RBI's DLG-ECL Clarification: When Cash Guarantees Finally Count

When a lender holds cash collateral against potential loan losses but still must provision for those same losses, something feels off. For months, NBFCs faced exactly this scenario with Default Loss Guarantees in digital lending arrangements. On February 13, 2026, RBI issued a notice that resolved the confusion. NBFCs may now factor DLG into Expected Credit Loss provisioning. This brings regulatory guidance in line with accounting standards and economic reality. The change matters for every NBFC in fintech partnerships where risk-sharing through guarantees is part of the business model.

The Background: Why This Was Confusing

DLG Framework and Funding Requirements

RBI permitted DLG arrangements in June 2023 for digital lending operations, then extended them to co-lending in August 2025. These guarantees can only be provided in fully funded forms. Also, there is a 5% cap on the total DLG cover for any loan portfolio. Cash deposits with the lender, fixed deposits with lien marked in the lender's favor, or bank guarantees are the permitted structures. In each case, the protection is equivalent to cash in hand.

The ECL Provisioning Question

The accounting question emerged around Expected Credit Loss provisioning. ECL is the forward-looking provisioning framework required under Indian Accounting Standards (Ind AS 109). Instead of waiting for defaults to occur, lenders estimate potential losses upfront. This is based on probability of default, loss given default, and exposure at default. The ECL amount is then set aside as a provision, hitting the profit and loss statement right away.

Should a fully funded guarantee reduce the ECL provision? Accounting logic suggests yes, since the guarantee absorbs losses that would otherwise hit the lender. But in 2025, RBI sent informal guidance through emails. NBFCs were directed to disregard DLG when computing ECL. This created tension between regulatory expectations and accounting standards. NBFCs faced an unclear position on how to report provisions and maintain true and fair financial statements.

The accounting vs regulatory gap:

The stakes extended beyond technical accounting. Provisioning affects reported profit, capital adequacy calculations, and investor perception of asset quality. NBFCs operating under digital lending partnerships needed clarity on the correct approach.

What the February 2026 Notification Does

The February 13 notice introduces three new paragraphs (36A, 36B, 36C) to set out how NBFCs should handle DLG in ECL calculations.

Permission to factor DLG: NBFCs may now consider DLG when figuring out provisions under the ECL framework across all three stages:

• Stage 1: Performing loans with 12-month expected loss

• Stage 2: Loans with major increase in credit risk requiring lifetime expected loss

• Stage 3: Credit-impaired assets

The permission applies uniformly across all stages, subject to compliance with Indian Accounting Standards.

The conditions are specific. The DLG deal must be integral to the contractual terms of the loan itself, not a separate side agreement. The guarantee cannot be recognized separately from the loan for accounting purposes. These requirements ensure the DLG truly represents embedded credit protection rather than a stand-alone financial instrument.

Disclosure requirements: NBFCs must comply with disclosure requirements under Ind AS 1, which governs presentation of financial statements. This means transparent reporting of how DLG affects provisioning. Users of financial statements can understand the impact on reported asset quality and profit.

Dynamic adjustment mechanism: Each time a DLG is invoked to cover actual losses, the guarantee cover reduces by the amount used. NBFCs must recompute ECL provisioning requirements after every use. This adjusts for the now-reduced DLG protection. Provisions stay aligned with actual remaining coverage as the guarantee depletes over time.

The practical effect: if an NBFC estimates 6.8% expected credit loss on a loan portfolio and holds a 5% DLG, the required ECL provision is now 1.8%. Previously, the NBFC would have provisioned the full 6.8% despite holding cash equivalent to 5% of potential losses.

Practical Implications for NBFCs

A. Financial Statement Impact

For NBFCs in fintech partnerships, the notice enables provisioning that reflects economic reality. Financial statements now show the net risk exposure rather than overstating expected losses. This affects reported profit in the current period. It also gives a more accurate picture of capital adequacy relative to actual risk.

B. Operational Requirements

The implementation demands are major:

• Real-time DLG tracking: Systems must monitor guarantee use as it occurs

• Dynamic ECL models: Provisions adjust automatically based on remaining guarantee coverage

• Documentation standards: DLG deals must meet Ind AS requirements showing integration with loan contracts

• Enhanced disclosures: Financial statements must show DLG impact on provisioning calculations

C. Ongoing Management

The requirement is not static. DLG cover depletes as the lender invokes the guarantee to cover actual defaults. An NBFC cannot make a one-time adjustment and consider the matter closed. Running portfolio analysis is required. This tracks current DLG balances against current ECL estimates. Regular recomputation is needed as either number changes.

The Broader Regulatory Context

From Informal Guidance to Formal Channels

The notice carries effects beyond the technical accounting question. It represents a shift from informal email guidance to formal regulatory channels. When major provisioning questions arise, the proper path is through official circulars and changes to master directions. Supervisor emails lack transparency and industry-wide visibility.

Impact on the Digital Lending Ecosystem

For the digital lending ecosystem, the clarity removes a source of doubt in fintech-NBFC partnerships. Lenders can now price the economics of deals where fintechs provide DLG. Risk-sharing models become more viable when provisioning reflects the actual risk transfer. Partners can structure deals knowing accounting treatment aligns with commercial substance.

The notice also addresses concerns raised by industry practitioners since the informal guidance emerged. Legal and accounting experts had questioned whether directives to ignore funded guarantees violated the principle of true and fair financial reporting. The February change resolves this by aligning RBI's formal position with accounting standards. This shows regulatory responsiveness when rules create conflicts with established financial reporting frameworks.

OneFin's Perspective

OneFin's platform handles the operational complexity these arrangements create. Dynamic ECL calculation supports real-time adjustment as DLG coverage changes. Provisions update automatically when guarantees are invoked. The system tracks guarantee use and remaining cover at portfolio level. This maintains the running balance that Ind AS reporting requires.

Digital lending frameworks continue to mature. Lending technology needs flexibility to handle evolving rules without manual workarounds or parallel spreadsheets. The DLG-ECL clarification is one example. Clean implementation depends on systems that adapt without code changes every time guidance shifts.

Conclusion

The February 13 notice brings needed clarity to an area where informal guidance had created confusion. NBFCs operating under DLG deals can now provision based on net economic exposure. This aligns financial reporting with commercial substance. The operational shift required is major but manageable with proper systems and processes.

The notice also reflects RBI's willingness to refine regulatory frameworks when practical use reveals gaps. Digital lending partnerships built on risk-sharing through guarantees now have clearer financial reporting foundations. The doubt about how these deals appear on balance sheets and income statements is resolved.

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