The Reserve Bank of India recently came up with guidelines on Default Loss Guarantee (DLG) in digital lending that is effective from 8th June 2023.[i] Before delving into DLG, it is important to define the term digital lending. As per the Reserve Bank of India, digital lending is defined as a remote and automated lending process, largely by use of seamless digital technologies for customer acquisition, credit assessment, loan approval, disbursement, recovery, and associated customer service.[ii] The DLG guidelines are applicable only to digital lending and arrangements that would be covered under the scope of the term ‘digital lending’ and the guarantees that don’t fall within the purview of digital lending would be treated as synthetic securitisation
DLG is an arrangement between a bank/Non-Banking Financial Company (NBFC) and a Fintech company where the Fintech Company agrees to compensate (up to a certain percentage of the loan) to the bank/NBFC in case the customer (borrower) defaults. The RBI guidelines cover some of the very important aspects that had been long demanded by the industry. It provided for accepted forms of DLG for regulated entities (i.e. Banks/NBFCs), maximum DLG cover for an outstanding loan, maximum invocation period (120 days), eligibility criteria for DLG providers and the compliances they need to make.
The guidelines also provide exemptions to certain types of guarantees like the guarantee schemes of Credit Guarantee Fund Trust for Micro and Small Enterprises, credit guarantee fund trust for low income housing and individual schemes under National Credit Guarantee Trustee Company Ltd and credit guarantee provided by BIS (Bank of International Settlement). Moreover, the lending service provider has to be incorporated as a company and such a provision is provided to enhance protection and deter the individual smaller agents to function as a lending service provider.
The present guidelines provides the mandatory requirement that the DLG arrangements msut be backed by a contract between the regulated entity and the DLG provider. The maximum DLG cover that can be provided for a particular loan portfolio is 5%. The RBI has also provided the required compliances by the regulated entity with respect to DLG providers like having a board-approved DLG policy in place. Conducting adequate due diligence of the DLG providers and establishing a customer protection and grievance redressal measures.
So, apart from the fact that these guidelines are a boost to the players in the fintech industry, it is definitely going to serve the larger purpose of serving the credit-starved sections of Indian society by enhancing credit penetration and the various compliances provided for in the guidelines will definitely go a long way to promote customer protection and transparency.
[i] RBI Guidelines on Default Loss Guarantee (DLG) in Digital Lending
[ii] RBI Guidelines on Digital Lending
Author ‘Arnab Goswami’ is a 3rd year student at University of Petroleum and Energy Studies, Dehradun.
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