Digital lending is now one instrument, and a default loss guarantee cannot exceed five per cent of what the portfolio disbursed

The Reserve Bank of India (Digital Lending) Directions, 2025 took three circulars written over five years and replaced them with one, and in doing so moved the default loss guarantee out of a standalone 2023 circular and into a chapter of the regime it always belonged to. The commercial terms are unchanged in substance: cover is capped at five per cent of what the portfolio disbursed, it is held in cash or in something a lender can realise like cash, and the lender invokes it within 120 days of a loan going overdue. What changed is the frame. A guarantee is now read against the same instrument that fixes the key fact statement, the cooling off right, the fee route and the directory filing, so an arrangement that is sound on the five per cent and wrong on the fees fails in one document rather than two.

One instrument where there were three

The Directions carry the reference DOR.STR.REC.19/21.07.001/2025-26 and are dated 8 May 2025. They are issued by the Department of Regulation under the powers the Reserve Bank holds in sections 21 and 35A of the Banking Regulation Act, 1949, sections 45JA, 45L and 45M of the Reserve Bank of India Act, 1934, section 30A of the National Housing Bank Act, 1987, section 6 of the Factoring Regulation Act, 2011 and section 11 of the Credit Information Companies (Regulation) Act, 2005. That list matters for a reason beyond provenance: a direction under section 35A binds a bank as a direction, so a breach is a regulatory default in its own right and not a matter of guidance not followed.

Three earlier circulars go. The fair practices circular on digital lending platforms of 24 June 2020, the digital lending guidelines of 2 September 2022 and the default loss guarantee guidelines of 8 June 2023 are all superseded. Anyone whose compliance file still cross refers to the 2022 guidelines by paragraph number is citing a repealed text, which is a small thing until an inspection asks which instrument the policy was written against.

Who is bound is wide. Commercial banks, primary urban co-operative banks, state and central co-operative banks, non-banking financial companies including housing finance companies, and all India financial institutions. A lending service provider is not a regulated entity and is not directly bound, and it is the limit that the obligation below is written against.

The outsourcing that is not an escape

The Directions require enhanced due diligence before a lender signs a lending service provider: its technical capability, the strength of its data privacy policy and storage, how it has conducted itself with borrowers in the past, and whether it can comply with the law that applies to it. That is a diligence obligation on the lender about someone else's business.

The sentence that does the real work says an outsourcing agreement cannot dilute or absolve the lender of any statutory or regulatory obligation, and that the lender stays fully responsible and liable for the acts and omissions of the provider. So the provider's recovery call and the provider's app permission are the lender's exposure. A contract can move money between the two parties. It cannot move the obligation.

The five per cent, and what it is five per cent of

A default loss guarantee is a contract under which someone other than the lender agrees to make good the lender's loss on default, up to a percentage of a loan portfolio. The cap is five per cent, and the measure is the total amount disbursed out of that loan portfolio, not the amount outstanding on it today. That difference is worth holding on to, because the denominator is fixed at disbursement and does not shrink as the loans are repaid. A portfolio that disbursed INR 100 crore and has run down to INR 40 crore carries a ceiling of INR 5 crore, not INR 2 crore.

Who may give it is also fixed. The guarantee may come from a lending service provider, or from another regulated entity acting as one, and the guarantor must be incorporated under the Companies Act, 2013. A limited liability partnership cannot stand behind the book, and nor can an individual promoter.

Before any of this, the lender needs a policy its board has approved, covering who is eligible to give a guarantee, how far cover may go, how the arrangement is monitored and what fees attach to it. The Directions are explicit that credit appraisal standards apply whether or not a guarantee is in place, which is the regulator saying in advance what it expects to find when a cover backed book goes bad.

Three forms, all of them cash or close to it

Cover is held in one of three ways: cash deposited with the lender, a fixed deposit with a scheduled commercial bank held under a lien marked in the lender's favour, or a bank guarantee in the lender's favour. Nothing else qualifies. A corporate guarantee from the provider's parent is not a default loss guarantee within these Directions, whatever the contract calls it, and an indemnity that depends on the provider still being solvent in year three is the exposure the form requirement exists to remove.

The tenor rule works the same way. The agreement must stay in force for a period not shorter than the longest tenor of any loan in the underlying portfolio. A three year loan in the pool holds the guarantee open for three years, and a provider that wants a twelve month arrangement has to change the pool rather than the agreement.

Invocation runs to a maximum overdue period of 120 days, unless the borrower pays in the meantime. It is a ceiling and not a window to be used late: a lender that lets day 121 pass has lost the cover on that account while keeping the loan.

