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Business Standard
2 days ago
- Business
- Business Standard
New DLG provisioning norms: Fintech bodies hope for relief from RBI
Fintech bodies have raised concerns about potential double-provisioning resulting from the Reserve Bank of India's (RBI 's) new mandate, which disallows lenders from offsetting default loss guarantees (DLGs) provided by loan service providers (LSPs) against provisions for stressed loans. These bodies are now collecting data from their members to present the likely impact of the mandate to the RBI. Lenders have been directed to make the necessary provisions by September 30. Fintech bodies are hopeful of gathering sufficient data on this segment by then, which could potentially influence the regulator's decision. The RBI has mandated finance companies to make full provisions on loans sourced through LSPs, regardless of the DLGs provided by these entities to the lenders. This is likely to have an impact on origination of such loans as it reduces the attractiveness of the portfolio for the finance companies. 'The RBI has communicated to some lenders that regulated entities should not offset DLG when it comes to provisioning. We have, in turn, suggested that the (DLG) model has been working now and there will be double-provisioning if it (DLG) is not considered. This means that an LSP provisions a separate 5 per cent and if the RE (regulated entity) also separately provisions (for expected credit loss), then efficient utilisation of capital would not take place,' said Jatinder Handoo, chief executive officer (CEO), Unified Fintech Forum. 'We will go back to the regulator with some data and information since this is a consultative process. Although it's a little difficult since this is a DLG portfolio, which I am not very sure is even marked in the credit bureau separately. We will request our members to give us data in terms of portfolio, customers, geographies, ticket size, and gender segregation,' he said. DLG is a contractual arrangement between the lender and an LSP, under which the latter guarantees to compensate the bank for losses due to default up to a certain percentage of the loan portfolio of the bank. As per RBI guidelines, lenders have to ensure that the total amount of DLG cover on any outstanding portfolio shall not exceed 5 per cent of the total amount disbursed out of that loan portfolio at any given time. In case of implicit guarantee arrangements, the DLG provider shall not bear performance risk of more than the equivalent amount of 5 per cent of the underlying loan portfolio. As a result, RBI guidelines say, provisioning shall be the responsibility of the RE as per the extant asset classification and provisioning norms, irrespective of any DLG cover available at the portfolio level. Additionally, the fintech bodies, in their meeting with RBI last month, have also apprised the regulator of the practical difficulties the industry is facing after the new digital lending guidelines came in. As per new norms, digital lenders, especially LSPs, have to show different options to a borrower and allow them to make an informed choice when they visit a marketplace or LSP's website. This, the industry said, will impact the customer experience. 'We are for transparency and openness of the system; this may be necessary. However, LSPs partner with multiple REs, with each having a different credit policy, such as restrictive or flexible. REs will have to complete soft underwriting of the customers and only then extend an offer,' Handoo said, adding that if a customer says they want a loan from lender A, and the person has five lenders as options, they expect surety and timely disbursement of the loan. However, they may not know whether their credit profile is appealing to a particular RE, in that case timeliness and customer user experience get impacted. In the meeting, the fintech industry bodies urged the RBI to allow non-banking financial companies (NBFCs) to offer credit lines through the Unified Payments Interface (UPI) after the facility was extended to small finance banks (SFBs) earlier this year. Industry sources said the regulator may not yet be open to including NBFCs, given that SFBs only recently got access to the feature. The RBI was also briefed on how the fintech sector has improved compliance practices over the past few quarters, following earlier scrutiny by the regulator.
