Reviewed and Validated by: Pushkar, Founder & Managing Partner
The Reserve Bank of India had released the Guidelines for Default Loss Guarantee (DLG) in Digital Lending on June 8, 2023. These guidelines were subsequently consolidated into the Reserve Bank of India (Digital Lending) Directions, 2025, which came into force immediately, except for certain specific provisions relating to multiple lender arrangements and reporting of Digital Lending Apps. The 2025 Directions now contain the relevant DLG framework under Chapter VI, titled “Loss sharing arrangement in case of default.”
This is particularly relevant for fintech companies, digital lending platforms, NBFCs, banks and lending service providers that operate in India’s regulated digital credit ecosystem. Corrida Legal regularly advises businesses on Fintech and E-Commerce Laws, including digital lending, BNPL, RBI compliance, lending models, platform documentation and regulatory risk.
The RBI, after examining the arrangements between Regulated Entities and Lending Service Providers, came out with these guidelines which, most importantly, state that DLG arrangements that comply with the prescribed framework shall not be treated as synthetic securitisation or as loan participation.
Synthetic securitisation is a structure where credit risk of an underlying pool of exposures is transferred, in whole or in part, through the use of credit derivatives or credit guarantees that serve to hedge the credit risk of the portfolio which remains on the balance sheet of the lender. In layman terms, it is an arrangement for providing guarantee towards the credit risk of a portfolio.
The Directions define a DLG as a contractual arrangement, called by whatever name, between a Regulated Entity and another entity, under which the latter guarantees to compensate the Regulated Entity for loss due to default, up to a certain percentage of the loan portfolio of the Regulated Entity, specified upfront. Any other implicit guarantee of a similar nature, linked to the performance of the loan portfolio of the Regulated Entity and specified upfront, is also covered within the definition of DLG.
From a legal documentation standpoint, this makes the DLG arrangement more than a simple commercial understanding. It requires a carefully drafted and enforceable contract. Businesses may also refer to Corrida Legal’s broader work on Commercial and Operational Contracts and Regulatory Compliance for FinTech Businesses in India for related considerations around fintech structuring, platform documentation and compliance risk.
The Directions mandate that DLG arrangements must be backed by an explicit and legally enforceable contract between the Regulated Entity and the DLG provider.
Contract-based requirements
There are compulsory requirements for the contractual arrangements. The contract between the Regulated Entity and the DLG provider must, at the minimum, contain the following:
1. Extent of DLG cover
The contract must clearly specify the extent of the DLG cover. The total amount of DLG cover on any outstanding portfolio, which is specified upfront, cannot exceed 5% of the total amount disbursed out of that loan portfolio at any given time. In case of implicit guarantee arrangements, the DLG provider cannot bear performance risk of more than the equivalent of 5% of the underlying loan portfolio.
This 5% cap is one of the most important legal and commercial points in a DLG arrangement. The parties cannot simply agree to a wider indemnity or a larger risk-sharing arrangement outside the RBI framework and still treat the arrangement as a compliant DLG.
2. Form in which DLG cover is maintained
The contract must mention the form in which the DLG cover will be maintained with the Regulated Entity. The RBI permits DLG cover only in one or more of the following forms: cash deposited with the Regulated Entity, fixed deposit maintained with a Scheduled Commercial Bank with a lien marked in favour of the Regulated Entity, or a bank guarantee in favour of the Regulated Entity.
This makes the form of security very important. A loosely worded indemnity, corporate comfort letter or informal assurance from the LSP may not be sufficient if it does not fit within the permitted RBI framework.
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3. Timeline for DLG invocation
The contract must provide the timeline for invocation of the DLG. Under the Directions, the Regulated Entity is required to invoke the DLG within a maximum overdue period of 120 days, unless the loan dues are made good by the borrower before that.
Accordingly, the agreement should not leave invocation open-ended. It should clearly set out the trigger, process, documentation, timelines and manner in which the DLG will be invoked.
