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Guidelines on Default Loss Guarantee (DLG) in Digital Lending

Reserve Bank of India (RBI) has issued guidelines on Default Loss Guarantee (DLG) in digital lending.

What is digital lending?

Digital Lending refers to a remote and automated lending process, largely by use of seamless digital technologies for customer acquisition, credit assessment, loan approval, disbursement, recovery, and associated customer service.

Digital Lending Apps / platforms (DLAs) include apps of the Regulated Entities (REs) as well as the apps of Lending Service Providers (LSPs) engaged by REs as agents for extending any credit facilitation services.

What is the basis of the guidelines on digital lending?

The guidelines on digital lending are based on the recommendations of the Working Group on ‘digital lending including lending through online platforms and mobile apps’ (Chairman: Jayant Kumar Dash). 

What is Default Loss Guarantee (DLG)?

  • Default Loss Guarantee (DLG) is a contractual arrangement between the REs and LSPs, under which the latter guarantees to compensate the RE, loss due to default up to a certain percentage of the loan portfolio of the RE, specified upfront. 
  • Any other implicit guarantee of similar nature linked to the performance of the loan portfolio of the RE and specified upfront, shall also be covered under the definition of DLG.

Which REs are covered by under DLG guidelines?

The guidelines are applicable to DLG arrangements entered in ‘Digital Lending’ operations undertaken by following entities –

  • All Commercial Banks (including Small Finance Banks)
  • Primary (Urban) Co-operative Banks
  • State Co-operative Banks
  • Central Co-operative Banks
  • Non-Banking Financial Companies (including Housing Finance Companies)

Who can be DLG provider?

RE may enter into DLG arrangements only with a LSP / other RE with which it has entered into an outsourcing (LSP) arrangement. 

In what form can DLG be accepted?

RE shall accept DLG only in one or more of the following forms –

  • Cash deposited with the RE
  • Fixed Deposits maintained with a Scheduled Commercial Bank with a lien marked in favour of the RE
  • Bank Guarantee in favour of the RE

What is the cap on proving DLG?

  • RE shall ensure that total amount of DLG cover on any outstanding portfolio which is specified upfront shall not exceed 5% of the amount of that loan portfolio. 
  • In case of implicit guarantee arrangements, the DLG provider shall not bear performance risk of more than the equivalent amount of 5% of the underlying loan portfolio.

When shall DLG be invoked?

The RE shall invoke DLG within a maximum overdue period of 120 days, unless made good by the borrower before that.

What are other requirements for DLG?

  • The period for which the DLG agreement will remain in force shall not be less than the longest tenor of the loan in the underlying loan portfolio.
  • DLG shall not involve any actual transfer of the underlying loan exposure from the books of the RE to the books of the DLG provider.
  • Any DLG arrangement shall not act as a substitute for credit appraisal requirements and robust credit underwriting standards need to be put in place irrespective of DLG cover.

What will be the impact of DLG on asset recognition and capital?

  • Recognition of individual loan assets in the portfolio as Non-Performing Assets (NPA) and consequent provisioning shall be the responsibility of the RE as per the extant asset classification and provisioning norms irrespective of any DLG cover available at the portfolio level. 
  • The amount of DLG invoked shall not be set off against the underlying individual loans. 
  • Capital computation, i.e., computation of exposure and application of Credit Risk Mitigation benefits on individual loan assets in the portfolio shall continue to be governed by the extant norms.

Which guarantees are not covered under DLG?

Guarantees covered under the following schemes / entities shall not be covered within the definition of DLG –

  • Guarantee schemes of Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), Credit Risk Guarantee Fund Trust for Low Income Housing (CRGFTLIH) and individual schemes under National Credit Guarantee Trustee Company Ltd (NCGTC).
  • Credit guarantee provided by Bank for International Settlements (BIS), International Monetary Fund (IMF) as well as Multilateral Development Banks.


References

Reserve Bank of India. (2022, September 02). 'Guidelines on Digital Lending'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12382&Mode=0

Reserve Bank of India. (2022, August 10). 'Recommendations of the Working group on Digital Lending - Implementation'. Retrieved from https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=54187

Reserve Bank of India. (2023, June 08). 'Guidelines on Default Loss Guarantee (DLG) in Digital Lending'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12514&Mode=0


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