RBI Imposes Limits on Default Loss Protections in Digital Lending Operations
Following a directive from the Reserve Bank of India (RBI), Non-Banking Finance Companies (NBFCs) are now asked to exclude default loss guarantees (DLGs) provided by fintech companies when calculating loan loss provisions. This move is set to significantly reshape the collaboration between the two stakeholders.
As a result, NBFCs will have to make full provisions upfront on loans sourced from digital lending partners, without factoring in fintech-provided guarantees. This will increase their provisioning burden, potentially impacting profitability, particularly for those with a high exposure to FinTech-originated loans. The reduction in attractiveness for new business generation could slow down digital lending distribution.
The RBI's communication in March states that DLGs should not be included in the computation of expected credit losses. This means NBFCs can no longer treat such guarantees as credit enhancements when making provisioning for stressed loans. Reports suggest this change follows cases where fintechs failed to honor DLGs, leaving NBFCs exposed to losses.
Digital lending partners such as MobiKwik, Paytm, and Moneyview are likely to be affected by the RBI's new directive. The directive may encourage NBFCs to strengthen their own underwriting skills and rely less on fintech partnerships that offer default loss guarantees. This shift could lead to greater transparency and accountability in digital lending.
The directive marks a shift away from the "balance sheet rental" model, addressing concerns about fintechs not honoring commitments when loans turned sour. It aims to reduce regulatory arbitrage and improve risk management in the digital lending ecosystem, potentially leading to a more sustainable growth model for NBFCs and fintechs in the long term.
The compliance deadline for this directive is September 30, 2025, although some NBFCs have already started making higher provisions from the fourth quarter of FY25. The move may signal a strategic shift towards NBFCs taking more direct responsibility for credit risk and a potential recalibration of fintech-NBFC lending partnerships.
NBFCs will need to adjust their loan loss provisions, no longer being able to include fintech-provided default loss guarantees, which could increase their provisioning burden, influence profitability, and potentially slow down digital lending distribution. As a result, fintech partners might see a decrease in demand for their guarantee services, motivating NBFCs to strengthen their own underwriting skills and internal risk management.
