The Reserve Bank of India (RB

The Reserve Bank of India (RBI) has come out with a regulatory framework to permit default loss guarantee arrangements in digital lending.The RBI had barred the first loss default guarantee arrangement under the digital lending norms. Under this credit-risk sharing agreement, a certain percentage of the default loan portfolio of banks and NBFCs (registered entities) are guaranteed by a third party, a fintech or lending service provider (LSP).According to the new guidelines, the entities may enter into default loss guarantee arrangements only with a lending service provider or other entities with which it has entered into an outsourcing arrangement. Further, the LSP providing default loss guarantee must be incorporated as a company under the Companies Act, 2013. It indicates that entities can accept default loss guarantees in forms like cash deposited with the entities, fixed deposits maintained with a scheduled commercial bank with a lien (a legal claim or legal right which is made against the assets that are held as collaterals for satisfying a debt ) marked in favour of the entities and bank guarantee in favour of the registered entities.The registered entities will ensure that a default cover could be provided for up to 5 percent of the loan portfolio. In case of implicit guarantee arrangements, the Digital Lending Guidelines (DLG) provider will not bear performance risk of more than the equivalent amount of 5 percent of the underlying loan portfolio.According to the guidelines, the registered entities will invoke default loss guarantee within a maximum overdue period of 120 days, unless made good by the borrower before that.