‘Default loss guarantee a boost for lenders’

MUMBAI:  The guidelines released by the Reserve Bank of India (RBI) on the Default Loss Guarantee will protect the banks from defaults and increase responsible lending in the fintech sector. Industry stakeholders believe the guidelines will enhance accountability, encourage responsible innovation and ensure fair practices and customer protection.

“RBI’s decision to permit First Loss Default Guarantee arrangements in digital lending is a big positive for the fintech industry. This would foster a secure and sustainable lending ecosystem. The guarantee assures borrowers of support in case of defaults, expanding credit access for MSMEs, stimulating economic growth,” said Shachindra Nath, vice Chairman and MD of U GRO Capital.

“For lenders, it provides a risk management framework and promotes responsible lending practices.” As per the guidelines, the default cover could be provided for up to 5% of the loan portfolio by fintech and the banks shall invoke this DLG within a maximum overdue period of 120 days. Earlier, entities were offering nearly 100% LDG to banking partners.

“The RBI has wisely set a cap of five percent of the loan portfolio, ensuring that lenders exercise prudence while mitigating risk. The RBI’s directive to invoke DLG within a maximum overdue period of 120 days, unless resolved by the borrower, demonstrates a commitment to timely resolution of defaults,” said Joginder Rana, Vice-Chairman & Managing Director, CASHe. “This will not only protect lenders from prolonged defaults but also encourage borrowers to take prompt corrective actions, ultimately fostering a healthier lending environment,” he added.

As per the guidelines, the lender must ensure that lending service providers publish the total number of portfolios and the respective amount of each portfolio on which the guarantee arrangement has been offered on their website.

“The guidelines on DLG cover will help improve overall due diligence mechanism in India’s flourishing fintech ecosystem. With a 5 percent DLG cap on any outstanding portfolio, lenders will be censured to exploit the borrowers through unscrupulous activities and thrust them into the debt trap,” Mahesh Shukla, CEO & Founder, PayMe told this newspaper.

Lenders have to publish portfolio details
As per the guidelines, the lender must ensure that lending service providers publish the total number of portfolios and the respective amount of each portfolio on which the guarantee arrangement has been offered on their website