RBI permits NBFCs to issue DLG in figuring out provisions beneath ECL – Market Evaluation & Knowledge

The modification, which comes into pressure instantly, clarifies that NBFCs might think about DLG safety whereas computing ECL, offered the assure association is integral to the contractual phrases of the mortgage and isn’t recognised as a separate asset within the books. 

The central financial institution added that because the DLG cowl reduces each time it’s invoked, NBFCs should recompute their ECL provisioning necessities throughout all levels after adjusting for the lowered assure cowl. 

The transfer follows the fast rise of digital lending and fintech-NBFC partnerships lately, which led to the widespread use of DLG constructions. Underneath such preparations, fintech companions agree to soak up a pre-defined portion of credit score losses to encourage NBFCs to lend to new-to-credit or higher-risk debtors.

Nonetheless, the RBI had earlier flagged considerations that sure DLG fashions resembled artificial securitisation constructions, which may doubtlessly obscure threat switch and lead to under-provisioning. The regulator had additionally clarified that NBFCs can’t deal with DLGs offered by unregulated digital lending service suppliers as legitimate credit score enhancements.

The most recent clarification goals to carry uniformity in provisioning practices whereas making certain that threat recognition stays aligned with prudential and accounting requirements.