Context:
Fintech companies and digital lenders are urging the Reserve Bank of India (RBI) to relax provisioning requirements for loan pools backed by Default Loss Guarantees (DLGs). They argue that current norms may result in double provisioning, reducing lending efficiency and capital deployment.
Key Issues Raised by Fintechs
Accounting Interpretation Differences
- Fintechs cite variability in interpreting Ind-AS standards.
- Ind-AS permits factoring in risk mitigants like DLGs while calculating Expected Credit Loss (ECL) provisions.
- RBI, however, insists that ECL provisions must be made in full, regardless of the DLG support.
Double Provisioning Concern
- Both the fintechs (LSPs) and regulated lenders (banks/NBFCs) are required to provision for the same loan pool.
- This redundancy impacts capital efficiency and may crowd out lending due to excess buffers being locked.
Industry Representation
- Unified Fintech Forum (UFF) and Fintech Association for Consumer Empowerment (FACE) have made formal representations to the RBI.
- They highlight the need for data-based regulatory clarity and emphasize that DLGs reduce effective credit risk.
RBI’s Stand
- In April, RBI wrote to four major non-bank lenders with high delinquencies in DLG-backed pools.
- Directed full provisioning under ECL norms for all third-party sourced loans, irrespective of DLGs.
- Concerns include:
- Elevated delinquencies and high DLG payouts
- Deterioration in asset quality of NBFCs
- Misuse of FLDG (First Loss Default Guarantee) arrangements as securitisation substitutes
Regulatory Perspective
- RBI supports DLGs as a risk-sharing mechanism, not as a replacement for robust underwriting.
- The aim is to ensure fintechs have ‘skin in the game’ but without compromising asset quality or provisioning discipline.
