RBI tightens default loss guarantee rule; NBFCs to exclude cover on fintech-sourced loans

Economic Times

27-05-2025

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The Reserve Bank of India ( RBI ) has directed finance companies to exclude default loss guarantees (DLGs) provided by fintech firms while making provisions for stressed loans, marking a setback for independent digital lending service providers.Non-banking finance companies (NBFCs) will have to make full regular provisions on loans sourced from these platforms, reducing their attractiveness for new business generation, industry experts said.In a communication to finance companies in May, the central bank directed them to drop 'credit enhancements under DLG arrangements as of March 31, 2025, from the computation of expected credit loss.'RBI said the provisions have to be implemented by September 30.Some NBFCs started making extra provisions from the fourth quarter of FY25 itself.Digital partners operate as lending service providers (LSPs), originating and servicing loans for NBFCs. MobiKwik, Paytm and Moneyview are among prominent digital lending partners.To have skin in the game, they provide DLGs to compensate for the loss that non-banks may suffer if a loan turns sour. In most cases, DLGs, which are capped at 5%, are in the form of fixed deposits, lienmarked in favour of NBFC as credit enhancements. The latter have been factoring in DLGs while computing expected credit losses.The RBI directive will push NBFCs to strengthen their underwriting skills and rely less on fintech partners, said a senior executive at a large finance company.The central bank didn't respond to ET's queries. For fintech, going forward, this will impact origination volumes and fee income and, therefore, earnings.The loan book originating and serviced through the lending service providers varies from one NBFC to another—on average, loans originated from fintech firms would be less than 10%. Most of these loans are short-term, unsecured personal loans with interest rates ranging from 16% to 22%.Asenior fintech executive said the RBI directive stems from the collapse of a large fintech company that suffered a loss in the first half of the previous fiscal year, as it had to provide Rs 172 crore as DLGs to NBFCs.'This company's ability to service the DLGs was contingent on capital infusion that was eventually done by a Singapore financial services company in the beginning of this calendar year,' said the person cited. 'Measures taken by RBI is to avoid any contingent risk in the financial system.'IMPACT IN NUMBERSUntil recently, on a loan pool of Rs 100 crore, if the expected loss was 8%, the finance company had to set aside Rs 3 crore as provision, since the fintech partner had deposited Rs 5 crore upfront (DLG of 5%).However, RBI has now mandated that the NBFC must provide for the entire Rs 8 crore upfront, even if it's got the DLG. In the above example, the NBFC will be allowed a writeback of the Rs 5 crore that's received as DLG when the loan matures.Earnings of at least three NBFCs were partly hit because of the central bank's direction.Japanese bank Sumitomo Mitsui Financial Group-backed SMFG India Credit's net profit fell to Rs 344 crore in FY25, down 78% from FY24, as it had to provide Rs 115 crore additionally toward DLGs, its audited results showed.