RBI's framework for Default Loss Guarantee (DLG) arrangements in digital lending has generated significant confusion. Many fintechs and NBFCs are unsure whether DLG applies to their partnership structure, what the cap means, and what compliance obligations change. This guide clears up the most common misconceptions.
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.
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.
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.
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.
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.
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:
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
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