Fintechs search simpler provisioning for default loss guarantee-backed loans

Fintechs consider the provisioning variance is because of the differentiated interpretation of Ind-AS accounting requirements, which permit for a ‘threat mitigant’ like Default Loss Guarantee to be thought-about whereas calculating the anticipated credit score loss (ECL) provisions.

Unified Fintech Forum and self-regulatory organisation Fintech Association for Consumer Empowerment (FACE), of their representiations to the Reserve Bank of India (RBI), have stated that making full provisions towards such loans will result in ‘double provisioning’, with each the lending service suppliers (LSPs) like fintechs and controlled entities resembling banks and non-bank lenders setting apart buffers for a similar mortgage pool.

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Both the LSP and the regulated entities are provisioning for a similar mortgage pool, thus impacting capital deployment effectivity, stated Jatin Handoo, chief government officer of UFF, previously Digital Lenders’ Association of India. 

It may also result in a ‘crowding out’ impact the place lenders can have much less sum of money for lending as a result of they must take out the additional quantity and supply for it individually, he stated. “RBI is open to listening to us and has requested us to give you data-based use instances, and customer-level and market insights.”

Full provisioning by NBFCs

Fintechs supply debtors loans from a number of banks. These intermediaries normally present a ‘default loss guarantee’ (DLG) to cowl these loans for encouraging lenders to companion with them. 

However, in April, the central financial institution wrote to not less than 4 non-bank lenders with excessive delinquencies of their DLG-backed loans. The regulator requested them to offer for all mortgage swimming pools sourced by third-party digital platforms beneath the anticipated credit score loss (ECL) accounting norms, no matter whether or not these are backed by DLG preparations.

A senior trade official defined that if the loss on the mortgage pool was 7% and 5% was lined beneath a DLG association, some NBFCs normally had a provision cowl of 2-4%, relying on their inner modelling and calculations. Audits by RBI in January-February revealed this provision accounting, following which RBI strengthened that your entire provisioning needs to be taken by the NBFC and any recoveries beneath DLG on the finish of the mortgage tenure could also be used to write-back the provisions.

“This will not be a coverage change, however a call-out for these NBFCs that weren’t doing sufficient provisioning. It’s a immediate for NBFCs to appropriately provision towards credit score losses, and deal with DLGs and recoveries individually,” stated Kunal Varma, chief government officer and founding father of digital non-banking finance firm Freo. However, he stated, this will likely result in some NBFCs re-evaluating their First Loss Default Guarantee or FLDG-linked relationships within the brief time period.

RBI’s issues stem from elevated delinquencies in some mortgage swimming pools sourced by fintechs, resulting in larger DLG payouts by them and successful on the asset high quality of some companion NBFCs. Moreover, there have additionally been issues round NBFCs utilizing FLDG preparations as an alternative choice to securitisation transactions, bypassing the rules of securitisation of mortgage swimming pools. 

RBI’s perspective appears to be that DLG preparations have been allowed to provide capital consolation from a regulatory perspective and encourage ‘skin in the game’ for fintechs, however not dilute the accountability of underwriting by regulated entities.

Point of competition

Typically, every fintech—resembling Paytm, PhonePe, MobiKwik—ties up with a number of regulated banks or NBFCs to supply a number of mortgage choices to their prospects. In flip, lenders can settle for DLG preparations within the type of money deposits, fastened deposits with a lien marked of their favour, and financial institution ensures.

DLG preparations for swimming pools of small-ticket unsecured loans are usually used for consumption and life-style lending, emergency healthcare bills, training finance for ability improvement or vocational levels and diplomas, sustainable power resembling putting in a photo voltaic roof and lending to small companies and new-to-credit debtors.

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FLDG has been some extent of competition for the reason that first digital lending pointers have been issued in August 2022. Worried that these DLG loss absorptions have been resulting in inaccurate reflection of the credit score high quality of those debtors, RBI in June 2023 issued the default loss assure framework, capping the worth of such preparations at 5% of the mortgage pool. It had then specified that regulated entities shall be answerable for recognising non-performing property of particular person loans within the portfolio and the resultant provisioning as per present norms, no matter any DLG cowl on the portfolio degree.

Even then trade representatives had approached RBI in search of readability on sure points of the rules resembling therapy of NPAs given the variations with the ECL framework, and on the sort of completely different cohorts and buildings that may be explored beneath the DLG framework. This had prompted RBI to challenge an FAQ in November 2023 clarifying a few of these points.

However, these circulars have been repealed when the consolidated Digital Lending Guidelines have been issued on 8 May 2025, resulting in some confusion on how provisioning for these loans could also be interpreted. Fintech lenders consider that DLG is a type of credit score assure or enhancement—your entire objective of which is to offer capital consolation to the lender and assist unlock the lender’s capital for added on-lending.

“As per Ind-AS, NBFCs have been contemplating the credit score enhancement supplied by an FLDG for functions of computing the ECL on a mortgage portfolio (provided that an FLDG qualifies as a credit score enhancement intrinsic to the contractual phrases of the association, which is the requirement beneath Ind-AS 109),” stated Shilpa Mankar Ahluwalia, companion, head-fintech, Shardul Amarchand Mangaldas & Co.

RBI’s 8 May instructions, nonetheless, recommend that the quantity of the DLG cowl can’t be adjusted to cut back ECL computation, which might alter the cost-benefit to NBFCs given the zero-provisioning good thing about DLGs, in response to consultants who consider it might additionally ship “combined alerts” to market individuals, buyers and new entrants within the LSP house and will result in the opinion that fintechs are to not be trusted.

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Already, DLG guidelines solely permit lien-marked deposits or financial institution ensures, which virtually removes any efficiency threat on such ensures, stated Ahluwalia. “The trade additionally claims that capping the DLG at 5% had already prompted NBFCs to implement sturdy credit score underwriting and threat instruments, and eradicating the provisioning good thing about DLG cowl might enhance prices of digital loans and scale back credit score entry.”