resulting in a case of liability to ‘joint promisees’ under the Contract Act.

In the matter of Govindlal Bhikulal Maheshwari vs Firm Thakurdas Bhallabhadas and ors.
(1973), the Hon’ble Bombay High Court explained that section 45 of the Contract Act has
two parts. The first specifies with whom the right to claim performance rests, in the case of
joint promisees. The court held that “unless a contrary intention appears from the contract,
the right to claim performance rests, as between the promisor and the joint promisees, with
the joint promisees during their joint lives.” The second part specifies with whom the right to
claim performance rests in case of death of any of the joint promisees. Given the joint nature
of the right, it has been the settled position of law that performance of the promise, in the
instant case the loan, can be demanded and enforced by the two parties jointly, unless the two
of them have nominated one of them, or a third party, to exercise the joint right as an agent.

Since creation of mortgage rights in favour of joint mortgagees has been a common
phenomenon, there are several judicial precedents upholding indivisibility of mortgages, and
singleness of debt. In Adiveppa Channappa Kittur vs Rachappa Balappa Hosmane (1948) 50
BOMLR 305, Bombay High Court said “A mortgage is a contract, whereby the mortgagors
usually, and as in this case, agree to repay a single total sum to the lender or lenders, and in
default to have the single total sum raised by the sale of the security. It is not the contractual
bargain that if the mortgagee's title should devolve on several co-owners, that each co-owner
should have the right to demand piecemeal a proportionate sum and have such proportionate
sums raised by the sale of the whole or some part of security. Such an arrangement could only
arise from an express agreement with the mortgagors.” The rights of a co-mortgagee was also
laid down by the Bombay High Court in the case supra by stating that in the case of co-
mortgagees “a single co-mortgagee cannot sue to recover the entire mortgage amount on his
own behalf; nor can he sue to recover his own share of the mortgage amount, as the mortgage
is indivisible. He must bring a suit to recover the entire amount on behalf of himself and the
other comortgagees.”
4
Section 45 of the Contract Act states that “When a person has made a promise to two or more persons jointly,
then, unless a contrary intention appears from the contract, the right to claim performance rests, as between him
and them, with them during their joint lives, and, after the death of any of them, with the representative of such
deceased person jointly with the survivor or survivors, and, after the death of the last survivor, with the
representatives of all jointly.”
5
Adiveppa Channappa Kittur vs Rachappa Balappa Hosmane (1948) 50 BOMLR 30
Co-lending: The scenario in India 

Co-lending for priority sector loans: 

In India, banks have certain targets with respect to lending to the ‘priority sector’ imposed by
RBI and  hence, in order to help banks achieve these targets, the CLM framework was
introduced, which helps  leverage the comparative advantages of banks and NBFCs while
lending to the priority sector. Thus, the  CLM guidelines were introduced for co-lending of
loans that qualify for the purpose of ‘priority sector  lending’ (‘PSL’).  

The CLM regulations require the banks and NBFCs entering into a co-lending arrangement to
have a ‘Master  Agreement’ for the purpose of implementing the CLM. The said agreement
must provide for the bank to  either take its share of the loans originated by the NBFC on its
books or retain discretion to reject certain  loans subject to due diligence. 

In case discretion is exercised by the bank with respect to the loans it takes on its books (so-
called ‘cherry  picking’ of loans or ‘discretionary co-lending’), the same will be akin to a
direct assignment transaction. In  this case, the bank taking over the loans on a discretionary
basis would have to comply with all the  requirements of the Master Direction – Reserve
Bank of India (Transfer of Loan Exposures) Directions,  20216 (‘TLE Directions’) with the
exception of the Minimum Holding Period (‘MHP’) requirements. 

The intent of permitting discretionary co-lending in the PSL CLM framework is to promote
PSL loans and  ultimately reduce the interest rate for the borrower, through the blended rate
of interest. Thus,  discretionary co-lending is an exception under the CLM framework. 

Co-lending for non-priority sector loans 

The intent of the CLM was to enable priority sector treatment in case of banks partnering
with NBFCs.  However, there does not seem to be a reason to contend that co-lending is not
possible outside of the  priority sector. Co-lending is a simple case of two lenders joining
together for extending a loan, as has been  done, over the years, in case of corporate loan
exposures under consortium lending approach. Without  doubt, each of the lenders do their
own due diligence, both for credit and KYC purposes. They may have a  mutual co-lenders’

6
https://rbidocs.rbi.org.in/rdocs/notification/PDFs/
86MDLOANEXPOSURESC6B1DFB428C349D885619396317F04DE. PDF
agreement, in addition to an agreement with the borrowers (which may, understandably, be a
common agreement). They may agree on a blended interest rate, and put all loan repayments
into a common account from where the two co-lenders may split the repayments to their
separate bank accounts. One of them may act as the servicer, for the purpose of maintaining
interface with the borrowers, and failing such an arrangement, both of them will have a
privity with the customer.

