FLDG: how default loss guarantee arrangements work under the RBI framework
FLDG, now formally referred to by the RBI as Default Loss Guarantee (DLG), is an arrangement where a lending service provider or partner absorbs the first slice of credit losses on a specified loan portfolio. Under the RBI's June 2023 guidance, DLG cover is capped at 5% of the amount of the outstanding loan portfolio, must be backed only by cash deposit, fixed deposit with a lien, or a bank guarantee, and must sit under a written contract with defined invocation timelines and disclosure.
Before 2023, FLDG was the quiet engine of a large part of Indian digital lending. A fintech sourced and often serviced the borrower, a regulated lender held the loan, and a side arrangement moved the first tranche of credit risk back to the fintech. The economics worked; the accountability did not, because the entity taking the risk was not the entity the regulator supervised.
The RBI's Default Loss Guarantee guidance put boundaries around the practice rather than banning it. This page covers what those boundaries are and, more practically, what changes in how a lender should govern a DLG-backed sourcing partner.
The regulatory shape
The core provisions are simple to state and easy to breach in structure. Read them as design constraints on the commercial arrangement, not as paperwork to be added afterwards.
- Cap: DLG cover is limited to 5% of the amount of the outstanding loan portfolio specified in the arrangement.
- Permitted forms: cash deposited with the regulated entity, a fixed deposit with a lien marked in its favour, or a bank guarantee. Corporate guarantees and other implicit structures are outside the framework.
- Written contract required, covering the extent of cover, the form, the timeline for invocation, and the disclosure obligations.
- Invocation: the regulated entity must invoke DLG within a defined period of the loan being classified as NPA - the guarantee cannot be left open indefinitely to smooth reported quality.
- No dilution of underwriting: the regulated entity retains full responsibility for the credit decision. A DLG does not substitute for its own credit appraisal.
- Disclosure: the number of portfolios and the amounts covered by DLG, and the identity of the providers, must be published as required.
The framework applies to arrangements dressed differently as well. If a commercial term has the economic effect of shifting first-loss credit risk to a partner, treat it as DLG and structure it inside the framework rather than around it.
What a compliant arrangement looks like in practice
Two lenders can run the same 5% cover and end up with completely different risk outcomes, because the cover is only the last line. What differs is whether the lender underwrites like the guarantee does not exist.
| Element | Weak arrangement | Sound arrangement |
|---|---|---|
| Underwriting | Rules effectively set by the partner's model | Lender's own policy, partner model as an input only |
| Portfolio definition | Loosely worded, revised informally | Named cohort, fixed period, agreed at origination |
| Cover form | Corporate guarantee or netting off payouts | Cash, lien-marked FD, or bank guarantee |
| Invocation | Deferred to protect reported quality | Within the contractual window after NPA classification |
| Monitoring | Reviewed at renewal | Monthly vintage curves by partner and cohort |
| Exit | No plan; the book is the plan | Defined run-off and servicing continuity if the partner fails |
Governing the partner, not just the guarantee
A 5% cap means the lender carries everything beyond a fairly ordinary level of stress. In an unsecured book that can be reached in a bad vintage, which makes partner-level portfolio monitoring the real control rather than the deposit sitting in the FD.
- Vintage curves by partner cohort - 30+ at month three and 90+ at month six, tracked monthly against the pricing assumption.
- Concentration limits per partner, per geography and per product, set before the relationship scales.
- Independent verification of a sample of the partner's sourcing - KYC, customer contactability, and consent trail.
- Customer conduct oversight: collections behaviour and grievance handling remain the lender's accountability under the digital lending framework.
- Data flows: customer data must reach the lender's systems directly, with the partner's access defined and logged.
- Stress test the book at two and three times the DLG cover, and know in advance what you would do at each level.
How FLDG changes sourcing economics
Partners funding a guarantee have real capital tied up, which changes their behaviour in ways a lender should anticipate. They become more selective, which helps quality, but they also push for volume to earn a return on that locked capital, and for looser portfolio definitions that spread the cover thinner.
The commercial conversation worth having is about the price of risk rather than the size of the guarantee. A partner willing to take a lower payout for a smaller DLG is often the better long-term counterparty, because their revenue does not depend on a book that has to stay pristine.
Where Toolyt fits
Toolyt gives lenders partner-level visibility on the sourcing side of a DLG arrangement: application quality, document completeness, deviation intensity and conversion, tracked by partner and cohort, with an auditable trail of who sourced and who approved each file. That is the same data set that later explains a vintage curve, so portfolio conversations with a partner start from evidence rather than assertion.
Frequently asked questions
- What is FLDG in lending?
- First Loss Default Guarantee is a contractual arrangement in which a sourcing or technology partner absorbs the initial portion of credit losses on a defined loan portfolio held by a regulated lender. The RBI now refers to it as Default Loss Guarantee and regulates it under its digital lending framework.
- What is the RBI cap on FLDG?
- Default Loss Guarantee cover is capped at 5% of the amount of the outstanding loan portfolio specified in the arrangement. Cover must be in the form of cash, a fixed deposit with a lien marked in favour of the regulated entity, or a bank guarantee.
- Is FLDG allowed in India?
- Yes, within the RBI's Default Loss Guarantee framework. It requires a written contract specifying the cover, its form, invocation timelines and disclosure, and the regulated entity must continue to run its own credit appraisal independent of the guarantee.
- Who can provide a default loss guarantee?
- A lending service provider or another regulated entity that the lender has a DLG arrangement with, subject to the contract and disclosure requirements. The guarantee must be backed by the permitted instruments rather than by a corporate guarantee or an informal netting of payouts.
- Does FLDG remove credit risk for the lender?
- No. It absorbs the first 5% of losses on the specified portfolio and nothing beyond it, and the lender remains fully responsible for underwriting, customer conduct and grievance redress. In a stressed vintage the residual risk sits entirely with the lender.
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