FLDG Arrangement: How Default Loss Guarantees Work in India
FLDG Arrangements Explained: How NBFCs and Fintechs Structure Default Loss Guarantees Under RBI Rules
Last reviewed: November 2026
An FLDG arrangement is a contract in which a fintech partner agrees to absorb a lender's loan losses up to a fixed share of a portfolio. The RBI's term is default loss guarantee (DLG), and it caps the cover at 5% of the amount disbursed.
This guide is for CEOs, CFOs and Heads of Partnerships at NBFCs and fintechs who negotiate these deals. It explains what the rules allow, how to structure the term sheet and what your systems must track.
Key Takeaways
- A DLG is permitted only in digital lending and co-lending, and is capped at 5% of the amount disbursed from a fixed portfolio.
- Only an LSP or another lender acting as an LSP, incorporated under the Companies Act, 2013, can provide it.
- Cover must be held as cash, a lien-marked bank fixed deposit or a bank guarantee, and invoked within 120 days overdue.
- Since 13 February 2026, Ind AS NBFCs may factor DLG into ECL provisions, but NPA classification is unchanged.
What Is an FLDG Arrangement Under RBI Rules?
It is a contractual promise by a partner to compensate the lender for defaults, up to a set percentage of a loan portfolio. The RBI's definition also captures implicit guarantees linked to portfolio performance, whatever the contract calls them.
The RBI treats such guarantees as synthetic securitisation, which is otherwise prohibited. It first allowed them for digital lending in June 2023, then for co-lending in August 2025.
For NBFCs, the digital lending version now sits in Chapter III, Section E, of the Reserve Bank of India (Non-Banking Financial Companies – Credit Facilities) Directions, 2025, dated 28 November 2025. Banks have parallel provisions in their own consolidated directions.
Why Do Partners Offer One?
A DLG gives the fintech skin in the game. The lender gets comfort that the partner's sourcing and collections will be disciplined, while the fintech gets access to balance sheet it could not raise alone.
That trade only works if both sides price it honestly. A partner that guarantees 5% on a product expected to lose 8% is signalling weak underwriting, not strength.
Who Can Give and Receive a DLG?
The NBFC is the beneficiary, and the provider must be its lending service provider. The table below separates what is allowed from what is not.
| Question | Permitted | Not Permitted |
|---|---|---|
| Who provides cover | An LSP, or another lender engaged as an LSP | Unrelated investors or group shell entities |
| Provider's legal form | Company incorporated under the Companies Act, 2013 | Partnerships, LLPs or individuals |
| Loans covered | Identified digital loans in a fixed DLG set | Loans under trust-administered credit guarantee schemes |
| P2P platforms | Not applicable | NBFC-P2Ps cannot offer DLG on loans they facilitate |
| Not counted as DLG | CGTMSE, CRGFTLIH, NCGTC schemes and multilateral guarantees | Not applicable |
Before signing, the NBFC needs a board-approved policy covering eligibility criteria, the extent of cover, monitoring and fees. It must also obtain a declaration from the provider, certified by its statutory auditor, on aggregate DLG outstanding, lenders and portfolios covered, and past default rates.
Read that declaration as credit data, not paperwork. A partner guaranteeing several lenders at once may not have the cash to honour every claim in a downturn.
How Should the Term Sheet Be Structured?
Every DLG needs an explicit, legally enforceable contract. These are the terms leadership should settle first.
| Term | What the Rules Say | Decision for Leadership |
|---|---|---|
| Cover amount | Up to 5% of the amount disbursed from the set | Whether 5% is enough for the product's expected loss |
| DLG set | Identifiable, sanctioned loans, fixed rather than dynamic | Set size and how often new sets open |
| Form of cover | Cash, lien-marked FD with a scheduled commercial bank, or bank guarantee | Which form fits the partner's balance sheet |
| Invocation | Within 120 days overdue, unless dues are cleared | Whether to invoke earlier, at 60 or 90 days |
| Tenor | At least the longest loan tenor in the set | Renewal and top-up mechanics |
| Recoveries | May be shared with the provider as agreed | Sharing ratio and waterfall |
| Disclosure | LSP publishes portfolio count and amounts monthly | Who prepares and checks the website data |
Two rules surprise commercial teams. Cover does not reset as loans mature, and once invoked it cannot be reinstated, even after recoveries.
