Context:
The Reserve Bank of India (RBI) has mandated that regulated entities (REs) make full provisioning for loans sourced via Loan Service Providers (LSPs), regardless of Default Loss Guarantees (DLGs) offered. RBI has prohibited offsetting DLGs against provisioning requirements for stressed loans.
- Deadline for compliance: September 30, 2025.
Industry Reaction: Risk of Double Provisioning
- Fintech bodies are collecting industry data to present concerns to RBI about double provisioning, which they argue is:
- Capital-inefficient.
- Likely to discourage loan origination through LSPs.
DLG Framework Under RBI Norms
- DLG = A contractual guarantee by the LSP to compensate lenders for defaults up to 5% of a loan portfolio.
- Key RBI stipulations:
- DLG cover on an outstanding portfolio must not exceed 5% of total disbursed amount.
- Even if DLG exists, provisioning remains solely the RE’s responsibility under existing norms.
Additional Regulatory Requirements for Digital Lenders
- Digital lending platforms must now:
- Offer multiple loan options to borrowers.
- Ensure borrowers can make informed choices through transparent digital marketplaces.
- Fintechs claim this may disrupt customer experience and conversion rates.
Way Forward: Industry-RBI Consultative Process
- Fintech bodies intend to:
- Submit impact data to RBI before the provisioning deadline.
- Request reconsideration of the provisioning treatment of DLG-covered loans.
- RBI has signaled openness to engagement, but maintains that risk provisioning must rest with REs.
Implications for Digital Lending Ecosystem
- Possible slowdown in loan origination through LSPs.
- Reduced portfolio attractiveness for NBFCs and digital lenders.
- Increased capital requirements, affecting small fintech players more severely.
