RBI Restricts Default Loss Guarantees In Digital Lending Provisions

New Delhi, May 27 (KNN) The Reserve Bank of India has issued new directives requiring finance companies to exclude default loss guarantees provided by fintech firms when calculating provisions for stressed loans.

The central bank's communication, sent to finance companies in May, mandates the removal of credit enhancements under default loss guarantee arrangements from expected credit loss computations effective March 31, 2025, with implementation required by September 30.

Non-banking finance companies will now be required to make full regular provisions on loans sourced from digital lending platforms, a change that industry experts anticipate will reduce the appeal of such partnerships for new business generation.

Some NBFCs have already begun implementing additional provisions starting from the fourth quarter of the 2024-25 financial year.

Digital lending service providers, including prominent companies such as MobiKwik, Paytm, and Moneyview, operate by originating and servicing loans on behalf of NBFCs.

These fintech firms typically provide default loss guarantees as a risk-sharing mechanism, compensating non-banking financial companies for potential losses when loans default.

Most default loss guarantees are capped at five percent of the loan value and are structured as fixed deposits with liens marked in favour of the NBFC as credit enhancements.

The regulatory change is expected to compel NBFCs to strengthen their internal underwriting capabilities and reduce their dependence on fintech partnerships.

The impact on fintech companies is anticipated to be significant, with reduced origination volumes and fee income affecting overall earnings.

The loan portfolio originating through lending service providers varies among NBFCs, though on average, loans from fintech firms represent less than ten percent of total lending.

These partnerships typically focus on short-term, unsecured personal loans carrying interest rates between 16 and 22 percent.

(KNN Bureau)