Inside This Article
On May 27, 2025, the Reserve Bank of India (RBI) introduced a significant clarification that will reshape how Non-Banking Financial Companies (NBFCs) and FinTech companies collaborate in digital lending.
In simple terms, the RBI has stated that NBFCs can no longer consider Default Loss Guarantees (DLGs) offered by FinTechs when calculating loan loss provisions. This may seem like a technical accounting update, but it has significant operational and strategic implications for the entire digital lending ecosystem.
In this blog, we’ll explain:
- What are Default Loss Guarantees (DLGs)?
- Why did the RBI introduce this change
- Key implications for NBFCs and FinTechs
- What both parties should do next
What Is a Default Loss Guarantee (DLG)?
A Default Loss Guarantee (DLG) is a financial backstop provided—often by a FinTech partner—to an NBFC, promising to cover a portion of the losses if borrowers default.
Example: Imagine a FinTech platform helps an NBFC disburse small-ticket loans online. To ease the NBFC’s risk, the FinTech assures, “If a borrower defaults, we’ll cover up to 5% of the loss.” This kind of guarantee gives the NBFC more confidence in extending loans, even to those with limited or no credit history.
DLGs have become widespread in digital lending partnerships, especially for reaching new-to-credit customers.
Read Our Blog: How to Set Up Digital Lending in India
What Has Changed?
As per the RBI’s May 2025 notification, NBFCs must ignore DLGs when calculating provisions for bad loans.
Earlier, the RBI had allowed NBFCs to consider DLGs up to 5% of the loan portfolio. Now, the regulator is sending a clear message:
“Regardless of third-party guarantees, NBFCs must assume full responsibility for credit risk.”
In essence, even if a FinTech partner promises to absorb a portion of the loss, it cannot reduce the NBFC’s provisioning requirement.
Why Did the RBI Introduce This Change?
The RBI’s decision stems from three key regulatory objectives:
1. Accountability in Lending
DLGs were often used by NBFCs to offload credit risk onto FinTech partners. This diluted the NBFC’s accountability in evaluating borrower creditworthiness. The RBI now expects NBFCs to take complete ownership of their loan books.
2. Transparency in Financial Reporting
DLG agreements were frequently undocumented or not disclosed clearly in NBFC financial statements. By disallowing DLGs in provisioning, the RBI is ensuring that the true quality of the loan book is reflected.
3. Prevention of Regulatory Arbitrage
Some FinTechs structured lending models where they bore minimal risk but directed significant volumes of credit. This allowed aggressive lending through NBFCs, bypassing regulatory norms. The RBI’s move aims to close this loophole.
Implications for NBFCs
NBFCs now need to re-evaluate key areas of their operations:
1. Higher Provisioning Requirements
Without DLGs, NBFCs will need to set aside more capital to cover potential defaults, impacting profitability, particularly for those with a high exposure to FinTech-originated loans.
2. Stronger Underwriting Standards
Risk evaluation will become more crucial than ever. NBFCs must invest in robust credit assessment frameworks, data-driven decision-making, and alternative credit scoring models.
3. Revised Partnership Models
NBFCs that relied on DLG-backed structures must renegotiate contracts with FinTech partners. They may explore co-lending, first-loss-default structures under regulatory norms, or purely technology-driven collaborations.
Implications for FinTechs
This regulatory shift challenges FinTechs to adapt and evolve:
1. DLG-Based Models Are No Longer Viable
FinTechs can no longer rely on offering DLGs to make their lending models attractive to NBFCs. Such promises now hold no weight in NBFC accounting or risk calculations.
2. Technology Must Become the Core Offering
FinTechs must focus on delivering value through:
- Advanced borrower screening
- Fraud detection algorithms
- Loan monitoring tools
- Digital onboarding and e-KYC
Your tech stack, not risk coverage, is now your competitive edge.
3. Evolve Into Strategic Enablers
There is an opportunity to reposition from being risk mitigators to technology enablers, co-lenders, or regulatory compliance partners. FinTechs that build resilient, regulatory-aligned platforms will lead in this new era.
Deadline for Compliance: September 30, 2025
NBFCs and their FinTech partners have until September 30, 2025, to align their practices with the new RBI directive.
This transition period must be used proactively to audit current agreements, adjust financial planning, and realign operating models.
Action Plan for Stakeholders
For NBFCs:
- Audit your loan book: Identify loans backed by DLGs
- Recalculate provisioning: Exclude DLGs from credit risk buffers
- Strengthen credit assessment: Invest in analytics and scoring systems
- Educate teams: Ensure internal teams understand the policy shift
- Review FinTech contracts: Shift from DLG reliance to long-term collaboration
For FinTechs:
- Assess your business model: If it relies on DLGs, pivot now
- Invest in core tech: Make your platform indispensable through automation, compliance, and insights
- Provide compliance support: Help NBFCs with onboarding, credit scoring, and monitoring
- Build trust: Prove your value without guarantees—through innovation and transparency
The Bigger Picture: What RBI Is Building
This clarification is part of a larger transformation of India’s digital lending landscape. The RBI envisions an ecosystem that prioritizes:
- Transparency in partnerships
- Accountability in risk-taking
- Robust credit governance
- Sustainable innovation in FinTech
The goal is a cleaner, more resilient, and trustworthy credit environment.
Final Thoughts
The RBI’s move is a wake-up call for digital lenders.
NBFCs can no longer outsource risk. FinTechs can no longer rely on guarantees. Borrowers will experience more responsible lending.
This is an opportunity for the ecosystem to mature. The companies that focus on compliance, build strong technology systems, and stay transparent won’t just keep up—they’ll stay ahead.
If you’re a compliance officer, FinTech founder, or involved in lending strategy, this is the moment to:
- Review your agreements
- Adjust your business model
- Rebuild your approach based on trust and long-term value
Let’s shape a digital credit ecosystem where innovation, risk management, and regulatory alignment go hand in hand.
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