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ARTICLE · 19 SEPTEMBER 2023

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RBI Nod On First Loss Default Guarantee For Banks And Fintech Lenders

Chandhiok & Mahajan
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The Reserve Bank of India ("RBI"), vide its circular RBI/2023-24/41 DOR.CRE.REC.21/21.07.001/2023-24, dated 8th June 2023 ("Guideline")...

IndiaTechnology
Bhargesh Ojha
Bhargesh Ojha
Priyanka Biswas
Priyanka Biswas

The Reserve Bank of India ("RBI"), vide its circular RBI/2023-24/41 DOR.CRE.REC.21/21.07.001/2023-24, dated 8th June 2023 ("Guideline") has allowed banks and non-bank financiers to enter into loss default guarantee arrangements in digital lending if certain conditions are satisfied. These guidelines are applicable to First Default Loss Guarantee ("FDLG") arrangements entered in 'Digital Lending' operations undertaken by entities regulated by the RBI and permitted to carry out lending business (hereinafter referred to as 'Regulated Entities' or 'RE'). A FDLG is a contractual arrangement between a RE and a fintech or lending service provider (mostly unregulated) where the latter guarantees to compensate up to a certain percentage of default in the loan portfolio. The bank is happy to extend the loan as the fintech sources the client (borrower) and also guarantee a part of the loss to the bank, in the event there is a default on the loan.

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