Mint
3 days ago
- Business
- Mint
Fintechs in talks with RBI for easier provisioning for default loss guarantee-backed loans
Mumbai: Fintech companies and digital lenders are seeking easier provisioning norms for loan pools backed by their guarantees, even as the central bank has flagged inadequate provisioning for these loans, according to five industry experts. Fintechs believe the provisioning variance is due to the differentiated interpretation of Ind-AS accounting standards, which allow for a 'risk mitigant' like Default Loss Guarantee to be considered while calculating the expected credit loss (ECL) provisions. Unified Fintech Forum and self-regulatory organisation Fintech Association for Consumer Empowerment (FACE), in their representiations to the Reserve Bank of India (RBI), have said that making full provisions against such loans will lead to 'double provisioning', with both the lending service providers (LSPs) like fintechs and regulated entities such as banks and non-bank lenders setting aside buffers for the same loan pool. Read more: RBI poised to cut rates as India eyes a steady takeoff Both the LSP and the regulated entities are provisioning for the same loan pool, thus impacting capital deployment efficiency, said Jatin Handoo, chief executive officer of UFF, formerly Digital Lenders' Association of India. It might also lead to a 'crowding out' effect where lenders will have less amount of money for lending because they have to take out the extra amount and provide for it separately, he said. 'RBI is open to listening to us and has asked us to come up with data-based use cases, and customer-level and market insights." Full provisioning by NBFCs Fintechs offer borrowers loans from multiple banks. These intermediaries usually provide a 'default loss guarantee' (DLG) to cover these loans for encouraging lenders to partner with them. However, in April, the central bank wrote to at least four non-bank lenders with high delinquencies in their DLG-backed loans. The regulator asked them to provide for all loan pools sourced through third-party digital platforms under the expected credit loss (ECL) accounting norms, regardless of whether these are backed by DLG arrangements. A senior industry official explained that if the loss on the loan pool was 7% and 5% was covered under a DLG arrangement, some NBFCs usually had a provision cover of 2-4%, depending on their internal modelling and calculations. Audits by RBI in January-February revealed this provision accounting, following which RBI reinforced that the entire provisioning has to be taken by the NBFC and any recoveries under DLG at the end of the loan tenure may be used to write-back the provisions. 'This is not a policy change, but a call-out for those NBFCs that were not doing enough provisioning. It's a prompt for NBFCs to appropriately provision against credit losses, and treat DLGs and recoveries separately," said Kunal Varma, chief executive officer and founder of digital non-banking finance company Freo. However, he said, this may lead to some NBFCs re-evaluating their First Loss Default Guarantee or FLDG-linked relationships in the short term. RBI's concerns stem from elevated delinquencies in some loan pools sourced by fintechs, leading to higher DLG payouts by them and a hit on the asset quality of a few partner NBFCs. Moreover, there have also been concerns around NBFCs using FLDG arrangements as an alternative to securitisation transactions, bypassing the guidelines of securitisation of loan pools. RBI's perspective seems to be that DLG arrangements were allowed to give capital comfort from a regulatory perspective and encourage 'skin in the game' for fintechs, but not dilute the accountability of underwriting by regulated entities. Point of contention Typically, each fintech—such as Paytm, PhonePe, MobiKwik—ties up with multiple regulated banks or NBFCs to offer multiple loan options to their customers. In turn, lenders can accept DLG arrangements in the form of cash deposits, fixed deposits with a lien marked in their favour, and bank guarantees. DLG arrangements for pools of small-ticket unsecured loans are generally used for consumption and lifestyle lending, emergency healthcare expenses, education finance for skill development or vocational degrees and diplomas, sustainable energy such as installing a solar roof and lending to small businesses and new-to-credit borrowers. Read more: How RBI is shaping the future of lending from Bengaluru's HSR Layout FLDG has been a point of contention since the first digital lending guidelines were issued in August 2022. Worried that these DLG loss absorptions were leading to inaccurate reflection of the credit quality of these borrowers, RBI in June 2023 issued the default loss guarantee framework, capping the value of such arrangements at 5% of the loan pool. It had then specified that regulated entities will be responsible for recognising non-performing assets of individual loans in the portfolio and the consequent provisioning as per current norms, regardless of any DLG cover at the portfolio level. Even then industry representatives had approached RBI seeking clarity on certain aspects of the guidelines such as treatment of NPAs given the differences with the ECL framework, and on the kind of different cohorts and structures that can be explored under the DLG framework. This had prompted RBI to issue an FAQ in November 2023 clarifying some of these aspects. However, these circulars were repealed when the consolidated Digital Lending Guidelines were issued on 8 May 2025, leading to some confusion on how provisioning for these loans may be interpreted. Fintech lenders believe that DLG is a form of credit guarantee or enhancement—the entire purpose of which is to provide capital comfort to the lender and help free up the lender's capital for additional on-lending. 'As per Ind-AS, NBFCs were considering the credit enhancement provided by an FLDG for purposes of computing the ECL on a loan portfolio (given that an FLDG qualifies as a credit enhancement intrinsic to the contractual terms of the arrangement, which is the requirement under Ind-AS 109)," said Shilpa Mankar Ahluwalia, partner, head-fintech, Shardul Amarchand Mangaldas & Co. RBI's 8 May directions, however, suggest that the amount of the DLG cover cannot be adjusted to reduce ECL computation, which could alter the cost-benefit to NBFCs given the zero-provisioning benefit of DLGs, according to experts who believe it could also send 'mixed signals" to market participants, investors and new entrants in the LSP space and may lead to the opinion that fintechs are not to be trusted. Read more: Lenders concerned about education loans as US tightens curbs on student visas Already, DLG rules only allow lien-marked deposits or bank guarantees, which practically removes any performance risk on such guarantees, said Ahluwalia. 'The industry also claims that capping the DLG at 5% had already prompted NBFCs to implement strong credit underwriting and risk tools, and removing the provisioning benefit of DLG cover may increase costs of digital loans and reduce credit access."
