RBI disallows DLG agreements in P2P lending space

The Reserve Bank of India (RBI) has issued a definitive stance that default loss guarantees (DLG) are not permissible for loans facilitated through NBFC-P2P platforms.

The clarification is part of a broader framework on digital lending that was detailed in guidelines issued in June 2023, specifically stating that "In cases of implicit guarantee arrangements, the DLG provider shall not bear performance risk exceeding the equivalent of five percent of the underlying loan portfolio."

P2P lending platforms face operational changes post-RBI directive

The central bank's recent clarification impacts numerous fintech startups, especially those like Lendbox, LiquiLoans, Faircent, and LendenClub, which had engaged affiliates such as Uni and MobiKwik to facilitate DLG.

The RBI's directive, dated April 26, explicitly states, “DLG is not permitted on loans arranged on NBFC-P2P platforms,” affecting both existing and potential operational strategies of these platforms.

RBI enhances scrutiny and governance in digital lending

Amid increasing regulatory scrutiny, the RBI's measures are seen as a move to improve governance and reduce risk in the digital lending landscape.

The recent prohibition of DLG on P2P platforms is part of a series of regulatory actions aimed at tightening controls over fintech operations, including stringent Know Your Customer (KYC) guidelines for payment aggregators, with a compliance deadline set for September 30, 2025.

The potential shift in customer and investor dynamics in P2P lending

Experts suggest that the absence of DLG could lead to increased customer acquisition costs for P2P platforms, necessitating a shift in their business models from reliance on DLG arrangements to possibly sourcing openly from the market.

The removal of DLG may also discourage investors, previously shielded somewhat from default risks, from investing in P2P loans, thus impacting the growth trajectory of this sector.