NBFC

RBI Eases DLG Rules for NBFCs in 2026: Impact on Digital Lending and Credit Growth

There has been a significant change in India’s financial sector. The Reserve Bank of India has once again allowed NBFC to use the Default Loss Guarantee (DLG). The strict rules issued in May 2025 have been effectively repealed. Many NBFCs and their fintech partners were in trouble due to the rules. They had to keep additional provisions, which reduced profits and made it difficult to give new loans. 

This new decision has brought relief to the digital lending sector. This will reduce capital pressure and increase the opportunity to give loans to new customers. Exciting time for business enthusiasts eyeing NBFC registration. People who did not have banking facilities earlier will also benefit. In this blog, we will understand the DLG, previously existing problems, and new changes. 

Understanding the Role of the Reserve Bank of India (RBI) 

The Reserve Bank of India is the central bank of India. Its main responsibility is to keep an eye on the banking and financial system of the country. RBI regulates the activities of banks and NBFCs. 

Digital lending is growing rapidly. Many NBFCs are now providing loans online in collaboration with fintech companies. These new models carry risks. So, RBI makes rules so that the interests of the customer are protected, and the financial system remains stable. 

RBI always says to follow prudential norms, or prudent financial rules. You should carefully examine and prepare for possible losses before giving out a loan. The RBI intervenes with a new financial model to avoid problems in the long run. 

What are Default Loss Guarantees (DLGs)? 

Default Loss Guarantee or DLG is a type of limited risk protection mechanism. This agreement is usually between an NBFC and a fintech company. When a borrower fails to repay the loan, the fintech partner bears a certain amount of loss. 

This guarantee is usually limited to 5% of the total loan portfolio. In addition, this guarantee has to be backed by cash collateral or a bank guarantee. It is backed by real security. 

DLG makes NBFCs willing to lend to new or risky customers. This is helpful for new borrowers. DLG becomes very important in the digital lending model, as it shares some risk. So, it has served as a useful framework for both fintechs and NBFCs. 

What Changed in May 2025? 

The Reserve Bank of India issued strict guidelines in May 2025. NBFCs will not be able to take DLG into account while calculating their provisions according to the rules. Despite the guarantee, provision will have to be made for the entire risk when calculating potential losses. 

The Expected Credit Loss (ECL) calculation increases. NBFCs have to keep more money aside. This puts pressure on their capital and reduces profits. 

This creates immediate financial pressure for many institutions. Digital loans become less attractive. Working with fintech partners also becomes less profitable. This decision slowed down the pace of digital lending and made NBFCs more cautious. 

RBI’s 2026 Decision: Restoration of DLG Framework  

The Reserve Bank of India has decided to re-recognize the Default Loss Guarantee (DLG) from February 2026. So, NBFCs will now be able to include DLG while calculating their Expected Credit Loss (ECL). However, DLG must be an integral part of the loan structure. Separate or artificially added guarantees will not be acceptable. 

NBFCs will have to recalculate ECL whenever DLG is used or invoked. The cover of the guarantee will gradually reduce. This rule has been made in line with Indian Accounting Standards (Ind AS). 

RBI wants all NBFCs to follow the same provisioning method. This will increase transparency, and risk will be properly understood. RBI is supporting innovation in digital lending and helping to emphasize risk management. It helps to create a balance between development and caution. 

Financial Impact on NBFCs  

This new decision has brought a lot of relief to NBFCs. Earlier, they had to keep additional provisions, but the pressure would be reduced to some extent. This will increase their capital utilization and make their balance sheet stronger. 

The impacts are given below in simple terms- 

• Reduced provisioning burden: There is no need to keep extra money aside as DLG can be taken. 

• Capital relief: The stuck capital will be released gradually. 

• Better balance sheet position: The financial position will be more stable. 

• Improved profitability: The possibility of future profits will increase. 

Now the free capital can be used for new lending. This is likely to improve Net Interest Margin (NIM) and Return on Assets (ROA). 

Boost to Digital Lending and Fintech Partnerships 

Cooperation between NBFCs and fintech companies will gain momentum again with the reinstatement of DLG. Now it helps many institutions to plan anew. 

The amount of loan disbursement may increase. It will be possible to reach customers, especially in small towns and rural areas. People who are outside the banking facilities can also get loans through digital means. 

Digital lending is growing rapidly in India. It will also help in fulfilling the financial inclusion goal that the government has taken. 

In addition, this decision will help create a responsible co-lending framework. Both NBFCs and fintechs will now have to pay more attention to transparency and risk management. This will make the entire ecosystem stronger. 

Risk Concerns and Regulatory Safeguards 

RBI was cautious earlier about the real hidden risk through the DLG system. They may not be able to assess the actual credit risk properly if NBFCs rely too much on guarantees. 

Even though DLG has been reaccredited, there are some strict conditions. Every time DLG is used, ECL must be recalculated. This will give a correct picture of the risk. 

RBI will monitor this sector regularly. If the quality of loans is deteriorating, then strict action may be taken again. 

NBFCs also help to maintain a strong underwriting process. Relying only on guarantees will not work. 

Also, regulatory arbitrage needs to be avoided. Risks cannot be reduced by using loopholes in the rules. Transparency and responsible behavior also help to keep this sector stable in the long run. 

Market Outlook and Sector Trends 

After the reinstatement of DLG, the market has created a positive sentiment towards digital-focused NBFCs. Investors and analysts believe that this decision will once again increase their loan disbursement capacity. So, the pace of credit growth may remain strong. 

However, competition is not less. Big banks and new generation fintech companies are also active in the same market. So, NBFCs will have to improve their efficiency, use of technology, and customer service. 

Compliance and transparency are very important. Failure to comply with the rules may lead to stricter measures in the future. 

A strong risk assessment is required to keep digital lending sustainable in the long term. Investors and stakeholders should now keep an eye on the quality of loans, provisioning methods, and internal control systems of NBFCs. 

Effects on Borrowers and the Economy 

This decision is important for ordinary borrowers. It may now be relatively easier to get loans. Small businesses and new-to-credit customers will benefit the most. 

Faster loan approval and disbursement will be possible through digital channels. This will strengthen India’s digital economy. Small entrepreneurs will be able to grow their businesses by getting capital easily. 

This framework tries to keep the financial system stable. RBI has supported innovation and maintained control. This decision gives equal importance to both development and security. 

Conclusion 

The Reserve Bank of India is an important turning point in the digital lending sector through this decision. RBI has now adopted a balanced policy, moving away from the strict position of 2025. This will boost the NBFC and fintech ecosystem. 

However, responsibility will also increase with this benefit. NBFCs will have to maintain proper risk assessment, strong compliance, and transparent accounting. Relying on DLG alone will not work. Disciplined financial practices are required for sustainable credit growth in the long term. 

It is very important for institutions working in the digital lending sector to know and follow the right rules. 

Enterslice provides you with complete support related to NBFC compliance, digital lending advisory, and RBI regulations. Contact us today to move your business forward in a safe and regulated manner. 

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