What the guarantee does not do

Two paragraphs stop a default loss guarantee from doing the thing a lender would most like it to do.

The first is asset classification. The lender recognises a non-performing asset under the ordinary norms, irrespective of any cover available at portfolio level, and an invoked guarantee does not set off the borrower's liability. So the provisioning arrives on time whether or not someone else is paying, and the borrower still owes what the borrower owes. A guarantee is a recovery of the lender's loss, not a discharge of the debt.

The second is capital. Capital on each loan is computed under the norms that already apply, and where the guarantor is itself a regulated entity it deducts the outstanding guarantee amount from its own capital. The cost of standing behind someone else's book sits on the guarantor's balance sheet, which is what keeps a chain of mutual guarantees between two lenders from manufacturing capital out of an agreement.

What cover cannot reach

Some lending is outside the arrangement altogether. Revolving credit facilities and credit cards cannot be covered. Loans under the government credit guarantee schemes cannot be covered, so a facility already carrying cover from the Credit Guarantee Fund Trust for Micro and Small Enterprises, the Credit Risk Guarantee Fund Trust for Low Income Housing or the National Credit Guarantee Trustee Company does not take a second layer. A non-banking financial company operating a peer to peer lending platform is excluded from these arrangements.

On the other side of the line, a guarantee from a government credit guarantee scheme or from the Bank for International Settlements, the International Monetary Fund or a multilateral development bank is not a default loss guarantee for these purposes at all. It is not forbidden cover. It is cover the five per cent ceiling was never counting.

The disclosure the provider owes, in public

A lending service provider that offers a guarantee publishes on its own website the number of portfolios on which it has given cover and the amount of each. The publication is monthly, within seven working days of the month ending.

This is the quiet obligation in the chapter, and it is the one a lender should read before signing, because it is the only place an outsider can see how many books one provider is standing behind. A provider at five per cent on one portfolio is inside the rule. The same provider at five per cent on thirty portfolios may be carrying more than it can pay, and the only public number that would show it is the one the provider itself is required to print.

The regime the guarantee now sits inside

Moving the guarantee into the Directions means it is read alongside obligations that have nothing to do with loss sharing, and a diligence exercise that stops at the guarantee chapter misses most of the file.

A key fact statement goes to the borrower in the form the Reserve Bank's circular of 15 April 2024 on key fact statements for loans and advances requires, and the statement and the documents around it, including terms and conditions, account statements and privacy policies, are digitally signed and sent automatically to the borrower's registered and verified email or mobile number once the loan contract is executed. The annual percentage rate carries the meaning that same circular gives it.

Servicing and repayment happen directly in the lender's account. The fee a lending service provider earns is paid by the lender and is never collected from the borrower on the side, which closes the route by which a published rate stayed low while the real cost of the loan sat in a platform charge.

The borrower gets a cooling off period, fixed by the lender's board in its loan policy and in no case shorter than one day, during which the borrower may exit by paying principal and the proportionate annual percentage rate with no penalty. A reasonable one time processing fee may be retained on exit, and if it applies it is disclosed upfront in the key fact statement.

Where a provider works with more than one lender, the platform shows all the offers the borrower matches with, names the lenders that did not match, keeps the content unbiased and objective, and avoids dark patterns and the promotion of one product over another. That obligation applied from 1 November 2025.

Finally, the lender reports every digital lending application it or its providers deploy on the Reserve Bank's Centralised Information Management System portal, updating the filing as applications are added or engagements end, with the chief compliance officer certifying that those applications comply. The first reporting date was 15 June 2025. The Reserve Bank publishes what is filed without verifying it, and says plainly that customer grievances about an application are for the lender to deal with directly.

What this means for a contract already signed

The five per cent is the number everyone remembers, and it is rarely the number that fails. The parts of an arrangement that tend not to survive a reading against the 2025 Directions are the form the cover is held in, the tenor against the longest loan in the pool, a right of invocation drafted without the 120 day limit in it, a fee that reaches the provider from the borrower rather than from the lender, and a set of covenants that assumes the provider's conduct is the provider's problem.

An arrangement signed under the June 2023 guidelines is not void for having been signed then. It is simply measured now against a different instrument, and the paragraph numbers in the schedule to the agreement point at a text that has been superseded.

What this note rests on

The Directions were read on the Reserve Bank's own notification pages for reference 12848, which is where the consolidated text is published. Paragraph references follow the numbering printed there. The key fact statement circular of 15 April 2024 is named in the Directions and is described here as the Directions describe it, not from its own text. Nothing here is drawn from a press release or a summary, and where this note states what a paragraph does rather than what it says, that is deliberate: the operative words of a provision are quoted on the instrument pages of this site and not in a note.