India caps platforms' first-loss guarantees on digital loans at 5% of disbursements

Implications for lenders

Lenders that buy first-loss cover from a partner platform should treat it as a bounded buffer, not a transfer of credit risk: in India it is capped at 5% of disbursements and does not change NPA recognition. Accepting only funded cover and setting an invocation trigger, such as India's 120 days overdue, can reduce disputes when losses arrive. Credit review of the platform itself, including its total guarantees across all partners, may matter as much as review of the borrowers.

Implications

Facts

Framework: the Reserve Bank of India (Digital Lending) Directions, 2025 (RBI/2025-26/36), issued on 8 May 2025, apply to commercial banks, urban, state and central co-operative banks, NBFCs including housing finance companies, and all-India financial institutions. They replaced the June 2023 DLG guidelines. For NBFCs, the DLG rules are now set out in Chapter III of the NBFC Credit Facilities Directions of 28 November 2025, which the February 2026 amendment cites. A DLG is a contractual arrangement under which a lending service provider (LSP), or another regulated entity acting as one, compensates the lender for loss due to default up to a set share of a loan portfolio. ¹

Who and how: a lender may enter into DLG arrangements only with an LSP, or another regulated entity acting as an LSP, that is incorporated as a company under the Companies Act, 2013. The lender needs a board-approved policy and a declaration from the provider, certified by its statutory auditor, on its aggregate DLG, the number of lenders and portfolios covered and past default rates. Cover is accepted only as cash deposited with the lender, a fixed deposit at a scheduled commercial bank with a lien in the lender's favour, or a bank guarantee in the lender's favour.

Cap and invocation: total DLG cover on a portfolio specified upfront may not exceed 5% of the total amount disbursed out of that portfolio at any time; the portfolio stays fixed and is "not meant to be dynamic". ¹ An implicit guarantee may not carry performance risk beyond the same limit. The lender must invoke the DLG within a maximum overdue period of 120 days, unless the borrower makes the dues good first, ² and the guarantee must run at least as long as the longest loan in the portfolio.

Accounting and capital: NPA recognition and provisioning remain the lender's responsibility under existing norms irrespective of any DLG cover. An invoked amount is not set off against individual loans and is not reinstated, including through recoveries, although recoveries can be shared with the provider by contract. A regulated entity that provides a DLG deducts the full outstanding amount from its capital. A DLG that meets these rules is not treated as synthetic securitisation or as a loan participation.

Disclosure and exclusions: lenders must ensure that their LSPs publish on their websites the number of portfolios and the amount of each portfolio covered by DLG, monthly and within seven working days after each month-end. ³ Guarantees under the government-backed CGTMSE, CRGFTLIH and NCGTC credit guarantee schemes, and guarantees from multilateral development banks, fall outside the definition of DLG.

Provisioning change: the NBFC Income Recognition, Asset Classification and Provisioning Amendment Directions, 2026 (RBI/2025-26/210), issued on 13 February 2026 with immediate effect, let NBFCs consider a DLG when setting provisions under the expected credit loss framework across all stages, subject to the accounting standards' conditions, including that the guarantee is integral to the loan's contractual terms and not recognised separately. Because invocation reduces the remaining cover, NBFCs must recompute their provisions across stages.

Analysis

The rules let fintech platforms share credit risk with the lenders whose balance sheets fund their loans, but only in a narrow band. A platform can absorb first losses up to 5% of what a fixed portfolio disbursed; losses beyond that fall on the regulated lender, which keeps responsibility for classification and provisioning. Funded forms mean the cover is already in the lender's hands when it is needed, the fixed portfolio stops cover from being recycled across new loans, and the monthly website disclosure lets lenders and investors see how much first-loss exposure a platform has written across all its partners. The February 2026 amendment eases the provisioning cost for NBFCs, but only where the guarantee passes an accounting test, and the relief shrinks as cover is used up.

Southeast Asia uses first-loss cover in different ways. In Malaysia, digital bank GXBank signed an unfunded first-loss arrangement in September 2026 under which the IFC covers up to USD 4.95 m of losses on MSME lending of up to USD 110 m. ⁴ Under India's rules, a guarantee from a multilateral development bank sits outside the DLG definition, so the cap is aimed at the platforms that originate loans for a lender, not at development lenders. In Indonesia, OJK's draft amendment to POJK 40/2024 would require online lending (pindar) platforms to set aside at least 5% of the net platform fee on each disbursement for lender losses caused by operator error or negligence. ⁵ That reserve covers failures of the operator, while India's DLG covers borrower default. Indonesian platforms' outstanding loans were IDR 106.94 trn in August 2026, and the TWP90 arrears ratio, the share more than ninety days past due, stood at 4.73%. ⁶

What it suggests for Southeast Asia: as banks and finance companies in Indonesia, Malaysia and elsewhere in the region lend through apps and embedded-finance partners, India offers a tested set of design choices for platform guarantees: a hard cap tied to disbursed amounts, funded forms only, a deadline for invocation, provisioning kept with the lender, and public monthly disclosure by the guarantor. Regulators that have not yet set rules for platform-provided first-loss cover can compare their options against these choices, and lenders can use them as a benchmark when negotiating risk-sharing terms with partners.

Counterpoints and uncertainties

A cap of 5% may be below expected losses on high-risk unsecured portfolios, so the cap can push risk-sharing into other forms, such as pricing, servicing fees or co-lending structures, that sit outside the DLG count. Funded cover ties up platform capital, which can limit how much smaller platforms originate. The provisioning relief for NBFCs depends on an accounting judgement that the guarantee is integral to the loan, which auditors may apply differently. The rules rest on India's legal framework for guarantees and on its supervisory reach over LSPs; Southeast Asian markets without a licensing or registration regime for lending platforms would need one before such rules could be enforced.