Thus, while RBI’s CLM framework has been issued in a limited context and for a specific
purpose, one may generalize co-lending in India as follows:

Particulars Discussion

Number of co-lenders Two, but there may be more than two as well. However, the 
practice should not be one of selling participations to several 
investors, as that may amount to formation of a collective 
investment vehicle.

Nature of co-lenders Financial sector entities, engaged in the business of giving loans

Type of loans Priority sector or non-priority sector loans

Minimum share of each In the case of the CLM framework, there is a minimum 20% 
co-lender retention by the originating co-lender. While there is no regulatory 
stipulation in this regard, but in order to ensure skin-in-the-game 
of the originating co-lender, the latter should continue to have a 
minimum participation, say, 20%. If the originating co-lender 
retains an insignificant share, it will be cutting against the
principle  of risk-retention, and may be taken at par with a transfer
of loan  exposures.

Sharing of risks and In view of the differential role of the different co-lenders in the 
rewards arrangement, the rates of return in the loan(s) may be shared 
 differently by the co-lenders. However, see comments below on 
one co-lender giving assurance to other co-lenders

Is the originating or This question may arise primarily from GST or taxation viewpoint
servicing co lender - can it be argued that the co-lender who is retaining higher
providing any services interest  is actually providing services to the arrangement, and
to  the arrangement therefore,  should be paying GST on the services to the
consortium? In this  case, the arrangement is not in the nature of a
joint venture, with  the venture being a separate entity. It is simply
a case of differential  services performed by each of the co-lenders,
and hence, the  question of any services provided by one to the
arrangement does  not arise.

Interest an all-inclusive rate is communicated to the borrower that is  mutually agreed
Rate by the co-lenders

Co-lending versus transfer of loan exposures

In case of co-lending, there is a retention of a share by the originating co-lender, and in most
cases, the financing co-lender takes a larger share. In case of transfer of loan exposures
(TLE), there may be retention of a share, of course on a pari passu basis, by the originator.
Thus, there is a strong likelihood of a co-lending having substantial similarity with TLE. We
need, however, to note the differences between the two:

between the two:

Particulars Transfer of loan Co-lending

exposures

Use as a mode of  Acquisition of a single No transfer or pooling. Loans are 

transfer/acquisition of  loan or pool  of loans, originated by co-lenders pursuant to 
loan exposures on bilateral basis an arrangement between them either
discretionary or non discretionary

Intent of the buyer Should be typically NA – There is no buyer (there are co

expansion of  loan book lenders intending to build their  books)

Intent of the seller Liquidation of NA – There is no seller (there are co

loan/loan book,  lenders)
reduction of
concentration, etc

Ease of execution High - loans are shifted High - Loans are co-originated by co
from  lender’s book to lenders and the customer facing is 
acquirer’s books. being done by any one of the lenders

Legal method of  Assignment, novation NA – does not involve transfer

“transfer” or  participation

Bankruptcy remoteness Yes NA – co-lenders recognise the loan to 

the extent of their respective  exposure

Continuation of  Possible Normally, one of the co-lenders acts 

originator as servicer as servicer

Credit Not possible Refer our discussion under the head,  “Credit
enhancement enhancement by the  originating co-lender”
by  originator

Lender on Assignor Each co-lendersfor its loan share. For  PSL loans,
record NBFC has to be the ‘single  point of interface’.
For non-PSL, it  would depend upon mutual 
 agreement between co-lenders.  Irrespective of
who the point of  contact is, both lenders would 
remain on record.

MHP Applicable NA
requirements

MRR Not applicable where In case of PSL loans - if the originating  co-lender
requirements buyer does  full DD, is an NBFC, minimum risk  retention of 20%.
else 10%.

Capital relief Transferred loan/loan None – loan is still on the books.  However, the
share  reduces from capital will have to be  maintained only on the
assets; proportional  lender’s  exposure, and need not been on the 
capital relief. entire loan.

Cherry picking Possible Possible in case of discretionary co lending

of loans permitted under the CLM  regulations as an
exception to  promote PSL loans. Not possible in 
other cases.

Loan participations

Is loan participation the same as co-lending?

Loan participation is quite a common practice in the banking world. In India, inter-bank
participation certificates may also be viewed as a form of loan participation. The TLE
Directions also allow transfer of participatory rights in a loan, after its origination, with or
without the transferring the legal title. A loan participation involves a lead underwriter or
syndicate leader, who underwrites the loan and subsequently sells participation rights to
various other lenders, called participants.