4. Disclosure requirements
The contract must also incorporate the applicable disclosure requirements. The Regulated Entity is required to ensure that the Lending Service Provider with whom it has a DLG arrangement publishes on its website the total number of portfolios and the respective amount of each portfolio on which DLG has been offered. The name of the Regulated Entity may or may not be disclosed as part of such disclosure.
This requirement is consistent with the RBI’s larger regulatory approach towards transparency in digital lending. Corrida Legal has also discussed the increasing regulatory scrutiny of fintech and digital lending models in its article on Fintech Laws in India: Understanding the Regulatory Regime.
Other important requirements
Apart from the contract-based requirements, the RBI Directions also prescribe certain prudential and operational conditions.
First, the Regulated Entity is required to put in place a Board approved policy before entering into any DLG arrangement. This policy must include, at a minimum, the eligibility criteria for the DLG provider, the nature and extent of DLG cover, the process for monitoring and reviewing the DLG arrangement, and details of the fees, if any, payable to or receivable from the DLG provider.
Second, the RBI has clarified that a DLG arrangement cannot act as a substitute for credit appraisal. The Regulated Entity must continue to maintain robust credit underwriting standards, irrespective of the DLG cover.
Third, every time a Regulated Entity enters into or renews a DLG arrangement, it must obtain adequate information to satisfy itself that the DLG provider will be able to honour the guarantee. This includes a declaration from the DLG provider, certified by its statutory auditor, regarding the aggregate DLG amount outstanding, the number of Regulated Entities, the number of portfolios against which DLG has been provided, and past default rates on similar portfolios.
This is also where legal and financial due diligence becomes important. Businesses may refer to Corrida Legal’s page on Fundraising Advisory and Documentation, which discusses legal due diligence, regulatory compliance, FEMA, RBI and transaction documentation support.
Fourth, the loan portfolio over which DLG is offered must consist of identifiable and measurable loan assets which have been sanctioned. This is referred to as the DLG set. The RBI has clarified that this portfolio must remain fixed for the purpose of DLG cover and is not meant to be dynamic.
Fifth, DLG arrangements are not permitted for revolving credit facilities offered through digital lending channels, credit cards, loans covered by specified credit guarantee schemes, or loans facilitated over NBFC-P2P platforms.
Why this matters for fintech companies and lending platforms
For fintech companies and lending service providers, the DLG framework is commercially significant because it permits a limited form of risk sharing, but only within a regulated structure. It also makes it clear that the RBI is willing to recognise commercial arrangements between Regulated Entities and LSPs, provided they are transparent, capped, documented and capable of regulatory review.
At the same time, the framework prevents LSPs from informally absorbing excessive credit risk, operating as shadow lenders, or creating arrangements that may undermine the Regulated Entity’s own underwriting responsibility. This is important for foreign investors, fintech founders and digital lending platforms looking to enter or scale in India. Corrida Legal’s article on Regulatory Compliance for FinTech Businesses in India: What Foreign Investors Should Know discusses these broader regulatory concerns in the fintech sector.
Conclusion
The RBI’s DLG framework is significant because it provides regulatory recognition to certain loss-sharing arrangements between Regulated Entities and Lending Service Providers, while also placing clear limits on their use. The framework attempts to strike a balance between enabling responsible fintech-led lending partnerships and ensuring that credit risk is not transferred or disguised in a manner that weakens underwriting discipline.
For Regulated Entities and Lending Service Providers, the key takeaway is that DLG arrangements are no longer merely commercial arrangements. They now require careful legal drafting, board-level policy support, due diligence, portfolio-level monitoring, strict compliance with the 5% cap, and ongoing disclosures.
Accordingly, any Regulated Entity or Lending Service Provider entering into a DLG arrangement should ensure that the agreement is specifically drafted in line with the RBI Directions, rather than relying on a generic guarantee, indemnity or risk-sharing clause. Businesses operating in the fintech, digital lending, BNPL, credit marketplace or financial services space may also explore Corrida Legal’s Fintech and E-Commerce Laws, India Entry and Foreign Investment and Commercial and Operational Contracts practice areas for related legal support.
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