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Article • 13 Jul 2026

Why Co-Lending Disputes Don't Behave Like Any Other Commercial Dispute

Why Co-Lending Disputes Don't Behave Like Any Other Commercial Dispute

Harshitha JS & Janhavi Kumar | CORD


Most information on dispute resolution talks about commercial disagreements in abstract terms: Party A and Party B, one contract, one forum. Consider a straightforward scenario: a borrower in a bank-NBFC co-lending arrangement misses three consecutive EMIs. The NBFC, which services the loan, classifies the account as a Non-Performing Asset (NPA). The bank, working off a separate system with a different internal review cycle, has not yet done so. The Credit Information Company now receives two contradictory reports on the same borrower. Who triggers the recovery process? Under which agreement? Before either party can answer, there are already three instruments in play, and no single one of them governs the full dispute. This is the stack. And understanding the stack is the beginning of understanding why co-lending disputes are genuinely different and harder to resolve. (Castler, Challenges in Co-Lending Partnerships and How to Solve Them, 2025)

 

The Three-Agreement Stack a CLA Actually Creates

 

The RBI's Co-Lending Arrangements Directions, 2025, effective from 1 January 2026, mark a significant expansion of the regulatory framework for co-lending. Previously, the 2020 circular governed co-lending only in the context of priority sector lending, covering agriculture, micro, small and medium enterprises, and housing. The 2025 Directions remove that limitation entirely. Para 8 defines a CLA simply: an upfront agreement between an originating lender and a partner lender to jointly fund a pool of loans in a fixed proportion, sharing both revenue and risk. Para 3 grandfathers anything already in place. If a CLA was signed before 6 August 2025 — or signed after that but before the entity's own effective date,  the old rules still apply to it, not the new ones.

 

The Directions themselves require two documents: the agreement between the CLA partners (para 12) and the loan agreement with the borrower (para 13). In practice the market answers this by splitting the commercial terms from the operational mechanics, and the result is a stack of three instruments rather than two. That is a drafting convention, not a regulatory command, but it is near-universal, and it is where the trouble starts.

 

Agreement 1, the Master Co-Lending Agreement: It is the foundational document between the bank and the NBFC. It governs the inter-se relationship: the risk split, the funding proportions, the servicing responsibilities, and the commercial arrangement between the two regulated entities. Under the 2025 Directions, each co-lending partner must maintain a minimum 10% risk retention, ensuring genuine skin-in-the-game, with the originating entity also permitted to provide a Default Loss Guarantee of up to 5% of outstanding loans. (Vinod Kothari Consultants, RBI Issues Co-Lending Directions, 2025) These provisions sit inside the Master Co-Lending Agreement , but they generate consequences that spill across all three instruments. 

 

Agreement 2, the Individual Loan Agreements: They are executed between each lender and the borrower. The 2025 Directions introduce unified borrower-level asset classification across partner regulated entities, requiring real-time information sharing , latest by the next working day , when either lender classifies an exposure as Special Mention Account (SMA) or Non-Performing Asset (NPA). (Vinod Kothari Consultants, RBI Issues Co-Lending Directions, 2025) The loan agreement governs what the borrower sees, knows, and is bound by. But the NPA classification obligation cuts across the inter-se Master Co-Lending Agreement in ways that the individual loan agreement cannot independently resolve. 

 

Agreement 3, the Servicing or Operational Agreement: This governs collections, escrow flows, credit information company reporting, and the day-to-day mechanics of loan management. 

 

Where Disputes Actually Emerge

 

NPA classification timing conflict: The 2025 Directions require real-time synchronisation of asset classification data, latest by the next working day when either lender classifies an exposure as Special Mention Account (SMA) or Non-Performing Asset (NPA). (Vinod Kothari Consultants, RBI Issues Co-Lending Directions, 2025) In practice, the bank and the NBFC are operating on different internal credit policy cycles and loan management systems. As Castler's analysis of co-lending challenges notes, where technology integration gaps exist between partners, the absence of real-time data synchronisation leads directly to reconciliation problems and disputes over loan status, including NPA classification. (Castler, Challenges in Co-Lending Partnerships and How to Solve Them, 2025) The Directions mandate synchronisation but are silent on which agreement governs the dispute when synchronisation fails, and on who bears the credit bureau reporting consequence in the interim period between one lender's classification and the other's.

