RBI issued Guidelines on Digital Lending in June 2022 (effective September 2022), introducing Default Loss Guarantee (DLG) framework. DLG allows Lending Service Providers to guarantee loan repayments to Regulated Entities up to specific limits. Banks/NBFCs remain ultimate lenders while fintech partners can absorb default risks through contractual arrangements. Framework aims to clarify responsibilities, reduce regulatory arbitrage, and protect borrower interests. Key provisions include DLG caps, disclosure requirements, and outsourcing guidelines for digital lending partnerships.

The Default Loss Guarantee mechanism emerged as RBI's response to the explosive growth of fintech-bank partnerships in digital lending. Prior to these guidelines, the regulatory framework was ambiguous about risk-sharing between banks and their fintech partners, leading to potential regulatory arbitrage and consumer protection issues. Under DLG, a Lending Service Provider (typically a fintech) can contractually guarantee to compensate the Regulated Entity (bank/NBFC) for loan defaults up to a predetermined amount or percentage. This creates a formal risk-transfer mechanism while ensuring the bank remains the actual lender. The framework addresses concerns about 'shadow banking' where fintechs were effectively lending without regulatory oversight. It also mandates that borrowers must know they're dealing with a regulated entity, not just the fintech interface. The DLG structure allows innovation in digital lending while maintaining regulatory control over credit risk assessment, pricing, and recovery processes within the formal banking system.