RBI Reinstates Default Loss Guarantees Framework for NBFCs

The Reserve Bank of India has reinstated the use of Default Loss Guarantees (DLGs) for Non-Banking Finance Companies (NBFCs) while calculating provisions on certain loan portfolios.  

The decision rolls back restrictions introduced in May 2025 that had required lenders to exclude such guarantees from loss estimates on loans originated through fintech partners. The revised framework applies with immediate effect. 

How The Rule Works 

DLGs, usually capped at 5% of a loan pool, are commonly backed by fixed deposits placed by digital lending partners. Under the updated guidance, NBFCs can factor in these guarantees only when they are an integral part of the loan arrangement.  

The central bank has also directed lenders to revise expected loss estimates each time a guarantee is invoked, as the available cover reduces with usage. 

Impact of the Earlier Directive 

The 2025 rules had raised provisioning requirements for NBFCs and increased credit costs. Several lenders reported material effects on profitability.  

SMFG India Credit posted a 44% decline in FY25 profit after setting aside ₹115 crore in additional DLG-related provisions. Credit Saison India reported a 22% fall in profit after providing ₹178 crore.  

Northern Arc Capital disclosed an overall impact of ₹780 crore and had provisions of ₹763 crore on its books as of 31 March 2025. 

Provisioning Schedule and Lending Trends 

The RBI had asked NBFCs to spread these additional provisions across the March, June, and September quarters of 2025.  

The higher buffers reduced returns on fintech-originated loans and led to a slowdown in some digital lending and co-lending activity during the period. Fintech partners also saw lower origination volumes as the benefit of guarantees was neutralised. 

Regulatory Alignment 

With the latest amendment, the RBI has aligned the treatment of DLGs across digital lending, co-lending, and credit-risk transfer guidelines. The change also coincides with revised co-lending norms that came into force in January this year. 

Read More: RBI Eases NBFC Norms for Smaller Shadow Banks! 

Conclusion 

The restoration of DLG recognition changes how NBFCs account for credit risk on fintech-linked loans. It reverses last year’s provisioning stance and updates the regulatory framework governing such arrangements. 

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