 

The servicing fee and the performance-linkage prohibition: The 2025 Directions prohibit any fee or charge arrangement between co-lending partners that is deferred, subordinated, or waived in a manner that directly or indirectly functions as a credit enhancement or liquidity support. (Vinod Kothari Consultants, RBI Issues Co-Lending Directions, 2025) Many servicing arrangements drafted before January 2026 included contingent fee structures , for example, a servicing fee payable to the NBFC only upon successful collection, or deferred until the loan account remained standard for a specified period. Under the 2025 Directions, such arrangements are now impermissible because they effectively make the NBFC's fee contingent on credit performance, which the RBI treats as a form of implicit credit support. An NBFC operating under such a legacy servicing agreement now faces a structural conflict between its existing contractual obligations and its new regulatory ones, and that conflict, when it surfaces as a fee dispute, cuts across the Master Co-Lending Agreement, the servicing agreement, and the regulatory framework simultaneously.

 

The 15-day transfer rule: The 2025 Directions mandate transfer of the bank's portion to the co-lending partner within 15 calendar days. (Cyril Amarchand Mangaldas, Analysis of RBI Co-Lending Arrangements Directions, 2025) A breach of this timeline generates operational consequences, interest accrual mismatches, escrow appropriation disputes, and credit bureau inconsistencies, that none of the three agreements, read individually, is equipped to resolve on its own.

 

The Clause Conflict Problem

 

In multi-contract structures, each agreement may have a well-drafted dispute resolution clause negotiated by the specific parties to that contract, reflecting how those parties wish to resolve disputes under that particular instrument, but such clauses often differ and are incompatible. (Norton Rose Fulbright, FAQs)

 

Indian law offers a starting point, not an answer. In Ameet Lalchand Shah v. Rishabh Enterprises, the Supreme Court held that where several agreements form a single composite transaction directed at a common commercial object, disputes across them may be referred to a single arbitration under the principal agreement. In Amit Guglani v. L&T Housing Finance Ltd. [ARB.P. 1317/2022, Delhi High Court, Jyoti Singh J., 22 August 2023] the Court, dealing with a tripartite subvention agreement and a home loan agreement carrying conflicting arbitration clauses, observed that the two were inseparable and that where connected agreements carry different arbitration clauses the dispute should be resolved under the clause in the chief or umbrella agreement, which is paramount to the clause in the secondary agreement. The petition itself was dismissed, on the separate ground that a notice invoking arbitration under Section 21 was mandatory and had not been issued.

 

The Compounding Risks of Unresolved Disputes

 

Multiplicity of proceedings: The bank may invoke arbitration under the Master Co-Lending Agreement. The borrower may approach a consumer forum under the loan agreement. The NBFC may seek an injunction on escrow flows under the servicing arrangement. These are not theoretical; they are the logical consequence of three instruments with three different dispute resolution architectures operating on the same underlying credit event.

 

Regulatory exposure from delay: Under increased regulatory oversight, unresolved disputes can become compliance concerns. A co-lending disagreement, repeated borrower complaints without a clear resolution process, or prolonged partner disputes may attract RBI scrutiny, and the regulator is less concerned with the outcome than with whether the regulated entity had a proper process in place. (CORD, Why NBFCs Need a Pre-Agreed Dispute Resolution Path, April 2026)

 

The system's failure: The 2025 Directions require real-time synchronisation of asset classification data , latest by the next working day when either lender classifies an exposure as Special Mention Account (SMA) or Non-Performing Asset (NPA). When a dispute breaks out, systems stop talking. One lender's books show an account as standard; the others show it as sub-standard. The Credit Information Company receives two contradictory reports on the same borrower. Every working day the dispute continues, the compliance breach compounds. Unlike most gaps that can be remediated after the fact, a corrupted credit trail cannot simply be unwound once the matter is settled.

 

What a Unified Dispute Resolution Architecture Looks Like

 

The answer is not to harmonise three separate dispute resolution clauses after the fact. It is to design a single dispute resolution architecture across all three agreements at the time of structuring the Co-Lending Arrangement.

 

This means a master dispute resolution protocol that sits above all three instruments, specifies a single institutional forum, and expressly governs disputes that arise at the intersection of more than one agreement. It means a consolidated escalation path, operational discussion, senior management escalation, conciliation, and then arbitration, that any party can invoke regardless of which agreement the dispute nominally arises under. And it means an adjudicator who can read an NPA classification dispute, a servicing fee prohibition question, and a 15-day transfer breach as a single interconnected matter, rather than three separate proceedings producing three incompatible outcomes.

 

Co-lending disputes have a specific texture. The General Counsel who has lived through one knows it immediately. The time to address that texture is not after the first escrow appropriation dispute lands in the inbox, it is when the Master Co-Lending Agreement is still in term sheet stage and all three agreements are being drafted in the same room.



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