Small Finance Banks (SFBs) in India are making a strong push to be included in the official co-lending market. Currently, the Reserve Bank of India (RBI) allows large universal banks and Non-Banking Financial Companies (NBFCs) to participate in co-lending arrangements (CLAs). However, SFBs, Regional Rural Banks, and Local Area Banks are currently excluded from this framework. The Association of SFBs of India (ASFBI) is now asking the regulator to change these rules to create a level playing field.

Co-lending is a system where two lenders join hands to give a loan. Usually, one partner (like an NBFC) handles the customers and the paperwork because they have a big network. The other partner (like a bank) provides the majority of the money because they have cheaper funds. They share both the interest income and the risk if the borrower does not pay back. SFBs believe that being part of this system will help them grow faster and manage their money better.

Baskar Babu R, who is the MD & CEO of Suryoday Small Finance Bank and Chairman of ASFBI, explained that this move would help SFBs enter new types of loans. For example, an SFB might want to offer gold loans but may not have many branches or experts in that field. Instead of spending a lot of money to open new branches, the SFB could partner with a specialized gold loan NBFC. The NBFC would find the customers using its 1,000 branches, while the bank would provide the low-cost funds. This way, the bank does not have to build a new business from scratch.

This demand for co-lending comes at a time when the RBI is changing the rules for Priority Sector Lending (PSL). Currently, SFBs must give 75% of their loans to the priority sector (like small farmers and micro-businesses). However, the RBI is lowering this target to 60% starting April 1, 2026. This change is meant to help SFBs move away from risky unsecured microfinance loans and move toward secured loans, like those backed by property or gold. Co-lending would provide the perfect path for this transition.

Beyond just partnering with NBFCs, SFBs also want the power to co-lend with other banks. Mr. Babu suggested that this would make things easier for borrowers. For instance, if a customer needs a loan of ₹2 lakh, but one bank's rules only allow it to give ₹1 lakh, a second bank could provide the remaining ₹1 lakh under the same agreement. The customer would only have to deal with one bank for paperwork and servicing, which reduces the cost for everyone involved.

For bank officers working in the SFB sector, these changes could mean a big shift in daily operations. Instead of focusing only on microfinance, officers might soon handle a wider variety of loan products through partnerships. It would also lead to better capital efficiency (using the bank's money more effectively). While the RBI has not yet given the green signal, the industry is hopeful that the regulator will evolve the framework soon to include SFBs.

For customers, this move could result in cheaper loans and better service. If SFBs can use their low-cost deposits to fund loans originated by expert NBFCs, the benefit of lower interest rates can be passed on to the borrower. It also means customers in rural areas can access more advanced banking products without having to visit multiple big city banks. Everyone is now watching the RBI to see if it will update the co-lending guidelines in the coming months.