RBI Restricts Default Loss Guarantees in Digital Loans
NBFCs must now fully provision for digital loans despite fintech-backed default guarantees
Mumbai: The Reserve Bank of India (RBI) has asked non-banking finance companies (NBFCs) to stop factoring in default loss guarantees (DLGs) provided by fintech companies while calculating loan loss provisions, a move that will reshape the collaboration between the two stakeholders.
NBFCs will now be required to make full regular provisions on loans sourced from fintech platforms, impacting their profitability, particularly for those with a high exposure to FinTech-originated loans. The move will also reduce attractiveness for new business generation and could slow down digital lending distribution.
DLG is a type of risk-sharing arrangement in digital lending. If a borrower fails to repay the loan, the fintech firm agrees to cover a portion of the loss, capped at 5 per cent as per RBI norms. Until recently, some NBFCs excluded this 5 per cent DLG amount when setting aside funds for potential loan losses. This reduced their provisioning burden.
The RBI’s communication in March has asked NBFCs to ignore DLGs when calculating provisions for bad loans. As a result, NBFCs will now have to set aside more capital to cover potential defaults. The move follows cases where fintechs failed to honour DLGs, leaving NBFCs exposed to losses, said reports. Digital lending partners such as MobiKwik, Paytm and Moneyview would be impacted with the RBI’s new directive.
