The Reserve Bank of India (RBI) on June 8 released guidelines on Default Loss Guarantee (DLG) arrangements in digital lending. These are arrangements by fintech companies (that act as lending service providers) to compensate banks or non-banking financial companies (NBFCs) up to a certain percentage of default of the loan extended by the bank or NBFC. Back in August 2022, RBI issued digital lending guidelines, which placed restrictions on the practice of DLGs and noted that the same was under examination by the central bank. To the relief of fintechs, as well as banks and NBFCs, these latest guidelines now allow DLGs in digital lending subject to certain conditions. "One of the key asks from most sector players has been to provide clarity on the permissible structure for DLG arrangements between two parties. The circular specifies details on scope, eligibility, structure, form, cap, disclosure requirements and exceptions.” — Jatinder Handoo, CEO, Digital Lenders Association of India (DLAI), told MoneyControl Why does this matter: Fintechs have a higher risk appetite and sometimes more data to assess creditworthiness, making them more likely to extend credit to the underserved sections of society or those who pose a higher default risk. But fintechs can only partner with banks or NBFCs to extend loans, and the latter might not have the same risk appetite. This is where DLGs come to play as it allows fintechs to assume some of the default risks, thus incentivizing banks and NBFCs to extend credit. "This will further facilitate orderly…
