In a significant move, the Reserve Bank of India (RBI) has recently issued Guidelines on Default Loss Guarantees (DLG) in Digital Lending.

This step comes as a response to the growing concerns surrounding First Loss Default Guarantee (FLDG) structures and aims to provide clarity and regulatory oversight in the digital lending space.

To understand the context, it is worth revisiting RBI’s press release on August 10, 2022[1], which highlighted their examination of FLDGs. Subsequently, in their Guidelines on Digital Lending dated September 02, 2022[2] (“Guidelines”), RBI mandated adherence to the provisions of paragraph 6(c) of the Master Direction – Reserve Bank of India (Securitization of Standard Asset) Directions, 2021 dated September 24, 2021[3]. This raised concerns due to the widespread use of FLDGs by Regulated Entities (REs) as loss sharing arrangements provided by their business correspondents.

With the introduction of the DLG Guidelines, RBI aims to address these concerns and establish clear guidelines for loss sharing arrangements in the digital lending landscape. In this article, we delve into the key takeaways from these guidelines, shedding light on their implications and providing a comprehensive understanding of the new framework.

Applicability: These DLG Guidelines are effective from June 08, 2023 and is applicable on all REs i.e., all Commercial Banks including Small Finance Banks, Primary Urban Co-Operative Banks, State Co-operative Banks, and District Central Co-operative Banks; and Non-Banking Financial Companies (including Housing Finance Companies).

Eligible DLG Provider: RE can only enter into a DLG arrangement with a Lending Service Provider[4] (“LSP”) as defined in the Guidelines and any other RE with which it has entered into an outsourcing arrangement. Since LSPs are not necessarily an RE, the DLG Guidelines has extended its scope to non-REs as well subject to the said LSP being a company incorporated under the Companies Act 2013.

Permitted DLG: DLG has been expressly defined to mean a contractual arrangement between the Regulated Entity (RE) and Eligible DLG Provider wherein the latter guarantees to compensate the RE, loss due to default up to a certain percentage of the loan portfolio of the RE. While the explicit agreement has been covered, RBI has also extended the definition to cover implicit arrangement between REs and Eligible DLG Provider wherein such implicit guarantee of similar nature is linked to the performance of the loan portfolio of the RE and specified upfront. RBI has explicitly clarified that DLG shall not involve in any actual transfer of the underlying loan exposure from the books of the RE to the books of the Eligible DLG Provider. Any DLG arrangement between RE and Eligible DLG Provider shall not act as a substitute for credit appraisal requirements.

Exceptions: While we are analysing what the DLG Guidelines explicitly and implicitly cover in its ambit, it is also important to understand what has been excluded. RBI has clarified that the following guarantees shall not be covered within the definition of DLG:

  1. Guarantee schemes of Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), Credit Risk Guarantee Fund Trust for Low Income Housing (CRGFTLIH) and individual schemes under National Credit Guarantee Trustee Company Ltd (NCGTC).
  2. Credit guarantee provided by Bank for International Settlements (BIS), International Monetary Fund (IMF) as well as Multilateral Development Banks as referred to in Paragraph 5.5 of RBI Master Circular on Basel III Capital Regulation dated May 12, 202

Further, RBI has also clarified that DLG arrangements conforming to the DLG Guidelines shall not be treated as ‘synthetic securitisation’[5] and/or shall also not attract the provisions of ‘loan participation’[6].

Structure and Form of DLG Arrangement: The RBI has outlined the structure and form of DLG arrangements, emphasizing the need for a clear and legally enforceable contract between the RE and the Eligible DLG Provider. This contract, regardless of its name, must define the terms and conditions upfront, including the extent of DLG cover, the manner in which DLG cover is maintained with the RE, and the timeline for DLG invocation. The RE is allowed to invoke DLG if the borrower remains overdue for a maximum period of 120 days unless the borrower rectifies the situation before that. To ensure transparency, the Eligible DLG Provider are required to publish on its website the total number of portfolios and the corresponding amounts for which DLG has been offered. This disclosure benefits both borrowers and REs, as it provides clarity on the involvement of the Eligible DLG Provider in various portfolios. When accepting DLG, REs are only permitted to do so in the following forms: cash deposited with the RE, fixed deposits held with a Scheduled Commercial Bank and marked as a lien in favor of the RE, and/or a Bank Guarantee in favor of the RE. The computation of exposure and the application of Credit Risk Mitigation benefits on individual loan assets in the portfolio will continue to be governed by the existing norms. The DLG Guidelines aim to establish a structured framework for DLG arrangements, ensuring clarity and transparency for all parties involved. By specifying the permissible forms of DLG and promoting disclosure, the RBI seeks to enhance the reliability and accountability of such arrangements in the digital lending sector

