New DLG provisioning norms: Fintech bodies hope for relief from RBI

Collecting data from fintechs to substantiate likely impact of double-provisioning

Fintech bodies have raised concerns about potential double-provisioning resulting from the Reserve Bank of India’s (RBI’s) new mandate, which disallows lenders from offsetting default loss guarantees (DLGs) provided by loan service providers (LSPs) against provisions for stressed loans. These bodies are now collecting data from their members to present the likely impact of the mandate to the RBI.

 

Lenders have been directed to make the necessary provisions by September 30. Fintech bodies are hopeful of gathering sufficient data on this segment by then, which could potentially influence the regulator’s decision.

 

The RBI has mandated finance companies to make full provisions on loans sourced through LSPs, regardless of the DLGs provided by these entities to the lenders. This is likely to have an impact on origination of such loans as it reduces the attractiveness of the portfolio for the finance companies.

 

“The RBI has communicated to some lenders that regulated entities should not offset DLG when it comes to provisioning. We have, in turn, suggested that the (DLG) model has been working now and there will be double-provisioning if it (DLG) is not considered. This means that an LSP provisions a separate 5 per cent and if the RE (regulated entity) also separately provisions (for expected credit loss), then efficient utilisation of capital would not take place,” said Jatinder Handoo, chief executive officer (CEO), Unified Fintech Forum. 

 

“We will go back to the regulator with some data and information since this is a consultative process. Although it’s a little difficult since this is a DLG portfolio, which I am not very sure is even marked in the credit bureau separately. We will request our members to give us data in terms of portfolio, customers, geographies, ticket size, and gender segregation,” he said.

 

DLG is a contractual arrangement between the lender and an LSP, under which the latter guarantees to compensate the bank for losses due to default up to a certain percentage of the loan portfolio of the bank.

 

As per RBI guidelines, lenders have to ensure that the total amount of DLG cover on any outstanding portfolio shall not exceed 5 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 5 per cent of the underlying loan portfolio. As a result, RBI guidelines say, 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.

 

Additionally, the fintech bodies, in their meeting with RBI last month, have also apprised the regulator of the practical difficulties the industry is facing after the new digital lending guidelines came in. 

 

As per new norms, digital lenders, especially LSPs, have to show different options to a borrower and allow them to make an informed choice when they visit a marketplace or LSP’s website. This, the industry said, will impact the customer experience.

 

“We are for transparency and openness of the system; this may be necessary. However, LSPs partner with multiple REs, with each having a different credit policy, such as restrictive or flexible. REs will have to complete soft underwriting of the customers and only then extend an offer,” Handoo said, adding that if a customer says they want a loan from lender A, and the person has five lenders as options, they expect surety and timely disbursement of the loan. However, they may not know whether their credit profile is appealing to a particular RE, in that case timeliness and customer user experience get impacted.

 

In the meeting, the fintech industry bodies urged the RBI to allow non-banking financial companies (NBFCs) to offer credit lines through the Unified Payments Interface (UPI) after the facility was extended to small finance banks (SFBs) earlier this year. Industry sources said the regulator may not yet be open to including NBFCs, given that SFBs only recently got access to the feature.

 

The RBI was also briefed on how the fintech sector has improved compliance practices over the past few quarters, following earlier scrutiny by the regulator. 

RBI mandate

  *  Fintechs to make full provisions on loans sourced through loan service providers

  *  Regulated entities should not offset default loss guarantee for provisioning

  *  Lenders to ensure total amount of DLG cover on outstanding portfolio shall not exceed 5% of disbursed amount

  *  Digital lenders to show different options to borrowers and allow them to make an informed choice