According to the RBI’s May 8 directions, recognition of individual loan assets in the portfolio as NPA and consequent provisioning shall be the responsibility of the lender, irrespective of any DLG cover available at the portfolio level.
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FRANCIS MASCARENHAS
The Reserve Bank of India’s (RBI) updated digital lending guidelines, which say that lenders must exclude default loss guarantee (DLG) cover while making provisions for bad loans, could have been prompted by some fintech entities becoming over reliant on lenders for business operations, sources say.
“The regulator’s notification is catered towards fintechs which are overly reliant on lenders. Since lenders and fintechs partner mostly for unsecured consumption loans, this could be considered as a credit tightening measure too,” a senior banker said.
Another industry source said that while some fintechs have built viable and scalable business models, other entities may not be able to handle severe stress on their balance sheet during adverse asset quality cycle.
“How much locus does that guarantee have if you have built your business model around it. Considering this, the RBI has asked lenders to enhance cushion when partnering with new entities,” they said.
Digital lending norms
According to the RBI’s May 8 directions, recognition of individual loan assets in the portfolio as non-performing asset (NPA) and consequent provisioning shall be the responsibility of the lender, irrespective of any DLG cover available at the portfolio level.
“The amount of DLG invoked shall not be set off against the underlying individual loans, i.e. the liability of the borrowers in respect of the underlying loan shall remain unaffected. Recovery by the RE, if any, from the loans on which DLG has been invoked and realised, can be shared with the DLG provider in terms of the contractual arrangement,” the guidelines stated , adding that the DLG amount once invoked by the lender shall not be reinstated, including through loan recovery.
A DLG is a contractual arrangement between a bank or a non-bank and another fintech entity, under which the latter guarantees to compensate the lender, for the loss due to default up to a certain percentage of the loan portfolio of the lender, which is specified upfront. Any other implicit guarantee of similar nature, linked to the performance of the loan portfolio of the RE and specified upfront, shall also be covered under the definition of DLG. Fintechs typically provide up to 5 per cent DLG to lenders.
With the new guidelines at play, lenders may now go slow on partnering with fintechs for co-origination of loans, bankers say.
Published on May 28, 2025
