The Reserve Bank of India (RBI) has recently issued FAQ on comprehensive guidelines on Default Loss Guarantee (DLG) in Digital Lending, aiming to regulate and enhance transparency in the digital lending ecosystem. These guidelines provide a structured framework for managing DLG arrangements, ensuring prudent risk management practices while fostering innovation in the digital lending landscape.
Key highlights of these guidelines shed light on various aspects concerning DLG, answering pertinent questions that stakeholders might have:
- Specification of DLG Portfolio: The guidelines emphasize that the portfolio over which DLG is offered must be clearly defined upfront, comprising identifiable and measurable loan assets. This ensures transparency and stability in DLG arrangements, preventing ambiguity regarding the coverage and scope of the guarantee.
- Calculation of DLG Cap: The cap of five per cent on DLG cover is calculated based on the total amount disbursed from the specified DLG portfolio at any given time. This calculation method provides clarity on the maximum exposure allowed under DLG arrangements, minimizing undue risk exposure for all parties involved.
- Non-Reinstatement of DLG: Once DLG is invoked due to a default, subsequent recoveries made from the defaulted amount cannot be added back to reinstate the DLG cover. This policy discourages moral hazard and encourages responsible lending and borrowing practices.
- Disclosure Requirements: The guidelines do not mandate the publication of the name of the RE (Retail Entity) along with the disclosure, simplifying compliance procedures for stakeholders. Board-Approved Policies: Both REs accepting DLG cover and REs acting as DLG providers are required to have Board-approved policies in place, ensuring alignment with regulatory standards and promoting robust risk management frameworks.
- Scope of Application: DLG arrangements are applicable only to loans sourced under the purview of the Digital Lending Guidelines, delineating the boundaries within which DLG can be availed.
- Exclusions: DLG arrangements are not permitted for loans arranged on NBFC-P2P platforms, credit cards, or revolving credit facilities offered through digital lending channels, ensuring clarity on the types of credit covered under DLG.
- Certification Requirement: Declarations from DLG providers, as mandated by Para 12.3 of the guidelines, must be certified by the statutory auditor of the DLG provider, ensuring credibility and accountability in the certification process.
These guidelines provide a structured framework for managing DLG arrangements in digital lending, balancing the need for innovation with prudent risk management practices. By addressing key questions and concerns, the RBI aims to foster a transparent, resilient, and inclusive digital lending ecosystem, conducive to sustainable economic growth.
