What the RBI’s latest move really tells us about resilience
The first thing you provision for is uncertainty. Not risk.
In May 2025, the RBI dropped a quiet bombshell: NBFCs are no longer permitted to offset loan provisioning using Default Loss Guarantees (DLGs) provided by fintech partners — even when those DLGs are cash-backed, irrevocable, and fully compliant.
At one level, this sounds like punishing prudence. After all, what’s the point of a 5% default guarantee, backed by a liened FD, if you can’t reduce your provision by that amount?
But once you step back and separate the regulatory architecture from spreadsheet logic, the move starts to make uncomfortable sense.
Why We Got Addicted to DLGs
DLGs are clever. They allowed fintechs to stay asset-light while giving NBFCs the confidence to lend to high-risk categories — like subprime personal loans, MSMEs, and buy-now-pay-later customers. With a 5% DLG in place, NBFCs could reduce their expected loss, and some even used it to optimistically model net provisions. Overall it does help the ecosystem enlarge the perimeter of borrowers.
Everyone looked good:
- Fintechs grew volumes.
- NBFCs kept RoEs high.
- Investors loved the capital-light scaling.
And then RBI stepped in and said:
"Provision for the whole loss. DLGs don't count."
This Isn’t About Math. It’s About Posture.
Yes, the DLG is cash-backed.
Yes, it’s enforceable.
Yes, it will probably pay out.
But RBI is not interested in probabilities. It’s interested in discipline.
Provisioning, in RBI’s eyes, is not a prediction. It’s a capital stance.
It reflects how much stress the lender is prepared to hold on its own balance sheet, without help from outsiders — even reliable ones.
A Case from the Field: MSME Lending
Take a ₹1 lakh working capital loan to an MSME borrower sourced via a fintech.
- At 61 days past due, internal models demand a 30% provision.
- The fintech has issued a DLG — 5%, backed by a fixed deposit.
- Earlier, NBFCs might provision only ₹25,000 net of DLG.
Now? RBI says: make it ₹30,000. Period.
Call the DLG later. Recognize it later. Book it as income when it’s real — not when it’s promised.
You still get the ₹5,000, yes. But you’re not allowed to believe in it until it arrives. So even when economic impact is zero, accounting will create a “truer-picture” of underlying operations.
(Note: the provisions can be written-back if the account becomes regular again. Also if the account slips further to 90DPD, then both 100% provisioning and 5% DLG will be called upon – though there could be practical considerations to making the same in the same quarter)
Home Loan Insurance Tells the Same Story
Think of it like this:
Banks offering home loans routinely insure against default. When a borrower misses, the bank files a claim.
But the regulator doesn’t allow the bank to reduce provisions just because it’s insured.
Why?
Because recoveries are not provisioning tools. They are outcomes.
The RBI is saying:
“Your buffers must stand alone. If someone helps you later — good. But don't lean on it upfront.”
The Bigger Picture: RBI’s Philosophy
This is not a swipe at fintechs or DLGs.
This is a call to lenders: don’t outsource your balance sheet.
DLGs are useful, even smart. But they are:
- Not capital
- Not collateral
- Not substitutes for provisioning
They are, at best, comforts.
But in financial systems, comfort is not resilience.
The Real Risk in Delegated Risk
When NBFCs start pricing risk based on someone else’s guarantee, two things happen:
1. They start underwriting what they wouldn’t have, unhedged.
2. They start modeling RoE on shared courage — not solo exposure.
It works well, until it doesn’t.
The RBI’s Core Message: Carry Your Own Umbrella
There’s an old saying in central banking:
“In good times, you prepare for bad ones. In bad times, you find out who prepared.”
With this move, the RBI is forcing NBFCs to own every loan they book. Fully. On day one. No offsets. No outsourcing.
And honestly — that’s how it should be.
Closing Thought
If a credit institution must rely on external guarantees to justify lower provisions, it may be mistaking liquidity for resilience.
The RBI’s stance is clear: provision first, recover later.
And that distinction is what protects lenders — and the system — from the illusion of safety.
Image brief: Mackay Rays: This illusion, created in 1957 by neuroscientist Donald M. MacKay, then at King's College London, shows that simple patterns of regular or repetitive stimuli, such as radial lines (called MacKay rays), can induce the perception of shimmering or illusory motion at right angles to those of the pattern. To see the illusion, look at the center of the circle and notice the peripheral shimmering. FROM “TRAVERSING THE HIGHWIRE FROM POP TO OPTICAL,” BY CHRISTOPHER W. TYLER, IN PLOS BIOLOGY, VOL. 3, NO. 4; APRIL 2005
