RBI Reverses 2025 DLG Rule, Relief for NBFCs

The Reserve Bank of India (RBI) has reinstated Default Loss Guarantees (DLGs) for non-banking financial companies (NBFCs), reversing an important regulatory tightening that took effect in May 2025. This policy reversal will reduce burdens on NBFCs, enhance fintech-banking collaborations, and boost credit flow, particularly in digital lending and underserved segments of society.

What Are Default Loss Guarantees (DLGs)?

Default Loss Guarantees are credit enhancement agreements that lending partners, especially fintech platforms, offer. The main motive behind this is to shield NBFCs from a percentage of loan defaults. This arrangement allows a partner, which can be a fintech or digital lending service provider, to give consent for acceptance of certain losses (around 5% of the Loan Value). The remaining amount of loss will have to be borne by NBFCs.

DLGs were highly utilised in digital lending and co-lending structures. This helps NBFCs to share risk, enhance capital efficiency, and increase borrowing to new-to-credit or higher-risk borrowers. But due to the RBI’s rule of last year, NBFCs were forced to remove DLGs from provisioning calculations. This led to larger provisions and reduced the allure of such arrangements.

What Has Changed Due Reversal Of 2025 Restrictions?

Due to the RBI’s updated guidance, things are now clearer and more practical for NBFCs.

• NBFCs are now allowed to consider DLGs while calculating Expected Credit Loss (ECL) provisions. This is only applicable when the guarantee is built into the loan contract itself.

• Secondly, from now onwards, DLGs cannot be shown as a separate asset on the balance sheet. NBFCS will have to recompute the provisions as per the needs.

• NBFCs will have to update loss estimates whenever a DLG is invoked. This will ensure that prudential norms are properly maintained.

This move of the RBI reverses the May 2025 rule that disallowed DLGs for provisioning. Due to the earlier restriction, NBFCs were forced to make full provisions on fintech-sourced loans, which significantly increased their provisioning cost and dampened digital loan origination volumes.

Why RBI Rolled Back Restrictions?

• Industry experts and credit rating agencies have welcomed the move as it would ease the provisioning pressure that is weighing on NBFC profitability and restrained credit growth.

• RBI’s previous tightening in 2025 was partially due to concerns over risk transfer transparency and provisioning practices. Some DLG models looked quite similar to synthetic securitisation, potentially obscuring true credit risk.

However, the revised rules strike a balance as it allows DLGs for provisioning but only when risk is being transferred and reported. This helps to ensure alignment with accounting standards and risk recognition norms.

How Will This Impact NBFCs and Fintech Partnerships?

The reinstatement of DLGs have following implications on the NBFC sector: -

Reduced Provisioning Burden

Due to the 2025 directive, many NBFCS were required to set up big additional buffers. SMFG India Credit’s profitability faced a sharp decline due to provisioning of around ₹115 crore for DLG obligations.

Credit Saison India faced a 22% decrease in its profit because of ₹178 crore in extra provisions. Northern Arc Capital, too, had an impact of ₹80 crore.

By restoring DLGs, these NBFCs will be able to lower the provision costs. This will enhance their net profits and balance sheet efficiency.

Revival of Fintech-NBFC Collaboration

The revised framework will help fintech partners to enhance their loan origination volumes. This is very important to make credit reach under-penetrated customer segments such as small businesses, new borrowers, and rural borrowers.

Fintech lenders who often serve as loan service providers (LSPs) will now be able to participate more actively in joint lending and risk-sharing arrangements.

Capital Efficiency and Credit Growth

By lowering the capital locked up in buffers, NBFCs will now be able to more effectively use capital for new loans. This can enhance credit momentum when banks and NBFCS are vying for more consumer and MSME loans. This will rebound the fintech-sourced credit volumes in the coming quarters.

What Are The Investor Takeaways?

The RBI’s move to restore the DLGs is very beneficial for the credit sector of India. It will boost NBFC’s capital efficiency, revive fintech partnerships and facilitate faster credit access to small businesses, rural borrowers and new-to-credit borrowers. The reduction of excessive provisioning burdens can improve NBFC profitability and will give rise to digital lending.

For stock investors, this indicates a constructive outlook for quality NBFCs and fintech lenders. Investors shall wait for next quarter’s results for improvement in credit growth, margins and return ratios. Building a portfolio of NBFCS that are fundamentally strong, well-capitalised and prudent in risk management can be a good strategy.

Sources

Business Standard

Economic Times