The Reserve Bank of India (RBI) has directed some non-banking financial companies (NBFCs) to stop factoring in default loss guarantees (DLGs) provided by fintech companies while calculating loan loss provisions, according to sources.
DLG is a type of risk-sharing arrangement in digital lending. If a borrower fails to repay the loan, the fintech firm agrees to cover a portion of the loss, capped at 5% as per RBI norms.
Until recently, some NBFCs excluded this 5% DLG amount when setting aside funds for potential loan losses. This reduced their provisioning burden.
However, a new communication from the RBI in March has asked them to include this in their calculations, effectively tightening provisioning norms.
According to sources, this directive makes the DLG model less attractive and has already caused some lenders to make additional provisions starting from the March quarter.
Industry bodies such as the Fintech Association for Consumer Empowerment (FACE) have been in discussions with the RBI over the past few months. While the directive originally came from the Department of Supervision based on audits, it has now reached the RBI’s Department of Regulation.
The industry is asking the RBI to consider allowing DLG amounts to be set off against provisions. Their argument is that if the NBFC has clear access to the DLG funds, often held in an escrow account with a bank, then the risk is reduced, and accounting standards would permit such a set-off.
If the RBI maintains its current stance, the result may be higher capital usage for NBFCs and a slowdown in digital loan distribution.
Paytm is among the companies affected. It began using the DLG model last year, and according to Macquarie, about 80% of its merchant loans are covered under DLG. This change could reduce distribution revenue for Paytm and similar players in the sector.