The Office of the Comptroller of the Currency (OCC), an independent bureau of the US
Department of Treasury, states, “A loan participation is a sharing or selling of interests in a
loan. xx.. Banks may sell participations to enhance their liquidity, interest rate risk
management, and capital and earnings. They may also sell participations to diversify their
loan portfolio and serve the credit needs of borrowers.”7

Under loan participation, the general structure essentially involves the ‘originating lender’ or
‘lead bank’ that originates the loan. Post origination of the loan, the originating lender sells
or transfers a portion or percentage of this loan to another financial institution, called the
‘participant’. The relationship between the originating lender and the participant is then
governed by a participation agreement.29

Issuance of participation rights by the originating lender is a mode of transfer of the loan -
whether fully or partially - intended to be transferred. This matter is now settled by a Privy
Council ruling in Lloyds TSB Bank PLC vs. Clarke & Anor (Bahamas) (2002)8.

Unlike in case of loan participation, in co-lending, presumably, both the lenders have
exercised their own due diligence and therefore, neither co-lender can be presumptively put
under fiduciary responsibilities. However, the question would mostly hinge on the facts -
whether the information about the borrower was collected and shared by one of the co-
lenders, or both the co-lenders had a relationship with the borrower.

It is not uncommon for the individual lenders in a co-lending arrangement to have had
previous dealings with the borrower as opposed to a loan participation arrangement wherein,
typically the lead lender has had frequent dealings with the borrower, while the participating
lenders may not have had frequent or any dealings with the borrower in the past.9

A loan participation is regarded as a sale of the originating lender’s interest; co-lending, on

the other hand, usually implies the origination of the loan by the co-lenders from the very
inception of the loan.

In case of a participated lending, there is an arranger who is mandated by the borrower to

form a syndicate of lenders and organise the funding. The arranger is typically the lead of the

7
https://www.occ.treas.gov/topics/supervision-and-examination/credit/commercial-credit/loan-sales.htm
8
Kevin B. Fisher, 1990. “Loan Participations and Bank Failures: The Penn Square Decisions” -
https://scholar.smu.edu/cgi/viewcontent.cgi?article=2824&context=smulr
9
Lester M. Bliwise, Norman W. Gutmacher and Edward A. Peterson (1997). “The Relationship amongst Co
Lenders -Identifying the Different Policies and Approaches of Co-Lenders Before a Deal Goes Bad” -
https://cdn.ymaws.com/www.acrel.org/resource/collection/C4C61E50-CC2D-42D6-B133-
18B2AA2AB2FF/1997BliwiseGutmacherPeterson_(spring).pdf
consortium and also normally has a major share in the loan. The rest of the syndicate
members normally do not have a relationship with the borrower.

In case of co-lending, on the other hand, while there is an originating lender, it is not
uncommon for each of the lenders to have ongoing relationships with the borrower, before
and after the jointly originated loan.

Asian Development Bank (ADB)10, for example, distinguishes between a so-called

complementary financing structure and a parallel loan structure - the latter is described as a
co-lending arrangement. The complementary financing scheme of ADB for instance, is
essentially a loan participation scheme where ADB acts as the lender on record while the
other lenders participate in the transaction by entering into a participation agreement. Under
the parallel loans structure, all co-lenders sign a common terms agreement, essentially
entering into a co-lending agreement.

Loan participations typically have several participants; co-lending is typically between two
entities only.

The legal distinction between co-lending and loan participations will actually be supported or
contradicted by the actual matrix of facts. If the funding co-lender has actually relied upon
the origination and credit underwriting by the originating co-lender, then the fiduciary
responsibilities attracted to lead arranger in syndicated lending apply in case of co-lending
too. However, if in co-lending, each of the co-lenders have done their own due diligence, and
have their own relationship with the borrower, the originating co-lender cannot be construed
as agent of the other lenders.

An article11 brings out the difference between loan participations and co-lending agreements
by stating that “In the case of participation interests, the seller is often the originator of the
underlying loan, who retains a senior interest and the role of “agent” or “lead lender” and is
typically the only party with direct contractual privity with, and primary obligations to, the
borrower. Participants acquire individual interests that are fully derivative of the originating
lender’s interest and that are governed by a participation agreement.”

10
https://www.adb.org/what-we-do/private-sector-financing/loan-syndications
11
https://www.goodwinlaw.com/-/media/files/publications/attorney-articles/2009/price-lebioda-the-journal-of
stuctured-finance.pdf
While in the case of co-lending, the co-lenders are direct parties to the agreement with the
borrower, albeit there can be only one co-lender acting as a single point of contact for the
borrowers.

Transferability of Loan Participations

Loan participations may be transferable further. Co-lending is a sort of partnership between

the co-lenders and therefore not transferable by the co-lender without the concurrence of the
other co-lender.

One of the questions of significance was whether loan participation agreements are
“securities” or “notes” (which are also securities). In identifying whether loan participations
constitute “notes” the Supreme Court in the US set forth a “family resemblance” test in the
case of Reves v. Ernst & Young1. Under this test, a note is presumed to be a security, unless
upon examination of the note based on four factors (listed below) would reveal a strong
resemblance between the note and one of a list of instruments that are not securities2.

