RBI issues FAQs on guidelines for default loss guarantee in digital lending

RBI

The Reserve Bank of India (RBI) on April 26 issued frequently asked questions (FAQs) on guidelines for default loss guarantee (DLG) in digital lending.

DLG is a a contractual arrangement between the bank and an entity under which the latter guarantees to compensate the bank for losses due to default up to a certain percentage of the loan portfolio of the bank.

While issuing the guidelines in June 2023, the RBI had said that banks must ensure that the total amount of DLG cover on any outstanding portfolio --  which is specified upfront -- shall not exceed five percent of the amount of that loan portfolio.

Also, in case of implicit guarantee arrangements, the DLG provider shall not bear performance risk of more than the equivalent amount of five percent of the underlying loan portfolio, the RBI had said.

On April 26, while issuing the FAQ, the RBI said the portfolio for which DLG can be offered, needs to consist identifiable and measurable loan assets. This portfolio will remain fixed for the purpose of DLG cover and is not meant to be dynamic, the central bank added.

The cap is applicable on the total amount disbursed out of the DLG set at
any given time, the RBI said. Further, the RBI said the DLG amount once invoked by the RE cannot be reinstated, including through loan recovery.

While the guidelines mandate the banks accepting DLG cover to have a Board approved policy in place, the banks acting as DLG providers shall also put in place Board approved policy as a prudent measure, the RBI added.