RBI comes out with framework to permit default loss guarantee to fintechs

The Reserve Bank of India (RBI) on Thursday 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. In case of implicit guarantee arrangements, the DLG provider will not bear performance risk of more than the equivalent amount of 5 per cent of the underlying loan portfolio, the framework said. According to the guidelines, the registered entities will invoke default loss guarantee within a maximum overdue period of 120 days, unless made good by the borrower before that.

“Based on extensive consultations with various stakeholders, and in tune with our objective of maintaining a balance between innovation and prudent risk management, it has been decided to put in place a regulatory framework for permitting default loss guarantee arrangements in digital lending. Detailed guidelines on the matter will be issued separately,” the RBI said in its statement on Thursday.

Followed by the RBI decision, fintech companies were forced to look at alternate options like co-lending small ticket loans, co-branded partnerships and revenue-sharing models.

RBI Governor Shaktikanta Das said the RBI was also streamlining the Bharat Bill Payment System (BBPS) and its membership criteria for operating units. BBPS has been operational since August 2017 and its scope was further expanded in December 2022. He said the move was to enhance the efficiency of the BBPS system and to encourage greater participation. Currently, BBPS has onboarded over 20,500 billers and processes over 98 million transactions every month.

“Streamlining Bharat Bill Payment System will help integrate backend systems efficiently for a seamless experience, which could also bring new players to the table and improve the ad-hoc payment system. It will be an advantage to bolster fraud monitoring and risk mitigation systems to ensure smooth online transactions,” said Pranay Jhaveri, managing director (India and South Asia), Euronet Worldwide, a provider of global electronic payment services.

In an effort to broaden the issuance of e-RUPI vouchers, Das said non-bank companies could also issue e-RUPI vouchers now.