The four factors set forth under the “family resemblance” test12 are as follows -

1. the motivations that would prompt a reasonable buyer and seller to enter into the
transaction - the relevant question here is whether the overall motivation of the parties is for
commercial purposes or investment purposes? If the instrument is issued to facilitate the
purchase and sale of consumer goods (or to advance any other consumer purpose), the
“security” designation is less appropriate.

2. the plan of distribution of the instrument - the relevant question here would be whether the
distribution is made to a broad segment of the public? If yes, it may connote an instrument in
which there is “common trading for speculation or investment”.

3. the reasonable expectations of the investing public - The public perception of an instrument
as a security may weigh in favour that the instrument is a security, and;

4. whether some factor, such as the existence of another regulatory scheme, significantly
reduces the risk of the instrument, thereby rendering application of the securities laws
unnecessary.

12
https://prfirmpwwwcdn0001.azureedge.net/prfirmstgacctpwwwcdncont0001/uploads/
bf787ac3a14594cc9839971dd71bd93
In a leading case on whether loan participations qualify as “notes” for the purpose of
identifying whether they are securities, the United States Court of Appeals, Second Circuit,
held in Banco Espanol de Credito v. Security Pacific National Bank 13 that loan participations
are not “notes” and thus, not securities. This was ruled after applying the “family
resemblance” test.

The Loan Syndications and Trading Association (‘LSTA’) has also intervened on the matter
and submitted an amicus brief14 to a federal district court in New York, that loan
participations, as well as, syndicated term loans are not securities. The implications of ruling
that syndicated term loans are securities would be adverse to the present industry practices.
The syndication would be more cumbersome and the details in the information memorandum
would also undergo substantial change. Further, the time taken in the process would increase
and thus, access to funds may be slower.

Is syndicated lending distinct from loan participations?

J. Thomas Cookson (1983)15 provides a clear distinction between ‘loan participations’ and
‘loan syndications’ by stating that “A loan participation is similar to a loan syndication in that
a group of banks provides funds to a borrower. In a loan syndication, however, each bank
signs the loan agreement with the borrower and receives a note representing its share of the
indebtedness, and thus has a separate and distinct legal relationship with the borrower.
Conversely, in a loan participation, the lead bank alone deals directly with the borrower and
retains all loan documentation, including the borrower’s note representing the amount
borrowed. The participating banks are involved solely with the lead bank and have no rights
directly against the borrower.”

From the above, it is clear that in the case of loan participation, the originating lender makes
a loan to the borrower and subsequently sells participation rights to other lenders. The other
lenders to whom the participation rights have been transferred would likely not have had any
prior interaction with the borrower.

Whereas in a loan syndication, multiple lenders extend loans to a single borrower. Each
lender has a separate lending relationship with the borrower, with one of the lenders acting as
the ‘lead lender’ or ‘lead manager’. As opposed to the case of loan participations, where only
13
https://h2o.law.harvard.edu/cases/4985
14
https://www.lsta.org/news-resources/are-syndicated-term-loans-securities
15
https://scholarship.law.wm.edu/cgi/viewcontent.cgi?article=2240&context=wmlr
the originating lender is a party to the loan agreement with the borrower, in the case of
syndicated lending, the syndicated members have a direct relationship with the borrower and
are named in the loan documentation.

Each lender in the case of syndicated lending assesses the borrower and is involved in
negotiation of the loan terms and conditions. In the case of loan participations, however, the
participating banks to whom the participating rights were subsequently sold to would have no
say in the underlying terms and conditions of the loan, which was decided by the originating
lender.

Another point of difference is that in syndicated lending involves common documentation

and direct co lending by the lenders to a single borrower, whereas loan participation
agreements are indirect lending arrangements wherein the originator sells participation rights
post origination16.

Conclusion

Loan participations have been a very common practice in India and other countries.
Syndicated lending is typically used in case of larger value loans for the purpose of spreading
the risk. The use of syndicated lending seems quite common in case of leveraged loans. Co-
lending, however, is a term that the RBI used in the context of priority sector loan for the
purpose of blending the origination capabilities of NBFCs with the funding strength of the
banks, for the purpose of affordable inclusive finance.

However, as the impulse for NBFC-bank partnerships in lending business is quite strong, and
banks have recently been eager to build retail portfolios, co-lending seems to be popular as an
alternative device to the regulatory discipline of TLE Directions. However, as discussed
above, certain current practices in co-lending may need re-examination and further guidance
by the regulator.

16
Joseph J. Norton (1996), “International Syndicated Lending: The Legal Context For Economic Development
in Latin America” - https://scholar.smu.edu/cgi/viewcontent.cgi?
referer=&httpsredir=1&article=1665&context=lbra