Fintechs believe the provisioning variance is due to the differentiated interpretation of Ind-AS accounting standards, which allow for a ‘risk mitigant’ like Default Loss Guarantee to be considered while calculating the expected credit loss (ECL) provisions.
Unified Fintech Forum and self-regulatory organisation Fintech Association for Consumer Empowerment (FACE), in their representiations to the Reserve Bank of India (RBI), have said that making full provisions against such loans will lead to ‘double provisioning’, with both the lending service providers (LSPs) like fintechs and regulated entities such as banks and non-bank lenders setting aside buffers for the same loan pool.
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Both the LSP and the regulated entities are provisioning for the same loan pool, thus impacting capital deployment efficiency, said Jatin Handoo, chief executive officer of UFF, formerly Digital Lenders’ Association of India.
It might also lead to a ‘crowding out’ effect where lenders will have less amount of money for lending because they have to take out the extra amount and provide for it separately, he said. “RBI is open to listening to us and has asked us to come up with data-based use cases, and customer-level and market insights.”
Full provisioning by NBFCs
Fintechs offer borrowers loans from multiple banks. These intermediaries usually provide a ‘default loss guarantee’ (DLG) to cover these loans for encouraging lenders to partner with them.
However, in April, the central bank wrote to at least four non-bank lenders with high delinquencies in their DLG-backed loans. The regulator asked them to provide for all loan pools sourced through third-party digital platforms under the expected credit loss (ECL) accounting norms, regardless of whether these are backed by DLG arrangements.
A senior industry official explained that if the loss on the loan pool was 7% and 5% was covered under a DLG arrangement, some NBFCs usually had a provision cover of 2-4%, depending on their internal modelling and calculations. Audits by RBI in January-February revealed this provision accounting, following which RBI reinforced that the entire provisioning has to be taken by the NBFC and any recoveries under DLG at the end of the loan tenure may be used to write-back the provisions.
“This is not a policy change, but a call-out for those NBFCs that were not doing enough provisioning. It’s a prompt for NBFCs to appropriately provision against credit losses, and treat DLGs and recoveries separately,” said Kunal Varma, chief executive officer and founder of digital non-banking finance company Freo. However, he said, this may lead to some NBFCs re-evaluating their First Loss Default Guarantee or FLDG-linked relationships in the short term.
RBI’s concerns stem from elevated delinquencies in some loan pools sourced by fintechs, leading to higher DLG payouts by them and a hit on the asset quality of a few partner NBFCs. Moreover, there have also been concerns around NBFCs using FLDG arrangements as an alternative to securitisation transactions, bypassing the guidelines of securitisation of loan pools.
RBI’s perspective seems to be that DLG arrangements were allowed to give capital comfort from a regulatory perspective and encourage ‘skin in the game’ for fintechs, but not dilute the accountability of underwriting by regulated entities.
Point of contention
Typically, each fintech—such as Paytm, PhonePe, MobiKwik—ties up with multiple regulated banks or NBFCs to offer multiple loan options to their customers. In turn, lenders can accept DLG arrangements in the form of cash deposits, fixed deposits with a lien marked in their favour, and bank guarantees.
DLG arrangements for pools of small-ticket unsecured loans are generally used for consumption and lifestyle lending, emergency healthcare expenses, education finance for skill development or vocational degrees and diplomas, sustainable energy such as installing a solar roof and lending to small businesses and new-to-credit borrowers.
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FLDG has been a point of contention since the first digital lending guidelines were issued in August 2022. Worried that these DLG loss absorptions were leading to inaccurate reflection of the credit quality of these borrowers, RBI in June 2023 issued the default loss guarantee framework, capping the value of such arrangements at 5% of the loan pool. It had then specified that regulated entities will be responsible for recognising non-performing assets of individual loans in the portfolio and the consequent provisioning as per current norms, regardless of any DLG cover at the portfolio level.
Even then industry representatives had approached RBI seeking clarity on certain aspects of the guidelines such as treatment of NPAs given the differences with the ECL framework, and on the kind of different cohorts and structures that can be explored under the DLG framework. This had prompted RBI to issue an FAQ in November 2023 clarifying some of these aspects.
However, these circulars were repealed when the consolidated Digital Lending Guidelines were issued on 8 May 2025, leading to some confusion on how provisioning for these loans may be interpreted. Fintech lenders believe that DLG is a form of credit guarantee or enhancement—the entire purpose of which is to provide capital comfort to the lender and help free up the lender’s capital for additional on-lending.
“As per Ind-AS, NBFCs were considering the credit enhancement provided by an FLDG for purposes of computing the ECL on a loan portfolio (given that an FLDG qualifies as a credit enhancement intrinsic to the contractual terms of the arrangement, which is the requirement under Ind-AS 109),” said Shilpa Mankar Ahluwalia, partner, head-fintech, Shardul Amarchand Mangaldas & Co.
RBI’s 8 May directions, however, suggest that the amount of the DLG cover cannot be adjusted to reduce ECL computation, which could alter the cost-benefit to NBFCs given the zero-provisioning benefit of DLGs, according to experts who believe it could also send “mixed signals” to market participants, investors and new entrants in the LSP space and may lead to the opinion that fintechs are not to be trusted.
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Already, DLG rules only allow lien-marked deposits or bank guarantees, which practically removes any performance risk on such guarantees, said Ahluwalia. “The industry also claims that capping the DLG at 5% had already prompted NBFCs to implement strong credit underwriting and risk tools, and removing the provisioning benefit of DLG cover may increase costs of digital loans and reduce credit access.”
