What is Default Loss Guarantee (DLG)?
- A contractual arrangement where a fintech entity guarantees to compensate lenders (banks or NBFCs) for losses arising from loan defaults.
- Typically covers losses up to 5% of the loan portfolio.
- Acts as a risk mitigation tool for lenders partnering with fintechs in loan origination.
Key Highlights of RBI’s Directive
- NPA Recognition and Provisioning:
- Lenders must exclude DLG cover while recognizing Non-Performing Assets (NPAs) and making provisions.
- DLG invocation does not affect borrower liability on the underlying loan.
- The DLG amount invoked cannot be set off against the underlying individual loans.
- Lenders are required to recognize NPAs and make provisions independently, irrespective of DLG coverage.
- Recovery and Invocation:
- Recovery proceeds from loans with invoked DLG may be shared with the DLG provider as per contract terms.
- Once invoked, the DLG cannot be reinstated, even if loan recoveries occur later.
- Rationale and Impact:
- Intended to address overreliance of fintechs on DLG for credit risk management.
- Places full responsibility for NPA recognition and provisioning on lenders, enhancing prudence.
- Expected to lead to reduced co-origination partnerships between banks and fintechs due to increased lender risk exposure.
- Seen as a credit tightening measure by RBI to ensure caution in lender-fintech partnerships.
Additional Recent Update (May 2025)
- RBI is seeking approval to allow domestic banks and their foreign branches to lend Indian Rupees to overseas borrowers for the first time, marking a significant move in international banking operations.
Implications
- Strengthens risk management discipline among lenders and fintechs.
- Could reshape fintech lending business models that depend on DLG.
- Enhances transparency and accountability in loan loss provisioning.
- May impact fintech-bank collaborations, influencing credit availability in certain segments.
BS
