By: Kunal Varma, Co-Founder and CEO of Freo.

“The RBI’s early May circular is a reminder to keep digital lending responsible and transparent. While Default Loss Guarantees (DLGs) were always allowed, the circular clarifies how NBFCs should provision for expected losses in their portfolios – specifically, that they must first provision for any credit losses and treat recoveries through DLGs separately. The two should not be mixed up, which is the main clarification.

This is not a policy change, but a call-out for those NBFCs that were not doing enough provisioning. It’s a move to ensure better compliance and transparency. For most responsible partnerships, the operational impact should be minimal. This does not affect the growth momentum of the industry or indicate any change in risk weightages.”