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Why in News?
The Reserve Bank of India (RBI) has restored the use of Default Loss Guarantees (DLGs) for Non-Banking Financial Companies (NBFCs), reversing earlier restrictions that increased provisioning requirements for loans sourced through fintech partnerships.
What Is the Decision?
- NBFCs can again factor in DLGs while calculating loan loss provisions.
- Condition: The guarantee must be an integral part of the loan structure.
- Lenders must revise loss estimates each time the guarantee is invoked, as available protection declines.
- The revised framework is effective immediately.
Background — Earlier RBI Rule (2025)
- RBI had required NBFCs to ignore fintech-provided DLGs when setting aside buffers for risky loans.
- NBFCs had to make full provisions, increasing credit costs.
- This reduced lending through fintech partnerships.
Impact:
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- Lower profitability
- Reduced digital loan origination
- Higher provisioning burden
What Are Default Loss Guarantees (DLGs)?
A DLG is a risk-sharing arrangement in digital lending:
- Fintech partner guarantees part of loan losses.
- If borrower defaults, guarantor covers agreed portion.
- Usually capped at around 5% of loan portfolio.
- Often backed by fixed deposits.
Purpose → Reduce lender risk and enable credit expansion.
