Co-Lending Model Can Bridge India's Last-Mile Credit Gap: IIFL

Co-Lending as a Catalyst for Financial Inclusion

IIFL Finance has outlined a compelling case for co-lending partnerships to solve one of India's persistent financial challenges: delivering affordable credit to the country's last-mile consumers. The non-banking financial company argues that collaborative lending models between institutional players can significantly accelerate credit penetration in underbanked regions, particularly in tier-2 and tier-3 towns where traditional banking infrastructure remains sparse.

Co-lending arrangements, where banks and NBFCs jointly originate loans while sharing risk and returns, have gained traction as a mechanism to expand financial services. IIFL's position reflects growing industry recognition that no single lender can adequately serve India's vast and diverse borrower base. By pooling resources, expertise, and distribution networks, financial institutions can reach customers who would otherwise fall outside conventional lending parameters.

The Challenge of Last-Mile Credit Delivery

Despite decades of financial inclusion efforts, a substantial portion of India's population remains excluded from formal credit systems. Rural and semi-urban areas particularly struggle with inadequate access to institutional borrowing, forcing many small businesses and households to rely on informal lending sources at significantly higher costs.

Traditional banks face operational constraints in serving scattered, small-ticket borrowing needs across distant geographies. NBFCs, conversely, possess ground-level presence and customer insights but often lack the capital base and regulatory advantages that banks enjoy. This structural mismatch creates a gap that conventional lending models struggle to fill. IIFL Finance suggests that co-lending directly addresses this inefficiency by combining the strengths of both player types.

How Co-Lending Works in Practice

Shared Risk, Shared Reward

In a typical co-lending arrangement, a bank and NBFC jointly approve and disburse a loan to a borrower. Both lenders share the credit risk proportionately and receive corresponding returns. The NBFC typically handles customer acquisition, underwriting, and collection, while the bank provides bulk funding at lower costs due to its access to cheaper deposits. This division of labour creates efficiency gains that ultimately benefit borrowers through lower interest rates or faster approvals.

Expanded Geographic Reach

NBFCs like IIFL operate through extensive branch networks in smaller towns where banking competition is limited. By partnering with banks, these institutions can leverage their local presence to identify creditworthy borrowers who formal banks might never reach. Simultaneously, banks gain market penetration without the capital-intensive burden of opening new branches in low-density areas.

Regulatory Support and Industry Momentum

India's financial regulator has increasingly supported co-lending models as a tool for inclusive growth. The Reserve Bank of India has issued guidelines permitting banks and NBFCs to co-lend, with specific frameworks governing capital adequacy, loan ticket sizes, and borrower eligibility. This regulatory endorsement has encouraged institutional participation and standardised the practice across the financial sector.

IIFL Finance's advocacy for co-lending comes as several large banks have begun scaling such partnerships. State Bank of India, ICICI Bank, and HDFC Bank have all announced or expanded co-lending initiatives, recognising the model's potential to drive loan growth in underserved segments. For NBFCs, these partnerships provide capital efficiency and access to cheaper funds, directly improving profitability.

Benefits for Borrowers and the Broader Economy

From a borrower's perspective, co-lending can translate into tangible advantages. Lower interest rates become possible when funding costs are reduced through bank partnerships. Faster loan disbursal timelines improve when processes are streamlined across lenders. Enhanced approval odds benefit creditworthy but historically excluded customers who may lack collateral or formal documentation.

At the macroeconomic level, expanded credit availability fuels consumption and entrepreneurship, particularly in rural and semi-urban India where credit is often the missing ingredient for growth. Small businesses can invest in inventory, equipment, and expansion. Household borrowers can access funds for education, healthcare, or home improvement—catalysts for upward mobility.

IIFL Finance's emphasis on co-lending underscores a broader industry consensus: India's financial inclusion journey cannot be completed by any single player acting independently. The sheer geographic spread and diversity of borrower needs demand collaborative approaches that leverage multiple institutional strengths. As co-lending models mature and scale, their contribution to narrowing India's credit gap will likely become increasingly visible in both financial system metrics and real household outcomes across the country.