RBI restores default loss guarantees for NBFCs

The Reserve Bank of India (RBI) has reinstated default loss guarantees (DLGs) for non-banking finance companies (NBFCs), reversing earlier restrictions that forced these institutions to increase their loan loss provisions when collaborating with fintech partners. This regulatory change allows NBFCs to incorporate DLGs into their calculations for provisioning against potential loan losses, thereby alleviating financial pressures and enhancing profitability. The decision is expected to facilitate increased credit growth and encourage greater loan origination through fintech partnerships, particularly beneficial for under-served retail customer segments. Industry leaders, including SMFG India Credit's MD & CEO Ravi Narayanan, have welcomed this move, asserting that it provides necessary regulatory clarity for safe expansion in digital lending. The RBI's previous directive, effective from March 2025, had mandated that DLGs from fintech lenders be excluded from calculations, resulting in significant financial strain on many NBFCs as they accrued substantial additional provisions. This rollback is anticipated to ease the capital burden on lenders, allowing for enhanced lending capabilities as the overall credit landscape improves, especially in light of updated co-lending guidelines that came into effect in January 2025.