RBI issues FAQs on default loss guarantee in digital lending

The Reserve Bank of India (RBI) on Friday issued frequently asked questions (FAQs) to provide more clarity on its guidelines for default loss guarantee (DLG) in digital lending, which were first issued in June 2023.

DLG is an agreement between the bank and an entity under which the latter guarantees to provide compensation to 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 per cent of the amount of that loan portfolio.

In its list of FAQs, the RBI said the portfolio for which DLG can be offered needs to consist of identifiable and measurable loan assets.

This portfolio will remain fixed for the purpose of DLG cover and is not meant to be dynamic.

The 5 per cent cap is applicable on the total amount disbursed out of the DLG set at any given time, the RBI said.

It also stated that 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.

The RBI has also clarified that DLG is not permitted on loans arranged on NBFC-P2P platforms.

Similarly, DLG arrangements are also not allowed for credit cards.

The RBI has on its website explained the FAQs with illustrative examples for easier understanding.