Latest news with #DLGs
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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's new directive to NBFCs; Oyo's third IPO attempt
The RBI has tightened rules on default loss guarantees (DLGs), a move that is likely to hit digital lenders hard. This and more in today's ETtech Top 5. Also in the letter: ■ Info Edge Q4 results ■ Sarvam's LLM gets muted response■ Bengaluru tech workforce crosses 1 million RBI tightens default loss guarantee rule; NBFCs to exclude cover on fintech-sourced loans The Reserve Bank of India (RBI) has directed non-banking finance companies (NBFCs) to exclude default loss guarantees (DLGs) provided by fintech partners when provisioning for bad loans. What's changing? NBFCs will no longer factor in the typical 5% guarantee from digital lending partners to reduce provisioning on stressed loans. This marks a significant shift that could dent both origination volumes and fee income for fintechs. The RBI wants NBFCs to: Strengthen underwriting practices. Curb systemic risks. Avoid over-reliance on fintechs. The move follows cases where fintechs failed to honour DLGs, leaving NBFCs exposed to losses. Who's affected? Digital lending partners such as:These firms act as lending service providers and typically offer DLGs of up to 5%, often backed by fixed deposits lien-marked in favour of NBFCs. These guarantees act as credit cushions and are usually factored into expected credit losses (ECL) calculations. When's the deadline? NBFCs must comply by September 30, treating fintech-originated loans as if there is no credit enhancement. Some NBFCs have already begun adjusting provisions from Q4 FY25. Also Read: Listed fintechs feel the pinch of lenders going slow on unsecured lending The impact: NBFCs: Higher provisions, leading to reduced appetite for fintech-originated credit. Higher provisions, leading to reduced appetite for fintech-originated credit. Fintechs: Likely decline in originations and income. Likely decline in originations and income. Borrowers: Stricter access to unsecured credit. This directive is part of the RBI's broader crackdown on hidden risks in India's rapidly growing digital lending ecosystem. It also serves as a nudge for NBFCs to shoulder the risk they underwrite, instead of outsourcing it. Also Read: Stuck digital lenders look to RBI to ease unsecured loan rules Oyo to meet bankers next week for third IPO attempt; eyes $5-7 billion valuation Ritesh Agarwal, CEO, Oyo Oravel Stays Ltd, the parent company of hospitality startup Oyo, is set to formally review proposals from merchant bankers next week as it prepares for a fresh attempt at an initial public offering (IPO), according to multiple people familiar with the development. Verbatim: 'During the preliminary discussions, some bankers proposed that the company could get valued as high as $10 billion for its public issue, but the company's realistic expectation is around $6-7 billion,' a source said. More details: The company is in talks with Indian and global banks. It aims to file its draft red herring prospectus (DRHP) between August and September, with a public listing targeted for March or April 2026, according to sources. This will be Oyo's third attempt at going public. It first filed with the Securities and Exchange Board of India in 2021, aiming for an Rs 8,430 crore IPO, but withdrew in 2022. A second filing, made confidentially in 2023, was also withdrawn in 2024. Recent fundraise: In August, Oyo raised Rs 1,457 crore from a group of investors at a significantly reduced valuation. In December, it secured $825 million in debt from Deutsche Bank to fund its $525 million acquisition of US motel chain Motel 6. Sponsor ETtech Top 5 & Morning Dispatch! Why it matters: ETtech Top 5 and Morning Dispatch are must-reads for India's tech and business leaders, including startup founders, investors, policy makers, industry insiders and employees. The opportunity: Reach a highly engaged audience of decision-makers. Boost your brand's visibility among the tech-savvy community. Custom sponsorship options to align with your brand's goals. What's next: Interested? Reach out to us at spotlightpartner@ to explore sponsorship opportunities. Info Edge Q4 revenue rises 14% to Rs 750 crore; net profit surges 8x to Rs 678 crore Sanjeev Bikhchandani, cofounder, Info Edge parent Info Edge posted a 14% year-on-year (YoY) increase in operating revenue for the March quarter, driven by robust growth across both recruitment and non-recruitment businesses. Financials: Operating revenue (Q4): Rs 750 crore. Rs 750 crore. Net profit (Q4): Rs 678 crore, up from Rs 88 crore a year ago. Rs 678 crore, up from Rs 88 crore a year ago. Revenue (FY25): Rs 2,849 crore, up 12% YoY. Rs 2,849 crore, up 12% YoY. Net profit (FY25): Rs 1,310 crore, more than double the Rs 594 crore reported in FY24. Rs 1,310 crore, more than double the Rs 594 crore reported in FY24. Total expenses (FY25): Rs 539 crore, compared to Rs 469 crore in FY24. Employee benefits: Rs 331 crore. Advertising and promotion costs: Rs 100 crore. Rs 539 crore, compared to Rs 469 crore in FY24. Revenue breakdown: Recruitment solutions (including : Rs 542 crore, up 13% YoY. : Rs 542 crore, up 13% YoY. 99Acres (real estate portal): Rs 106 crore, up 14%. Rs 106 crore, up 14%. Other businesses (including and : Rs 101 crore, up nearly 20%. Also Read: Info Edge shareholders approve Rs 1,000 crore investment in its VC fund Sarvam AI unveils multilingual LLM; low traction poses questions on India's AI scene Indian AI startup Sarvam AI, the first company chosen by the government to build a homegrown foundational model, has launched its open-source large language model (LLM). However, the early reception has been muted, with only a few hundred downloads in the initial days. About the model: Sarvam claims its LLM, Sarvam M, performs well on benchmarks in mathematics, programming, and 11 Indian languages, including Hindi, Gujarati, Kannada, and Malayalam. The model supports a hybrid reasoning mode for tackling complex logical reasoning problems, as well as mathematical and coding tasks. Additionally, it features a non-think mode for general-purpose conversation. According to the company, Sarvam M outperforms similarly sized models on coding and math benchmarks. No traction: The model, released on Hugging Face, recorded just over 300 downloads at launch. As of May 27, the number had increased to 1,200. The lukewarm response has reignited debate over India's place in the global AI race, particularly with rivals such as DeepSeek and OpenAI. Frinks AI raises $5.4 million: Frinks AI has raised $5.4 million in a new funding round led by Prime Venture Partners. Founded by IIT Hyderabad alumni Aditya Agrawal, Dharmgya Sharma, and Subhra S Bhattacherjee, Frinks AI is a deep-tech startup developing next-generation vision AI systems for industrial automation and quality control. Contineu raises $1.2 million: Deeptech startup Contineu has raised $1.2 million in a seed funding round led by SenseAI Ventures, with Piper Serica Angel Fund participating. Founded in 2023, the startup automates data entry on construction sites through its platform, utilising helmet-mounted cameras and 3D computer vision models. Technology workforce in Bengaluru crosses one-million mark; IT city among 12 global tech hubs: CBRE Bengaluru is now among the top 12 global technology hubs, joining the ranks of Beijing, Boston, London, New York, and Toronto, as its technology workforce has crossed the one million mark. Details: According to a report by real estate consultant CBRE, Bengaluru's tech talent scale rivals that of the US hubs of San Francisco and New York. The city ranks fourth among the 12 tech markets in terms of the share of its working-age population. 75% of Bengaluru's falls in this productive age group. Between 2019 and 2024, Bengaluru saw a 2.4% increase in its working population. The city also leads in terms of AI development talent. In 2024, Bengaluru attracted 140 venture capital (VC) deals worth $3.3 billion. Updated On May 27, 2025, 07:30 PM IST
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.
