Context: Recently, RBI announced a Co-Lending Model (CLM) scheme under which banks can provide loans along with NBFCs to priority sector borrowers based on a prior agreement. 


  • Under priority sector norms, banks are mandated to lend a particular portion of their funds to specified sectors, like weaker sections of the society, agriculture, MSME and social infrastructure.

About the CLM scheme:

  • Role of NBFC: NBFCs will be the single point of interface for the customers and shall enter into a loan agreement with the borrowers.
    • The co-lending banks will take their share of the individual loans on a back-to-back basis in their books.
  • Interest rate: The ultimate borrower may be charged an all-inclusive interest rate as may be agreed upon by both the lenders.
  • Grievance redressal: Suitable arrangement must be put in place by the co-lenders to resolve any complaint registered by a borrower with the NBFC within 30 days.
  • If the complaint is not resolved: The borrower would have the option to escalate the same with the concerned Banking Ombudsman/Ombudsman for NBFCs or the Customer Education and Protection Cell (CEPC) in RBI.


  • To improve the flow of credit: To the unserved and underserved sector of the economy and make available funds to the ultimate beneficiary at an affordable cost, considering the lower cost of funds from banks and greater reach of the NBFC.
  • Greater flexibility: The CLM, which is an improvement over the co-origination of loan schemes (announced by the RBI in 2018), seeks to provide greater flexibility to the lending institutions.
  • Avoid inter-mingling of funds: As all transactions (disbursements/ repayments) between the banks and NBFCs relating to CLM have to be routed through an escrow account maintained with the banks.

Priority Sector Lending:

  • Priority Sector Lending (PSL) is an important role given by the Reserve Bank of India (RBI) to the banks for providing a specified portion of the bank lending to few specific sectors. 
  • This is essentially meant for an all round development of the economy as opposed to focusing only on the financial sector.
  • Eligible banks: 
    • All scheduled commercial banks and foreign banks (with a sizable presence in India) are mandated to set aside 40% of their Adjusted Net Bank Credit (ANDC) for lending to these sectors.
    • Regional rural banks, co-operative banks and small finance banks have to allocate 75% of ANDC to PSL.
  • The Priority Sector includes the following categories
    • Agriculture; 
    • Micro, Small and Medium Enterprises; 
    • Export Credit; Education; 
    • Housing; 
    • Social Infrastructure; 
    • Renewable Energy and 
    • Others.
  • Priority Sector Lending Certificates (PSLCs): Are a mechanism to enable banks to achieve the priority sector lending target and sub-targets by purchase of these instruments in the event of shortfall.