Creating a balance of risk: The DLG Guidelines establish certain parameters for the duration and coverage of DLG arrangements. The contract period for DLG should be at least as long as the longest tenor of the loans in the underlying loan portfolio. Additionally, the total amount of DLG cover for any outstanding portfolio should not exceed 5% of the loan portfolio’s value. In the case of implicit DLG arrangements, the Eligible DLG Provider should not bear a performance risk exceeding 5% of the underlying loan portfolio. These requirements aim to strike a balance between providing REs with a reasonable level of comfort through the co-terminus tenure of DLG and ensuring that the maximum credit risk associated with the loan portfolio remains with the REs. By placing the responsibility on REs to thoroughly assess borrowers and not solely rely on the Eligible DLG Provider, the RBI aims to discourage irresponsible lending practices in the market. Furthermore, the upfront specification and full funding of DLG cover are intended to mitigate risks associated with DLG arrangements. It is important to note that REs retain the responsibility for NPA classification and loan provisioning. The amount of DLG invoked cannot be set off against the underlying individual loans. However, if the RE successfully recovers amounts from the loans on which DLG has been invoked, those recovered amounts can be shared with the Eligible DLG Provider as per the terms of the contract. Overall, these guidelines seek to ensure a balanced approach to DLG arrangements, promoting responsible lending practices while providing a mechanism for risk-sharing between REs and Eligible DLG Providers. By maintaining REs’ accountability for loan classification and provisioning, the RBI aims to uphold the stability and integrity of the lending industry.

Other requirements: REs are required to establish a board-approved policy that outlines the terms of DLG arrangements. This policy should cover various aspects, including the eligibility criteria for the Eligible DLG Provider, the nature and extent of DLG cover, the process for monitoring and reviewing the DLG arrangement, and the details of any fees payable to the Eligible DLG Provider. Additionally, the DLG Guidelines emphasize the importance of robust credit underwriting standards for REs, regardless of the presence of DLG cover in their loan portfolio. It is the responsibility of the REs to conduct due diligence on the Eligible DLG Provider and ensure that they are capable of honoring the DLG extended by them. To ensure transparency and accountability, the RBI requires REs to obtain a declaration from the Eligible DLG Provider, certified by a statutory auditor. This declaration should include information on the aggregate DLG amount outstanding, the number of REs involved, the respective number of portfolios covered by DLG, and past default rates on similar portfolios. These measures aim to strengthen risk management practices and enhance the overall integrity of DLG arrangements in the digital lending sector. REs are expected to adhere to these requirements to ensure a robust and reliable framework for DLG implementation.

Grievance Redressal: Customer protection measures and grievance redressal issues pertaining to DLG arrangements shall be regulated by the Guidelines along with other applicable extant norms.


In conclusion, the introduction of the DLG Guidelines by RBI has provided much-needed clarity and relief to the digital lending sector. These guidelines address the concerns surrounding loss sharing arrangements and establish a regulatory framework for default loss guarantees. By allowing loss sharing arrangements through DLGs, the RBI showcases its commitment to fostering innovation and growth while upholding necessary standards to mitigate systemic risks. It strikes a balance between facilitating digital lending and safeguarding the obligations and standards of REs. The immediate impact of the 5% DLG cap on the relationship between lenders and DLG providers, and its consequential effect on the lending market, will be an area of keen interest and scrutiny which will provide valuable insights into the adaptability and resilience of the lending market.

Overall, the DLG guidelines mark a significant milestone in the evolution of digital lending in India, offering a clear roadmap for loss sharing arrangements and instilling confidence among stakeholders. It will be interesting to observe the long-term impact of these guidelines and their contribution to the continued growth and stability of the digital lending industry.





[4] An agent of a Regulated Entity who carries out one or more of lender’s functions or part thereof in customer acquisition, underwriting support, pricing support, servicing, monitoring, recovery of specific loan or loan portfolio on behalf of REs in conformity with extant outsourcing guidelines issued by the Reserve Bank.

[5] As defined under Para 5(y) of the Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021 dated September 24, 2021

[6] As defined under Para 9(e) of the Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021 dated September 24, 202

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