The Reserve Bank of India (RBI) on Thursday allowed banks and non-bank financiers to enter into loss default guarantee arrangements in digital lending if certain conditions are satisfied.
Under the first loss default guarantee (FLDG), a third party guarantees to compensate up to a certain percentage of default in a loan portfolio.
Lenders, RBI said, can enter into these agreements only with a lending service provider (LSP) or other lenders with which it has entered into an outsourcing arrangement. Moreover, LSP providing these guarantees must be incorporated as a company under the Companies Act, 2013.
RBI also specified that lenders could accept default loss guarantees in the form of cash deposited with the lenders, fixed deposits with a scheduled commercial bank with a lien marked in favour of the lender, and bank guarantees in favour of the lender.
“Regulated entity (RE) shall ensure that total amount of default loss guarantee (DLG) cover on any outstanding portfolio which is specified upfront shall not exceed 5% of the amount of that loan portfolio," it said.
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