RBI Issues Guidelines on Default Loss Guarantee (DLG) in Digital Lending in India
Updated On : August 2023
In recent years, the digital lending industry has witnessed significant growth in India, offering quick and convenient financial solutions to individuals and small businesses. However, concerns have been raised regarding the transparency, accountability, and fair practices of these digital lending platforms. To address these concerns and promote responsible lending, the Reserve Bank of India (RBI) has issued comprehensive guidelines on default loss guarantee in digital lending.
Understanding Digital Lending
Digital lending refers to the process of lending money to borrowers through online platforms or mobile applications, without the need for physical interactions or extensive paperwork. It has gained popularity due to its accessibility, faster loan disbursals, and minimal documentation requirements. Digital lending platforms leverage technology and alternative data sources to assess the creditworthiness of borrowers and make informed lending decisions.
On 8th June 2023, RBI issued the guidelines on Default Loss Guarantee (DLG). As per the guidelines, any arrangement between Regulated Entities (REs) and Lending Service Providers (LSPs) or between two REs involving DLG or First Loss Default Guarantee (FLDG) will have to adhere to these guidelines. These guidelines will be applicable with immediate effect to NBFCs, Commercial banks, Urban co-operative banks, State co-operative banks, and central co-operative banks.
What is Default Loss Guarantee (DLG) agreement?
The DLG arrangement must be backed by a legally enforceable contract between Regulated Entities and DLG providers. The agreement covers the following points:
- The overall DLG cover under the upfront guarantee arrangements for any active loan portfolio shall not exceed 5% of that loan portfolio's value. The DLG provider shall not bear a performance risk of more than the equivalent amount of 5% of the underlying loan portfolio for implied guarantee arrangements.
- The RE will accept DLG only in the form of cash deposits, fixed deposits maintained with Scheduled Commercial Banks, and lien marked in favour of RE and BG in favour of RE.
- The Timeline for DLG invocation will be a maximum overdue period of 120 days.
- Disclosure requirements, the RE who has a DLG agreement, can publish their details on the website like the total number of portfolios, number of portfolios, etc.
Regarding recognition of NPAs and treatment of DLG for regulatory capital:
- The RE will recognize individual loan assets in the portfolio as NPAs and provisioning will be done as per the extant asset classification, and provisioning norms.
- The amount of DLG raised shall not be set off against underlying individual loans.
- Recovery by the RE, the invoked DLG loans can be shared with DLG providers in the form of contractual arrangements.
- The extant norms will govern the computation of exposure and application of credit risk mitigation benefits to individual loan assets in the portfolio.
Benefits of the Guidelines
- Borrower Protection: The guidelines aim to protect borrowers from predatory lending practices, ensuring transparency in loan terms and conditions. This promotes responsible lending and helps prevent borrowers from falling into debt traps.
- Enhanced Credibility: By mandating registration and compliance with the guidelines, the RBI strengthens the credibility of digital lending platforms. This fosters trust among borrowers and lenders, contributing to the overall growth and stability of the digital lending sector.
- Regulatory Oversight: The guidelines provide a regulatory framework for digital lending platforms, ensuring their operations align with established norms. This oversight enhances systemic stability and reduces the risk of financial disruptions arising from unscrupulous lending practices.
- Consumer Awareness: The guidelines encourage lenders to provide clear and concise information to borrowers, enabling them to make informed decisions. This promotes financial literacy and empowers borrowers to choose the most suitable lending option for their needs.
The RBI's guidelines on default loss guarantee in digital lending signify a significant step towards regulating the rapidly expanding digital lending industry in India. By promoting responsible lending practices, enhancing transparency, and safeguarding the interests of borrowers, these guidelines create a more sustainable and consumer-friendly lending ecosystem. As the digital lending landscape continues to evolve, adherence to these guidelines will contribute to the sector's long-term viability, benefiting both borrowers and lenders alike.
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