RBI issues guidelines for default loss guarantee, provides breather to fintechs

In a notification issued on Thursday, the central bank said that regulated entities (RE) shall ensure that the total default guarantee shall not exceed 5% of the portfolio amount.

FLDG is the guarantee that an unregulated entity offers to regulated lenders. The RE offers loans to customers sourced by the partner entity in lieu of guarantees against the first chunk of defaults. In some cases this used to be as high as 100%.

The regulator had cracked down on such arrangements with stringent digital lending norms back in September 2022, which permitted FLDGs only between regulated entities.

Relaxing its previous stand, the RBI has said that banks and NBFCs are allowed to enter into FLDG arrangements with regulated entities as well as other loan service providers (LSP). This opens up the market for early-stage fintechs, who can now partner with banks and NBFCs and source loans for them without having to wait for an NBFC licence.

The RBI has cautioned that any calculation of NPA (non-performing assets, or loans that are not paid on time) should be per existing guidelines and not offset against FLDG arrangements with partners.

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“The amount of DLG (default loss guarantee) shall not be set off against the underlying individual loans,” the RBI said.To ensure that there is oversight on lenders’ arrangements with unregulated LSPs, it has mandated that every lender will have board-approved FLDG policies.

It has also mandated that fintechs will need to declare upfront details about all their default guarantee arrangements and the number of lenders they have entered into such deals with.

The Digital Lending Association of India (DLAI) issued a statement saying that it will help the digital lending sector grow and facilitate all players to participate in this space.

“One of the key asks from most sector players has been to provide clarity on the permissible structure for DLG arrangements between two parties. The circular issued today clearly specifies details on scope, eligibility, structure, form, cap, disclosure requirements, and exceptions’’, said Jatinder Handoo, chief executive officer, DLAI.