What changed
RBI has formalized guidelines for Default Loss Guarantee (DLG) arrangements in digital lending, moving from examination to permission. DLG arrangements that comply with these guidelines will not be treated as synthetic securitisation or loan participation. The guidelines apply to all commercial banks (including Small Finance Banks), primary urban co-operative banks, state/central co-operative banks, and NBFCs including HFCs. Note: These guidelines were repealed by the RBI (Digital Lending) Directions, 2025 dated May 8, 2025.
What it means for you
Banks and lenders can now legally enter into DLG arrangements with LSPs or other REs, provided the LSP is a company under the Companies Act. This provides a clear regulatory framework for risk-sharing in digital lending, reducing ambiguity and potential regulatory arbitrage. Lenders must ensure DLG arrangements are structured as per the guidelines to avoid being classified as synthetic securitisation.
What you must do
- Review existing FLDG arrangements to ensure compliance with the new DLG guidelines (note: repealed as of May 8, 2025).
- Ensure DLG providers are eligible: LSPs must be incorporated as companies under the Companies Act, 2013.
- Document DLG terms upfront, including the percentage of portfolio covered (max 5%).
- Monitor that DLG arrangements do not involve synthetic securitisation or loan participation.
- Update internal policies and outsourcing agreements to reflect the new DLG framework.
Who it affects
All Commercial Banks including Small Finance Banks, Primary (Urban) Co-operative Banks, State Co-operative Banks and Central Co-operative Banks, Non-Banking Financial Companies including Housing Finance Companies, Lending Service Providers (LSPs) in digital lending
What is Default Loss Guarantee (DLG) as per this circular?
DLG is a contractual arrangement where an entity (LSP or another RE) guarantees to compensate the RE for default losses up to a specified percentage of the loan portfolio, agreed upfront. It covers any similar implicit guarantee linked to portfolio performance. The cap is 5% of the loan portfolio.
Are DLG arrangements considered synthetic securitisation?
No, DLG arrangements that conform to these guidelines will not be treated as synthetic securitisation or loan participation, as per the circular.
Who can provide DLG under these guidelines?
Only LSPs that are incorporated as companies under the Companies Act, 2013, or other REs with which the RE has an outsourcing arrangement, are eligible to provide DLG.
What is the maximum DLG cover allowed?
The total DLG cover on any outstanding portfolio shall not exceed 5% of the amount of that loan portfolio.
When must DLG be invoked?
The RE shall invoke DLG within a maximum overdue period of 120 days, unless made good by the borrower before that.
What is the minimum tenor of a DLG agreement?
The period for which the DLG agreement will remain in force shall not be less than the longest tenor of the loan in the portfolio.