Guarding Digital Lending | RBI’s Game-Changing Guidelines for ‘Default Loss Guarantee’

RBI vide Circular No. RBI/2023-24/41 DOR.CRE.REC.21/21.07.001/2023-24, Dated June 8, 2023 has issued guidelines on Default Loss Guarantee (DLG) in digital lending. This move aimed at ensuring the orderly development of the credit delivery system.

As per the guidelines, a Regulated Entity (RE) can only enter into DLG arrangements with a Lending Service Provider (LSP) or another RE with whom it has entered into an outsourcing LSP arrangement. The guidelines are effective from 08.06.2023. The key highlights of the guidelines on Default Loss Guarantee (DLG) in Digital Lending are discussed below:

1. Meaning of Default Loss Guarantee (DLG)

The term ‘Default Loss Guarantee’ (DLG) refers to a contractual arrangement, between a Regulated Entity (RE) and an entity that meets certain criteria specified in the guidelines, under which the latter entity guarantees to compensate the RE, loss due to default up to a certain percentage of the loan portfolio of the RE, specified upfront.

Further, any implicit guarantees that are similar in nature and are directly linked to the performance of the RE’s loan portfolio, and are specified upfront in the agreement would also fall under the definition of DLG.

2. Applicability of DLG guidelines

These guidelines are applicable to DLG arrangements entered in ‘Digital Lending’ operations undertaken by the following entities –

(a) All Commercial Banks (including Small Finance Banks),

(b) Primary (Urban) Co-operative Banks, State Co-operative Banks, Central Co-operative Banks; and

(c) Non-Banking Financial Companies (including Housing Finance Companies).

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