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In a move that could significantly reshape partnerships between fintechs and non-banking financial companies (NBFCs), the Reserve Bank of India (RBI) has tightened rules governing Default
Loss Guarantees (DLGs). The revised norms now explicitly disallow NBFCs from availing DLG cover for loans sourced through fintech partners, if those fintechs are not regulated entities,
independent digital lending service providers.
This means NBFCs can no longer use guarantees offered by unregulated digital lending platforms to cushion losses from defaults, a practice that had gained traction in recent years. The
regulatory tightening is expected to improve transparency and ensure fintech-NBFC collaborations don’t bypass prudential lending norms.
The decision to disallow fintech-provided digital lending guarantees by the RBI represents a fundamental shift toward enhanced regulatory oversight and risk accountability in the digital
lending ecosystem.
Rajat Deshpande, CEO and co-founder, FinBox, said, “While this creates near-term operational challenges, I view it as a necessary evolution that will ultimately strengthen the sector's
foundation. The core principle here is sound—regulated entities must maintain full ownership of their underwriting decisions and risk assessment processes.”
“This eliminates the regulatory arbitrage that some players may have exploited and ensures that lenders cannot outsource their fundamental responsibility for credit evaluation to unregulated
entities,” added Deshpande.
From an operational perspective, this transition will require significant infrastructure investments. NBFCs and banks will need to rapidly scale their internal capabilities—building robust
data analytics platforms, enhancing their risk assessment frameworks, and developing sophisticated business rule engines.
While this represents a substantial capital commitment, particularly for smaller institutions, it's an investment in long-term competitive differentiation and regulatory compliance.
Deshpande said, “The cost implications are nuanced. Yes, this will likely increase the cost of capital for fintech partnerships in the short term, as lenders price in the additional
operational complexity and direct risk exposure.”
However, it's worth noting that pure FLDG models were already becoming a smaller component of most lenders' portfolios, as institutions sought more sustainable partnership structures.
“The timing coincides with broader challenges in the digital personal loan segment, where we've observed elevated delinquency rates putting pressure on pricing and partnership terms,” adds
Deshpande.
However, the RBI's recent decision to reduce risk weights for personal loans from 125% back to 100% provides some offsetting regulatory relief.
“Looking ahead, I believe this will catalyse innovation in risk assessment technologies and drive more collaborative, technology-enabled partnerships between fintechs and traditional
lenders—relationships built on shared expertise rather than risk transfer mechanisms. The players who adapt quickly and invest in building genuine value-add capabilities will emerge stronger
in this new paradigm,” added Deshpande.