RBI DLG Rules Explained: Common Confusions Cleared for Fintechs and NBFCs

What Is DLG? A Quick Definition

Default Loss Guarantee (DLG) is an arrangement in digital lending where a Lending Service Provider (LSP) or a third party provides a credit guarantee to the Regulated Entity (RE — typically an NBFC or bank) against default on a loan portfolio. Essentially, the LSP promises to compensate the RE up to a defined percentage of losses on a specified loan book. RBI formalised the DLG framework through its circular issued in June 2023, which set out the conditions under which such arrangements are permissible and the caps that apply.

Confusion 1: Is DLG the Same as FLDG?

This is the most common source of confusion. FLDG — First Loss Default Guarantee — is the older, informal term that the industry used for similar arrangements before RBI formalisation. The RBI circular uses the term "Default Loss Guarantee" (DLG) as the regulated term. FLDG arrangements that existed before the circular were required to be reviewed for compliance with the new DLG framework. In regulatory conversations, FLDG and DLG refer to essentially the same commercial arrangement — but only DLG is the recognised regulatory term.

Confusion 2: Does DLG Apply to All Lending Partnerships?

No. DLG is a specific type of credit enhancement arrangement. Not all NBFC-fintech co-lending or sourcing partnerships involve DLG. A standard LSP arrangement where the fintech sources customers but bears no credit risk does not constitute a DLG. DLG applies specifically when the LSP (or an associate entity) takes on a contingent credit risk obligation to the RE. If your fintech-NBFC partnership does not involve the fintech guaranteeing any portion of credit losses, DLG rules may not apply.

Confusion 3: What Is the DLG Cap?

RBI's DLG circular specifies that the DLG amount must not exceed 5% of the loan portfolio designated under the DLG arrangement. This cap is on the outstanding portfolio, not the total disbursements. Exceeding this cap — or structuring arrangements in ways that effectively create higher implicit guarantees — is non-compliant. Both the NBFC and the fintech LSP are responsible for ensuring the arrangement stays within regulatory limits.

Confusion 4: Does the LSP or the NBFC Hold the DLG?

The DLG is provided by the LSP (or an associate) to the RE (NBFC or bank). The RE holds the benefit of the guarantee. RBI's circular specifies the form in which the DLG must be maintained: cash deposits, fixed deposits, or bank guarantees. The DLG amount must be accessible to the RE in the event of default without requiring the LSP's co-operation. This has operational implications for how the guarantee amount is structured and where it sits.

Confusion 5: Does IT/Cybersecurity Compliance Change Under DLG Arrangements?

Yes — but not in the way most firms assume. The DLG circular does not directly impose new IT requirements. However, DLG arrangements are part of the broader digital lending framework, and RBI's digital lending guidelines apply to all digital lending activity — including the IT systems, data flows, and security controls of both the RE and the LSP. Specifically:

• The NBFC must ensure its IT framework (per the RBI IT Framework for NBFCs) covers the digital lending infrastructure, including LSP systems that process borrower data
• Data shared between the NBFC and LSP must comply with RBI's data localisation requirements
• The LSP's cybersecurity posture is part of the NBFC's third-party risk management obligations
• Any breach or incident affecting the DLG portfolio must be reported per CERT-In and RBI incident reporting requirements

What Fintechs Acting as LSPs Must Do

• Ensure the DLG arrangement is documented in a formal written agreement with the RE
• Maintain the DLG amount in the specified form (cash, FD, or bank guarantee) and ensure the RE has unilateral access to it
• Ensure the DLG does not exceed 5% of the outstanding portfolio
• Comply with all digital lending guidelines as they apply to LSPs: KFS, direct disbursement, grievance redressal
• Maintain data processing within the scope permitted by the RE and RBI data rules
• Have adequate cybersecurity controls — the RE will include you in their third-party risk assessment

What NBFCs Partnering with Fintechs Must Do

• Due diligence the LSP's cybersecurity and compliance posture before entering the DLG arrangement
• Ensure the DLG agreement is board-approved and disclosed appropriately
• Monitor DLG portfolio size and ensure the 5% cap is not breached
• Include DLG-related loans in the annual IS audit scope
• Ensure the LSP's data handling is covered in the vendor management framework
• Review digital lending compliance regularly for the DLG portfolio — see our guide on RBI Digital Lending Guidelines: 10 Mistakes Lenders Are Still Making in 2025

DLG structures that were built informally before RBI's June 2023 circular still exist in many partnerships. If your arrangement has not been formally reviewed against the DLG circular, it is worth doing that review before your next RBI inspection.

Infosek Team

Common questions

What is the DLG cap under the RBI circular?

The RBI circular specifies that the Default Loss Guarantee amount must not exceed 5 percent of the loan portfolio designated under the DLG arrangement. The cap applies to the outstanding portfolio, not to total disbursements, and both the NBFC and the fintech acting as Lending Service Provider are responsible for staying within it.

Is DLG the same as FLDG?

They are related but not identical. DLG is the arrangement RBI has formally recognised and capped, whereas FLDG describes the broader first-loss guarantee structures that existed before. Structuring an arrangement to create a higher implicit guarantee than the DLG cap permits is non-compliant.