Digital Lending- Loss sharing arrangement in case of default

Digital Lending

Date: May 08, 2025.

18. Eligibility as DLG provider

i. RE may enter into DLG arrangements only with a LSP/ other RE engaged as a LSP. Further, the LSP providing DLG shall be incorporated as a company under the Companies Act, 2013.

19. Due diligence and other requirements with respect to DLG provider

i. RE, including a RE acting as DLG provider, shall put in place a Board approved policy before entering into any DLG arrangement. Such policy shall include, at a minimum, the eligibility criteria for DLG provider, nature and extent of DLG cover, process of monitoring and reviewing the DLG arrangement, and the details of the fees, if any, payable to/ received by the DLG provider, as the case may be.

ii. RE shall ensure that any DLG arrangement does not act as a substitute for credit appraisal requirements and robust credit underwriting standards need to be put in place irrespective of the DLG cover.

iii. Every time a RE enters into or renews a DLG arrangement, it shall obtain adequate information to satisfy itself that the entity extending DLG would be able to honour it. Such information shall, at a minimum, include a declaration from the DLG provider, certified by the statutory auditor of the DLG provider, on the aggregate DLG amount outstanding, the number of RE and the respective number of portfolios against which DLG has been provided. The declaration shall also contain past default rates on similar portfolios.

iv. It is clarified that the due-diligence requirements specified herein are in addition to the general requirements applicable to RE-LSP arrangements as set out in para 5 of these Directions.

20. Restrictions on entering into DLG arrangements

i. RE shall not enter into DLG arrangements for revolving credit facilities offered through digital lending channel and credit cards as defined under Master Direction – Credit Card and Debit Card – Issuance and Conduct Directions, 2022 dated April 21, 2022.

ii. RE shall not enter into DLG arrangements on the loans which are covered by the credit guarantee schemes administered by trust funds as specified under para 2 of Review of Prudential Norms – Risk Weights for Exposures guaranteed by Credit Guarantee Schemes (CGS) dated September 07, 2022, as amended from time to time.

iii. NBFC – P2P shall not enter into DLG arrangements for the loans facilitated over its platform and be guided by para 6(1)(iv) of Master Direction - Non-Banking Financial Company – Peer to Peer Lending Platform (Reserve Bank) Directions, 2017 dated October 04, 2017, as amended from time to time.

21. Structure of DLG arrangements

i. DLG arrangements shall be backed by an explicit and legally enforceable contract between the RE and the DLG provider. Such contract, among other things, shall contain the following details:

a. Extent of DLG cover;

b. Form in which DLG cover is to be maintained with the RE;

c. Timeline for DLG invocation;

d. Disclosure requirements as under para 27 of these Directions.

22. Forms of DLG

i. RE shall accept DLG only in one or more of the following forms:

a. Cash deposited with the RE;

b. Fixed Deposit maintained with a Scheduled Commercial Bank with a lien marked in favour of the RE;

c. Bank Guarantee in favour of the RE.

23. Cap on DLG

i. RE shall ensure that the total amount of DLG cover on any outstanding portfolio which is specified upfront shall not exceed five per cent of the total amount disbursed out of that loan portfolio at any given time. In case of implicit guarantee arrangements, the DLG Provider shall not bear performance risk of more than the equivalent amount of five per cent of the underlying loan portfolio.

ii. The portfolio over which DLG can be offered shall consist of identifiable and measurable loan assets which have been sanctioned (the ‘DLG set’). This portfolio shall remain fixed for the purpose of DLG cover and is not meant to be dynamic. Refer to Illustrations given in Annex – II.

24. Recognition of NPA

i. Recognition of individual loan assets in the portfolio as Non-Performing Asset (NPA) and consequent provisioning shall be the responsibility of the RE as per the extant asset classification and provisioning norms irrespective of any DLG cover available at the portfolio level.

ii. The amount of DLG invoked shall not be set off against the underlying individual loans, i.e. the liability of the borrowers in respect of the underlying loan shall remain unaffected.

iii. Recovery by the RE, if any, from the loans on which DLG has been invoked and realised, can be shared with the DLG provider in terms of the contractual arrangement.

iv. DLG amount once invoked by the RE shall not be reinstated, including through loan recovery.

25. Treatment of DLG for regulatory capital

i. Capital computation, i.e., computation of exposure and application of Credit Risk Mitigation benefits on individual loan assets in the portfolio shall continue to be governed by the extant norms11.

ii. In case, DLG provider is an RE, it shall deduct full amount of the DLG which is outstanding from its capital.

26. Invocation and tenor of DLG

i. RE shall invoke DLG within a maximum overdue period of 120 days, unless the loan dues are made good by the borrower before that.

ii. The period for which the DLG agreement remains in force shall not be less than the longest tenor of the loan in the underlying loan portfolio.

27. Disclosure requirements

i. RE shall put in place a mechanism to ensure that LSPs with whom they have a DLG arrangement shall publish on their website the total number of portfolios and the respective amount of each portfolio on which DLG has been offered. The name of the RE may or may not be disclosed as part of disclosure under this provision.

ii. Disclosure under para (i) above shall be made on a monthly basis, with the disclosure for any given month to be provided no later than seven (7) working days following the conclusion of that month.

28. Exceptions

Guarantees covered under the following schemes/ entities shall not be covered within the definition of DLG:

i. Guarantee schemes of Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), Credit Risk Guarantee Fund Trust for Low Income Housing (CRGFTLIH) and individual schemes under National Credit Guarantee Trustee Company Ltd (NCGTC).

ii. Credit guarantee provided by Bank for International Settlements (BIS), International Monetary Fund (IMF) as well as Multilateral Development Banks as referred to in para 5.5 of RBI Master Circular on Basel III Capital Regulation dated April 01, 2025, as amended from time to time.