The Reserve Bank on Thursday came out with guidelines on default loss guarantee (DLG) in digital lending, a move aimed at ensuring the orderly development of the credit delivery system.

DLG is a contractual arrangement between a regulated entity (RE) and an entity meeting prescribed norms, under which the latter guarantees to compensate the RE, loss due to default up to a certain percentage of the loan portfolio specified upfront.

RE refers to entities, like banks and NBFCs, which are regulated by the RBI.

As per the guidelines, a RE may enter into DLG arrangements only with a Lending Service Provider (LSP)3/ other RE with which it has entered into an outsourcing (LSP) arrangement.

"DLG arrangements must be backed by an explicit legally enforceable contract between the RE and the DLG provider," it said.

Last year, the Reserve Bank issued the regulatory framework for digital lending.

With a view to further promoting responsible innovation and prudent risk management, it has been decided to issue guidelines on Default Loss Guarantee arrangements in Digital Lending, RBI Governor Shaktikanta Das said while announcing the monetary policy earlier in the day.

This, he said, will further facilitate the orderly development of the digital lending ecosystem and enhance credit penetration in the economy.

The guidelines further said RE should ensure that the total amount of DLG cover on any outstanding portfolio, which is specified upfront should not exceed 5 per cent of the amount of that loan portfolio.

"In case of implicit guarantee arrangements, the DLG provider shall not bear performance risk of more than the equivalent amount of five per cent of the underlying loan portfolio," it added.

It also said recognition of individual loan assets in the portfolio as NPA and consequent provisioning will be the responsibility of the RE.

Also, the REs will have put in place a Board approved policy before entering into any DLG arrangement.

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