The significant expansion of digital lending in India, drove RBI to issue the Digital Lending guidelines (DL guidelines) in September 2022. The DL guidelines struck a balance between the need for an innovative and inclusive system of lending and protecting the customer’s interest.

The DL guidelines focused on three main areas:

  • Customer protection and conduct requirements
  • Technology and data requirement
  • Regulatory framework

However, no specific guidelines were provided for contracts involving Default Loss Guarantee (DLG). RBI in its press release issued in August’22 clarified that recommendations around this area were under examination. Until then, Regulated Entities (REs)2 entering into financial contracts that included a clause on First Loss Default Guarantee (FLDG) or DLG were required to comply with the Securitisation Guidelines, especially the provision relating to synthetic securitisation3.

New development

The RBI, vide a statement dated 8 June 2023 has now permitted REs to enter into agreements with LSPs or other REs involving DLGs, subject to compliance with the Guidelines on Default Loss Guarantee (DLG) in digital lending (the Guidelines). The Guidelines are applicable from 8 June 2023.

The Guidelines have provided clarification on the pre-requisites to a DLG arrangement and points to consider while entering into or after entering into a DLG arrangement.