The Reserve Bank of India has introduced a 5 per cent cap on the first loan default guarantee (FLDG) that fintechs provide to their lending partners.

The central bank stated in a notification released on Thursday that regulated enterprises (RE) must ensure that the overall default guarantee does not exceed 5 per cent of the portfolio size.

FLDG is a guarantee provided by an unregulated business to regulated lenders. In lieu of guarantees against the first tranche of defaults, the RE makes loans to consumers referred by the partner firm. This used to be as high as 100 per cent in rare circumstances.

The regulator had cracked down on such arrangements with stringent digital lending norms back in September 2022, which permitted FLDGs only between regulated entities.

The RBI has softened its previous stance and stated that banks and NBFCs may enter into FLDG arrangements with regulated businesses as well as other loan service providers (LSP). This broadens the market for early-stage fintechs, who can now collaborate with banks and NBFCs to acquire loans without having to wait for an NBFC licence.

The RBI has warned that any computation of NPA (non-performing assets, or loans that are not paid on time) should be done in accordance with existing norms and should not be offset against FLDG arrangements with partners.

“The amount of DLG (default loss guarantee) shall not be set off against the underlying individual loans,” the RBI said.

It has asked that all lenders establish board-approved FLDG policies to ensure oversight of their contracts with unregulated LSPs.

It has also mandated that fintechs disclose any default guarantee arrangements and the number of lenders with whom they have agreed into such agreements upfront.

The Digital Lending Association of India (DLAI) made a statement stating that it will aid in the growth of the digital lending sector and make it easier for all businesses to participate in this market.