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Guidelines on Default Loss Guarantee in Digital Lending

06 Jul 2023

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After considerable engagement between the Reserve Bank of India and the fintech industry, RBI regulated lending entities have now been permitted to enter into default loss guarantee arrangements pursuant to the recently issued Guidelines on Default Loss Guarantee.
Partner: Joseph Jimmy, Shruti Rajan, Jyotsna Jayaram, Counsel: Anubhav Ghosh, Senior Associates: Rachana Rautray, Varsha Yogish, Associates: Prabal De, Pranvi Jain


On 8 June 2023, the Reserve Bank of India (RBI) issued the Guidelines on Default Loss Guarantee in Digital Lending (DLG Guidelines) setting out the conditions under which RBI regulated lending entities (RE) can enter into default loss guarantee (DLG) arrangements amongst each other, or with lending service providers (LSP). The DLG Guidelines have been introduced after considerable engagement between RBI and the fintech industry, following RBI’s earlier decision to treat guarantee arrangements between LSPs and REs as ‘synthetic securitisation’ under the RBI’s Guidelines on Digital Lending dated 2 September 2022 (Digital Lending Guidelines) (To read our update on digital lending, click here).

This treatment had led to apprehensions that DLG arrangements could be prohibited in the digital lending ecosystem. In a relief to the fintech industry the RBI has, through the DLG Guidelines, exempted DLG arrangements conforming to the guidelines from being treated as synthetic securitisation.

Conditions under the Default Loss Guarantee Guidelines

The DLG Guidelines define DLG as a contractual arrangement between the RE and a DLG provider under which the latter guarantees to compensate the RE for any loss due to default on loans. The DLG Guidelines also clarify that any other implicit guarantee of similar nature linked to the performance of the loan portfolio of the RE would be covered within the scope of a DLG and would therefore also be subject to the conditions under the DLG Guidelines.

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