Fees also need care. The LSP's service fees must be paid by the NBFC, not collected from borrowers, so the partner cannot recover its DLG cost through separate borrower charges.
Do your partnership terms and your loan system agree on every DLG set?
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Visit Digiqt to see how we build lending platforms that track partner portfolios end to end.
How Does a DLG Play Out Over a Portfolio's Life?
The cap is fixed at the start, while losses arrive over time. In this illustrative scenario, an NBFC and a fintech LSP open one DLG set.
| Stage | Event | DLG Position |
|---|---|---|
| Set opens | ₹60 crore disbursed across identified loans | Cap = 5% × ₹60 crore = ₹3 crore, held as a lien-marked FD |
| Year 1 | Loans worth ₹1.9 crore reach 120 days overdue | ₹1.9 crore invoked, ₹1.1 crore cover left |
| Year 1 | ₹0.4 crore recovered from invoked loans | Shared as per contract, cover stays at ₹1.1 crore |
| Year 2 | Loans worth ₹1.6 crore reach 120 days overdue | ₹1.1 crore invoked, cover exhausted |
| Year 2 | Residual loss | NBFC absorbs ₹1.6 crore − ₹1.1 crore = ₹0.5 crore |
Total defaults reached ₹3.5 crore, or about 5.8% of the ₹60 crore disbursed. The guarantee covered ₹3 crore, and the NBFC carried the rest before its share of recoveries.
The lesson for leadership: price and underwrite as if the DLG will run out. The rules say plainly that a DLG does not replace credit appraisal.
How Does a DLG Affect Provisioning and Capital?
Classification stays loan by loan, while provisioning can now reflect the cover. Capital treatment depends on who provides the guarantee.
- Asset classification. Each loan is classified under the NBFC Income Recognition, Asset Classification and Provisioning Directions, 2025, whatever the DLG position.
- No set-off. Invoked amounts are not netted against individual loans, so the borrower still owes the full dues.
- ECL recognition. Since 13 February 2026, an NBFC may consider the DLG in ECL across all stages, if the DLG is integral to the loan's contractual terms under Ind AS.
- Recalculation. After each invocation, cover shrinks, so ECL must be recomputed for the remaining cover.
- Provider capital. If the provider is itself an NBFC, it must deduct the full outstanding DLG from its capital.
Analytics help here. An expected credit loss intelligence agent can recompute stage-wise provisions as cover falls, which keeps finance and risk on the same numbers.
What Must Your Systems Track?
A DLG lives across the loan system, treasury and the partner's website. Each needs a clean data link.
- Set register. Tag each loan to one DLG set at sanction, and lock the set once it closes.
- Cap ledger. Track disbursed amount, cap, invoked amount and remaining cover per set.
- Invocation trigger. Flag loans approaching 120 days overdue and raise claims automatically.
- Collateral tracking. Monitor FD lien status and bank guarantee expiry against the longest loan tenor.
- Disclosure feed. Send portfolio counts and amounts to the LSP each month, within seven working days of month-end.
Early warning matters as much as the ledger. An early delinquency warning agent can show which sets will burn through their cover first.
Partner oversight is the other half. A BaaS partner monitoring agent can watch partner performance and contract terms across many fintech relationships.
Where Do FLDG Deals Go Wrong?
Most problems come from treating the DLG as a commercial side deal rather than a regulated structure.
- Dynamic pools. Adding new loans to an old set breaches the fixed-set rule and inflates the effective cover.
- Hidden extra cover. Fee clawbacks or performance-linked rebates can count as implicit DLG and break the 5% cap.
- Missed invocation. Claims raised after 120 days overdue create a compliance breach and a contract dispute.
- Expired guarantees. A bank guarantee that lapses before the longest loan tenor leaves the tail of the book uncovered.
What Is Changing Next?
The RBI is harmonising DLG treatment across digital lending, co-lending and credit risk transfer. Co-lending DLG, first allowed in August 2025, is now referenced alongside the Credit Risk Transfer Directions, 2025.
The February 2026 ECL change makes accurate set-level data more valuable. For more on automation across shared loan books, see AI agents in co-lending.
Want DLG caps, invocations and disclosures handled by the system, not spreadsheets?
Talk to Our Lending Technology Specialists
Visit Digiqt to see how we build lending platforms and AI agents for NBFC-fintech partnerships.
