Introduction:

Digital lending has changed the lending landscape, providing quick and convenient access to financial services. To regulate the digital lending space and protect the interests of borrowers, the Reserve Bank of India (RBI) has recently issued guidelines on Default Loss Guarantee (DLG) in Digital Lending. These guidelines aim to establish responsible practices, enhance customer protection, and promote financial inclusion. In this blog, we will delve into the key highlights of the RBI guidelines on DLG and understand their significance for the fintech industry.

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Scope and Eligibility:

The guidelines cover DLG arrangements in digital lending operations conducted by regulated entities, including commercial banks, co-operative banks, and non-banking financial companies (NBFCs). DLG arrangements can only be made with a Lending Service Provider (LSP) or another regulated entity with whom an outsourcing arrangement exists. The LSP must be a company incorporated under the Companies Act, 2013.

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Structure and Forms:

DLG arrangements must clearly specify the extent of coverage, the form in which it will be maintained (cash, fixed deposits, or bank guarantee), and the timeline for invocation. The total DLG cover should not exceed 5% of the loan portfolio, ensuring a prudent risk management approach.

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NPA Recognition and Regulatory Capital Treatment:

Under the guidelines, the responsibility of recognizing individual loan assets as Non-Performing Assets (NPAs) and provisioning lies with the regulated entity, irrespective of DLG cover. Capital computation and credit risk mitigation benefits for individual loan assets continue to be governed by existing norms.

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Disclosure and Due Diligence:

LSPs with DLG arrangements are required to publish the total number of portfolios and corresponding DLG amounts on their websites, promoting transparency and accountability. Regulated entities must have a board-approved policy and obtain adequate information on the DLG provider's ability to honor the arrangement. This ensures proper due diligence and risk assessment.

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Customer Protection:

The RBI emphasizes the importance of customer protection measures and grievance redressal in digital lending. The guidelines highlight that customer protection practices should adhere to the RBI's guidelines on digital lending and applicable norms, safeguarding the interests of borrowers and promoting fair lending practices.

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Conclusion:

The RBI's guidelines on DLG in Digital Lending mark a significant step towards ensuring responsible lending practices, enhancing financial inclusion, and promoting transparency in the digital lending ecosystem. By regulating DLG arrangements and establishing clear guidelines for eligibility, structure, disclosure, and customer protection, the RBI aims to create a robust and inclusive fintech landscape. It is imperative for regulated entities to stay informed and comply with these guidelines to build trust, foster customer-centricity, and drive sustainable growth in the digital lending space.

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Credits: Manish Mishra, EnterSlice.