All entities regulated by the central bank will have to ensure invocation of default guarantees within 120 days of a loan falling overdue, guidelines issued Thursday by the central bank mandated.
“Regulated entities shall ensure that total amount of DLG (default loss guarantee) cover on any outstanding portfolio which is specified upfront shall not exceed 5% of the amount of that loan portfolio,” the RBI rules said. “In case of implicit guarantee arrangements, the DLG provider shall not bear performance risk of more than the equivalent amount of 5% of the underlying loan portfolio.”
In terms of recognising bad loan assets, the recognition and provisioning of such assets will be the responsibility of the regulated entities. The central bank also stipulated that the amount of DLG invoked will not be set off against the underlying individual loans. At the time of issuing the working group recommendations for digital lending firms in August 2022, the RBI had said that recommendation relating to First Loss Default Guarantee (FLDG) was under examination. As per the first loss default guarantee (FLDG) model, the first hit on a default is taken by the fintech firm that originated the loan.
“While most of the regulated entities have already stopped taking FLDGs on new loans originated by non-regulated fintechs, the regulatory framework will bring in more clarity as digital lending is going to stay and increase substantially in scale,” said Karthik Srinivasan, Senior vice president, ICRA.
The RBI also said that default guarantee has to be invoked within a maximum overdue period of 120 days, unless made good by the borrower before that.
