RBI Eases Default Loss Guarantee Rules for NBFCs in Digital Lending Framework

The Reserve Bank of India (RBI) has reinstated the Default Loss Guarantee (DLG) framework for Non-Banking Financial Companies (NBFCs), effectively reversing restrictions introduced under the RBI Digital Lending Directions, 2025 that had required lenders to exclude such guarantees from loss estimates on loans originated through fintech partners. The amendment, issued through the RBI (Non-Banking Financial Companies, Income Recognition, Asset Classification and Provisioning) Amendment Directions, 2026, dated 13 February 2026, allows NBFCs to once again factor in DLG arrangements when calculating provisions on their digital loan portfolios. This policy reversal is expected to significantly ease the provisioning burden on NBFCs engaged in digital lending and strengthen the broader fintech-NBFC partnership ecosystem.

Understanding Default Loss Guarantees in Digital Lending

A Default Loss Guarantee is a contractual arrangement under which a Lending Service Provider (LSP) or a Digital Lending App (DLA) operator guarantees a Regulated Entity (RE) against a portion of defaults on a loan portfolio sourced through the LSP's platform. DLGs are typically capped at 5% of the outstanding loan portfolio and are usually backed by fixed deposits or bank guarantees placed by the digital lending partner with the RE. The DLG mechanism serves a dual purpose: it provides the RE with a first-loss cushion that reduces credit risk, and it gives the LSP a stake in the quality of loans originated through its platform, aligning incentives between the originator and the lender.

The May 2025 Restrictions and Their Impact

When the RBI released the consolidated Digital Lending Directions on 8 May 2025 under circular reference RBI/2025-26/36, it repealed the earlier September 2022 guidelines, the DLG FAQ, and the outsourcing norms, consolidating them into a single framework. The Directions apply to all commercial banks, primary urban cooperative banks, NBFCs (including housing finance companies), and all-India financial institutions. Among the changes, the May 2025 framework required REs to exclude DLG arrangements from their provisioning calculations, meaning NBFCs could no longer offset expected losses against the guarantee provided by their fintech partners. This effectively increased the provisioning burden on NBFCs and constrained their lending capacity, particularly for smaller NBFCs operating under revised RBI registration frameworks.

The February 2026 Reversal

The RBI's February 2026 amendment reverses the May 2025 position by allowing NBFCs to recognise DLG arrangements in their provisioning calculations, subject to specified conditions. Under the amended framework, NBFCs can factor in DLG guarantees only when the guarantee is an integral part of the loan arrangement. Additionally, lenders are required to revise expected loss estimates each time a guarantee is invoked, since the available cover reduces with usage. The restoration allows NBFCs to unwind previously booked provisions, thereby freeing up locked capital and improving balance-sheet capacity for new loan disbursements. Entities involved in payment aggregator licensing and digital lending should take note of these revised norms.

Key Fact Statement and Borrower Protection

While easing the DLG norms for NBFCs, the RBI has maintained its borrower protection standards under the Digital Lending Directions, 2025. REs are required to provide borrowers with a digitally signed Key Fact Statement (KFS) that discloses the Annual Percentage Rate (APR), all applicable fees, and a minimum cooling-off period during which borrowers may exit the loan by paying only proportionate interest and a disclosed processing fee. The cooling-off window is set at one day for very short-term loans and three days for tenors exceeding one week. All loan disbursals must flow directly to the borrower's account, and repayments must flow directly back to the RE, eliminating pass-through arrangements that had created opacity in earlier digital lending models.

Multi-Lender LSP Framework

The 2025 Directions also introduced specific provisions for LSPs partnering with multiple REs, effective from 1 November 2025. Under this framework, LSPs that present loan offers from more than one lender must transparently disclose all potential lenders to the borrower and present offers in an unbiased manner. The multi-lender framework aims to prevent situations where LSPs steer borrowers towards specific lenders based on higher commissions rather than borrower suitability. Companies managing cross-border transactions under FEMA or repatriating dividends from Indian subsidiaries should be aware that the digital lending framework also affects foreign-owned NBFCs operating in India.

Impact on the NBFC Sector

The reinstatement of DLG recognition is expected to have a material positive impact on the NBFC sector, particularly for mid-sized and smaller NBFCs that rely heavily on fintech partnerships for loan origination. By reducing provisioning requirements, the amendment frees up capital that can be deployed for fresh lending. Industry estimates suggest that the DLG reversal could unlock significant additional lending capacity across the sector. The move is also expected to strengthen fintech-NBFC collaborations and boost credit flow in underserved segments, including small business lending and micro-credit. Firms should update their compliance calendars and reporting frameworks under FATCA and CRS to reflect these revised norms.

Key Takeaways

• The RBI has reinstated DLG recognition for NBFCs through the IRACP Amendment Directions, 2026, dated 13 February 2026, reversing restrictions from the May 2025 Digital Lending Directions.

• DLGs, typically capped at 5% of the loan portfolio and backed by fixed deposits, can now be factored into NBFC provisioning calculations, subject to conditions.

• Lenders must revise expected loss estimates each time a DLG is invoked, as the available guarantee cover reduces with usage.

• Borrower protection norms remain intact, including mandatory Key Fact Statements with APR disclosure and cooling-off periods.

• The multi-lender LSP framework, effective since 1 November 2025, requires transparent and unbiased presentation of loan offers from multiple lenders.

• The DLG reversal is expected to reduce provisioning burdens, free up NBFC capital, and boost credit flow in digital lending and underserved market segments.

NBFCs and their fintech partners should review their existing DLG arrangements to ensure compliance with the conditions specified in the February 2026 amendment.