The Reserve Bank of India (RBI) has introduced an important new regulation affecting how Non-Banking Financial Companies (NBFCs) handle loans sourced through fintech platforms. This rule focuses on Default Loss Guarantees (DLGs) — promises by fintech companies to cover losses if a borrower defaults on a loan.
Previously, NBFCs could rely on these guarantees to reduce the amount of money set aside as a provision or safety net against loan defaults. But now, RBI mandates NBFCs to exclude these fintech-backed guarantees when calculating provisions for stressed loans. This means NBFCs must fully account for the risk of losses on such loans themselves.
What Are Default Loss Guarantees?
DLGs are agreements where fintech firms, acting as Lending Service Providers (LSPs), promise to reimburse NBFCs for loan losses if borrowers fail to repay. This helped NBFCs lower their financial risk and provisioning requirements.
What Has Changed?
From now on, NBFCs must ignore these fintech guarantees while calculating Expected Credit Loss (ECL) provisions for loans sourced via fintech channels. NBFCs must comply fully by September 30, 2025.
Implications for NBFCs and Fintechs:
– Higher provisioning burden: NBFCs must set aside more capital against fintech-originated loans.
– Impact on digital lending: Fintechs may struggle to continue offering guarantees or need to revise business models, possibly increasing loan costs or reducing loan volumes.
– Shift in collaborations: Both NBFCs and fintechs must rethink partnerships and risk management.
Why RBI Did This?
RBI’s move ensures NBFCs maintain strong capital buffers and avoid over-reliance on fintech guarantees that might be unreliable. This protects the financial system from under-provisioning risks and promotes sustainable lending practices in India’s fast-growing digital credit space.