Economic Times
27-05-2025
- Business
- Economic Times
RBI tightens default loss guarantee rule; NBFCs to exclude cover on fintech-sourced loans
Live Events (You can now subscribe to our (You can now subscribe to our Economic Times WhatsApp channel 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 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 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 NBFCs started making extra provisions from the fourth quarter of FY25 partners operate as lending service providers (LSPs), originating and servicing loans for NBFCs. MobiKwik, Paytm and Moneyview are among prominent digital lending 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 RBI directive will push NBFCs to strengthen their underwriting skills and rely less on fintech partners, said a senior executive at a large finance central bank didn't respond to ET's queries. For fintech, going forward, this will impact origination volumes and fee income and, therefore, 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 of at least three NBFCs were partly hit because of the central bank's 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.
Time of India
27-05-2025
- Business
- Time of India
NBFCs to Exclude Cover on Fintech-sourced Loans
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, lien-marked 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%. A senior 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.' Until 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.
India Today
09-05-2025
- Business
- India Today
YES Securities raises Paytm target to Rs 975 on profitability turnaround and surge in merchant lending
In its Q4FY25 result note on Paytm (One97 Communications Ltd.), YES Securities has maintained an ADD rating and raised the stock's target price to Rs 975 from Rs 915, citing improvements in contribution margin, operating efficiency, and lending momentum. The brokerage noted meaningful sequential gains across key financial and operating metrics, even as regulatory incentives like UPI subsidies moderated grew 4.6% quarter-on-quarter to Rs 1,911 crore, with payment services revenue up 4.3% QoQ and financial services revenue up 8.6% QoQ, according to the report. Despite a sharp drop in UPI incentives (from Rs 288 crore in Q4FY24 to Rs 70 crore in Q4FY25), contribution profit rose 11.8% QoQ to Rs 1,072 crore, resulting in a contribution margin of 56.1%, up by 363 basis rise in contribution margin was driven by improvement in net payment margin and cost optimisation, especially in processing charges,' the analysts stated. The report highlighted that payment processing charges declined 8.8% QoQ, benefiting from favourable mix, seasonality, and partner rate adjustments. These efficiencies, combined with stable employee and platform costs, led to EBITDA before ESOP turning positive at 81 crore, compared to a loss of Rs 40 crore in the previous quarter. EBITDA margin improved by 642 bps sequentially, reaching 4.2%.YES Securities also noted that marketing, employee benefits, and software costs were largely flat or lower, indicating tight cost lending, merchant loan disbursals grew 12.6% QoQ to Rs 4,320 crore, with 50–60% of disbursements now under the Default Loss Guarantee (DLG) model. The report observed that nearly half of the merchant loans were repeat transactions, suggesting strengthening borrower behaviour and product DLG model is gaining momentum with lenders, and the higher-margin lending mix is helping revenue stability,' the report merchant subscription base rose 6% QoQ to 12.4 million, while the company continued to expand its device-led monetisation footprint across offline Securities reaffirmed Paytm's medium-term guidance of 30–35% revenue growth and 15–20% EBITDA margin, stating that future margin expansion is likely as ESOP-related expenses taper and monetisation brokerage further noted that ongoing discussions around MDR on UPI for large merchants could result in 5–8 basis points upside in net margin if implemented.'We maintain ADD rating on Paytm with a revised target price of Rs 975, valuing it at 5.4x FY27 Price-to-Sales,' the report concluded.
