MUMBAI Fintech associations, on behalf of industry players, are expected to approach the Reserve Bank of India (RBI) for certain clarifications regarding the Default Loss Guarantee (DLG) guidelines issued on Thursday.

In response, the regulator is likely to issue a FAQ or manual detailing some specifications and definitions.

“People are still absorbing it in terms of what it exactly means. It’s the first time these guidelines have come out, so there are some questions. We will consolidate them and refer to the RBI,” an industry official told businessline.

Sources said fintech industry lobbies have asked their members to list down areas that might be difficult from an implementation or operational perspective and any queries they may have with respect to structure and risk-related issues.

Industry bodies are likely to meet next week to discuss these issues and are expected to approach the regulator in 10–15 days, sources said.

Some initial operational issues that have come up include ambiguity on the treatment of NPAs and how they will be factored in given the differences with the ECL framework. Players are also seeking clarity on the term loan portfolios and what sort of different cohorts and structures can be explored under that.

5% cap on DLG cover

Some industry players believe the 5 per cent cap is restrictive but admit that it is prudent of the regulator to be cautious given past experience. In turn, these norms will lead to greater rigour in the underwriting models and partner due diligence.

“The 5 per cent cap serves to ensure that partners bring in the right credit opportunities for regulated entities. Additionally, it is in the industry’s best interest to establish strategic partnerships that generate reasonable remuneration from regulated entities, said Anand Kumar Bajaj, founder, MD, and CEO, PayNearby.

“The RBI is implying that entities should price risk appropriately and work within that framework, thus setting a limit for the tolerance band for NPAs,” said Akshay Mehrotra, co-founder and CEO of Fibe.

Given the diversity among lenders, players catering to segments with small loan tenures and ticket sizes as low as ₹2,000 could have higher risk in underlying portfolios, and this cap may not be sufficient there. However, these players then have the option of managing this through pricing, a source said, adding that these players constitute a very small segment of the market given that the average ticket size is ₹10,000–25,000.

“Going by the steady-state credit loss rate for most loan books, the cap is very reasonable to meet the regulatory objectives of prudent risk management and innovation,” said Sugandh Saxena, CEO of FACE (Fintech Association for Consumer Empowerment), adding that the requirement of publishing DLG details will bring clear market signals for more efficient models.