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RBI’s Default Loss Guarantee (DLG) Rules for Lenders and Fintechs

31 May 20251 min read
BANKING & FINANCERBI’s Default LossGuarantee (DLG)Rules for Lendersand Fintechs31 May 2025safalsetu.com

Why in the news

RBI’s DLG directive makes lenders fully responsible for NPA recognition and provisioning, which may change bank-fintech partnerships.

About DLG

  • Fintech compensates banks or NBFCs for defaults, usually up to 5% of the portfolio.

Key provisions

  • Ignore DLG cover when recognising NPAs and provisioning.
  • Borrower liability stays; no set-off against individual loans.
  • Recoveries may be shared with the provider; an invoked DLG cannot be reinstated.

Rationale and impact

  • Curbs fintech overreliance on DLG; promotes lender prudence.
  • Likely fewer co-origination tie-ups; seen as credit tightening.
  • May reshape DLG-based fintech models and credit availability.

Related update

  • RBI seeks approval for banks and their foreign branches to lend rupees to overseas borrowers for the first time.

Exam angle

  • DLG cover: 5%; no reinstatement.

Test yourself

1. What share of the loan portfolio does a Default Loss Guarantee typically cover?

DLGs usually cover losses up to 5% of the loan portfolio.

2. Under RBI's DLG directive, what happens once a DLG has been invoked?

An invoked DLG cannot be reinstated, even if recoveries follow.

3. How must lenders treat DLG cover while recognising NPAs under the RBI directive?

Lenders must exclude DLG cover and recognise NPAs and provisions independently.

This topic is part of Daily Current Affairs 31 May 2025 (18 topics).

All topics of the dayDay quizMay 2025

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