RBI allows default loss guarantee to fintechs

RBI came out with a regulatory framework to permit default loss guarantee arrangements in digital lending.

This is considered as a major relief to financial technology (fintech) companies that were seeking clarity on their lending arrangements with banks and non-banking financial companies. The RBI had barred the first loss default guarantee arrangement under the digital lending norms. Under this credit-risk sharing agreement, a certain percentage of the default loan portfolio of banks and NBFCs (registered entities) are guaranteed by a third party, a fintech or lending service provider (LSP).

According to the new guidelines, the entities may enter into default loss guarantee arrangements only with a lending service provider or other entities with which it has entered into an outsourcing arrangement.

Further, the LSP providing default loss guarantee must be incorporated as a company under the Companies Act, 2013. It indicates that entities can accept default loss guarantee in forms like cash deposited with the entities, fixed deposits maintained with a scheduled commercial bank with a lien marked in favour of the entities and bank guarantee in favour of the registered entities. The registered entities will ensure that a default cover could be provided for up to 5 per cent of the loan portfolio.