RBI allows NBFCs to factor DLG in determining provisions under ECL

RBI allows NBFCs to factor in default loss guarantees from lending apps while computing ECL provisions, tightening uniformity without diluting prudential safeguards

The Reserve Bank of India (RBI) on Thursday allowed non-banking financial companies (NBFCs) to factor in default loss guarantees (DLG) provided by lending apps while determining provisions under the expected credit loss (ECL) framework across all stages of loan default, subject to compliance with Indian Accounting Standards (Ind AS).

 

The amendment, which comes into force immediately, clarifies that NBFCs may consider DLG protection while computing ECL, provided the guarantee arrangement is integral to the contractual terms of the loan and is not recognised as a separate asset in the books. 

The central bank added that since the DLG cover reduces every time it is invoked, NBFCs must recompute their ECL provisioning requirements across all stages after adjusting for the reduced guarantee cover. 

The move follows the rapid rise of digital lending and fintech-NBFC partnerships in recent years, which led to the widespread use of DLG structures. Under such arrangements, fintech partners agree to absorb a pre-defined portion of credit losses to encourage NBFCs to lend to new-to-credit or higher-risk borrowers.

 

However, the RBI had earlier flagged concerns that certain DLG models resembled synthetic securitisation structures, which could potentially obscure risk transfer and result in under-provisioning. The regulator had also clarified that NBFCs cannot treat DLGs provided by unregulated digital lending service providers as valid credit enhancements.

 

The latest clarification aims to bring uniformity in provisioning practices while ensuring that risk recognition remains aligned with prudential and accounting standards.