RBI's Default Loss Guarantee (DLG) Rules for Digital Lending, Explained
A Default Loss Guarantee (DLG) — commonly called First Loss Default Guarantee (FLDG) — lets a lender contract a partner to absorb defaults up to a set share of a loan portfolio. The Reserve Bank of India (RBI) permits it, but caps the cover at five per cent of the portfolio, restricts its form, and fixes a 120-day invocation window.
This is an explainer, not legal advice. For binding provisions, refer to the official RBI circular.
Key facts: RBI first permitted DLG through its "Guidelines on Default Loss Guarantee (DLG) in Digital Lending" dated June 08, 2023, later consolidated into the Reserve Bank of India (Digital Lending) Directions, 2025. YuVerse handles over 2.5 crore voice AI calls a month for lenders operating under exactly these rules.
What Is a Default Loss Guarantee (DLG) in Digital Lending?
A Default Loss Guarantee is a contractual arrangement between a Regulated Entity (RE) — a bank, co-operative bank or Non-Banking Financial Company (NBFC), including a Housing Finance Company (HFC) — and a partner who guarantees to compensate the RE for losses due to default, up to a certain percentage of the loan portfolio specified upfront.
In practice, a fintech Lending Service Provider (LSP) sources and services loans on a bank or NBFC's book, and offers a DLG to share the credit risk. RBI examined this "FLDG" model and, through its circular RBI/2023-24/41 DOR.CRE.REC.21/21.07.001/2023-24 dated June 08, 2023, decided to permit such arrangements subject to defined guardrails. Arrangements that conform are not treated as "synthetic securitisation" or "loan participation."
Parameter | What RBI's DLG rules specify |
|---|---|
Who can provide DLG | An LSP or another RE with which the RE has an outsourcing arrangement; the LSP must be a company incorporated under the Companies Act, 2013 |
Cap on cover | Not more than five per cent of the amount of that loan portfolio |
Permitted forms | Cash deposit; lien-marked fixed deposit at a Scheduled Commercial Bank; or bank guarantee — all in favour of the RE |
Invocation window | Within a maximum overdue period of 120 days, unless the borrower repays first |
Tenor | Not less than the longest tenor of any loan in the underlying portfolio |
Disclosure | LSPs must publish portfolio count and amounts on which DLG is offered |
What Does RBI's DLG Circular Actually Say?
The circular sets out a handful of hard limits. On the cap, the RE must ensure that total DLG cover on any outstanding portfolio, specified upfront, does not exceed five per cent of that portfolio. So on a ₹100 crore digital loan portfolio, DLG cover cannot exceed ₹5 crore.
On permitted forms, an RE may accept DLG only as cash deposited with it, a fixed deposit at a Scheduled Commercial Bank with a lien marked in the RE's favour, or a bank guarantee in the RE's favour. Informal or open-ended promises do not qualify.
On invocation, the RE must invoke the DLG within a maximum overdue period of 120 days, unless the borrower makes good the amount before that.
Crucially, the circular keeps asset classification with the lender. Recognising individual loans as Non-Performing Assets (NPAs) and making the consequent provisions remains the RE's responsibility, irrespective of any DLG cover at the portfolio level. The amount of DLG invoked cannot be set off against the underlying individual loans. This design prevents a guarantee from masking the true credit quality of the book. RBI also reiterates that a DLG "shall not act as a substitute for credit appraisal" — robust underwriting standards are required regardless of cover.
Why Did RBI Cap DLG at 5%?
Before these rules, some FLDG structures effectively pushed most of the credit risk onto an unregulated fintech partner while the loan sat on a regulated lender's balance sheet. That blurred accountability and could disguise portfolio stress. By capping cover at five per cent and requiring the lender to keep classifying and provisioning loans on its own books, RBI keeps the regulated entity accountable for underwriting quality while still allowing a measured, transparent form of risk-sharing. The disclosure requirement — LSPs publishing the portfolios and amounts on which DLG is offered — adds a layer of visibility for the market.
How Does DLG Fit the Digital Lending Directions, 2025?
The 2023 DLG guidelines have since been repealed and consolidated into the Reserve Bank of India (Digital Lending) Directions, 2025 (circular RBI/2025-26/36 DOR.STR.REC.19/21.07.001/2025-26, dated May 8, 2025), which now houses the DLG chapter alongside Key Fact Statement, cooling-off and other digital lending norms. The 2025 Directions retain the core: DLG cover must not exceed five per cent of the total amount disbursed out of that loan portfolio at any given time, and the invocation and disclosure logic carries over. The underlying framework for "Digital Lending" was first laid out in RBI's Guidelines on Digital Lending dated September 02, 2022. Lenders should read the DLG provisions as part of that consolidated rulebook rather than as a standalone circular.
How AI Helps Lenders Stay DLG-Compliant
Because RBI insists a DLG can never substitute for credit appraisal, the real compliance work sits in underwriting and monitoring. AI strengthens both. Alternative-data credit models such as YuALT score thin-file and no-bureau borrowers so lenders keep robust standards even where a DLG partner shares risk. On the monitoring side, AI dashboards track portfolio-level overdue ageing against the 120-day invocation window and flag NPA recognition that must stay on the lender's books — helping ensure the guarantee is invoked correctly and never used to mask stress. Used this way, AI supports the discipline RBI's rules demand rather than working around them.
FAQ
Q1. Is FLDG the same as DLG? Yes. RBI's circular notes that a Default Loss Guarantee is "commonly known as FLDG" (First Loss Default Guarantee). The 2023 guidelines formalised and renamed the arrangement as DLG.
Q2. What is the maximum DLG a lender can accept? Total DLG cover on any outstanding portfolio, specified upfront, must not exceed five per cent of that loan portfolio. On a ₹100 crore portfolio, that is ₹5 crore.
Q3. In what forms can DLG be held? Only as cash deposited with the RE, a fixed deposit at a Scheduled Commercial Bank with a lien marked in the RE's favour, or a bank guarantee in the RE's favour.
Q4. Who can provide a DLG? An LSP or another RE with which the lender has an outsourcing arrangement. An LSP providing DLG must be incorporated as a company under the Companies Act, 2013.
Q5. Does a DLG change how NPAs are recognised? No. Classifying loans as NPAs and making provisions stays the lender's responsibility, irrespective of DLG cover, and invoked DLG cannot be set off against individual loans.
Q6. Where are the DLG rules now found? They have been consolidated into the Reserve Bank of India (Digital Lending) Directions, 2025. For binding text, refer to the official circular.
Conclusion
RBI's DLG framework allows measured risk-sharing in digital lending while keeping accountability — underwriting, asset classification and provisioning — firmly with the regulated lender. The 5% cap, permitted forms, 120-day invocation and disclosure duties are the pillars to design around. Related reading: how AI scores thin-file borrowers, how NBFCs analyse bank statements in seconds, voice AI for digital lending onboarding and AI adoption among Indian NBFCs.
Building compliant digital lending workflows? Talk to the YuVerse team to see how AI supports underwriting and portfolio monitoring.
References
- RBI — Guidelines on Default Loss Guarantee (DLG) in Digital Lending (RBI/2023-24/41, June 08, 2023) — https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12514&Mode=0
- RBI — Reserve Bank of India (Digital Lending) Directions, 2025 (RBI/2025-26/36, May 8, 2025) — https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12848&Mode=0
- RBI — Guidelines on Digital Lending (September 02, 2022) — https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12382&Mode=0
