What Are Default Loss Guarantees?
Default loss guarantees are arrangements where fintech lending service providers (LSPs) offer partial protection against loan defaults, typically capped at 5 percent of the portfolio. These guarantees are often backed by fixed deposits or other financial safeguards.
They have been widely used in digital lending and co-lending structures to share risk between NBFCs and fintech partners. By cushioning initial losses, DLGs make it easier for lenders to extend credit to new and under-served customer segments.
Rollback of 2025 Directive
The latest decision marks a reversal of the RBI’s May 2025 directive, which had required NBFCs to exclude DLGs when calculating provisioning for stressed or risky loans. That rule, implemented from March 31, 2025, effectively forced lenders to build full provisions regardless of available guarantees.
The earlier framework significantly increased credit costs and reduced the attractiveness of fintech-originated loans. Several NBFCs had to make substantial additional provisions across the March, June and September quarters of 2025.
With the restoration of DLG recognition, entities can reverse excess provisioning carried so far, freeing up capital for fresh lending.
Immediate Industry Impact
Industry leaders have welcomed the move, calling it a major relief for NBFCs engaged in digital lending partnerships. The regulatory clarity is expected to improve profitability, enhance balance-sheet flexibility and revive loan origination volumes.
Rating agencies have noted that the amendment will support overall credit expansion, especially in the retail segment. The timing is also considered significant, given that revised co-lending guidelines became effective earlier this year.
The RBI has, however, introduced safeguards. Lenders must update their loss estimates every time a guarantee is invoked, as the available protection diminishes with each claim. This ensures that NBFCs do not overstate the risk mitigation provided by DLGs.
Provisioning Pressure Eases
The 2025 rules had forced several lenders to absorb heavy provisioning hits. Some reported double-digit declines in annual profit after booking additional DLG-related buffers.
The restored framework is expected to reverse part of that strain. By reducing provisioning requirements, NBFCs can deploy capital more efficiently and potentially pass on benefits through expanded lending activity.
For fintech firms, the decision could stimulate fresh partnerships and higher loan origination, as risk-sharing structures regain regulatory acceptance.
Balancing Growth and Prudence
The RBI’s revised approach seeks to harmonise the treatment of DLGs across digital lending, co-lending and credit risk transfer guidelines. While enabling credit growth, the regulator continues to emphasise transparency and prudent risk assessment.
Boost for Digital Lending Ecosystem
India’s digital lending market has grown rapidly over the past few years, driven by fintech innovation and increased smartphone penetration. NBFC-fintech partnerships have played a central role in expanding credit access to micro-entrepreneurs and retail borrowers.
By reinstating DLG recognition, the RBI has provided regulatory certainty to this ecosystem. The move is expected to encourage responsible scaling while maintaining oversight through updated provisioning norms.
As economic activity picks up and retail credit demand strengthens, the restored DLG framework could act as a catalyst for renewed lending momentum.
The coming quarters will reveal how effectively NBFCs leverage this regulatory relief to balance growth, risk management and profitability in an evolving financial landscape.
