RBI Introduces Provisioning Framework for NBFCs under Default Loss Guarantee Arrangements: Key Changes to IRACP Directions 2026
The Reserve Bank of India has taken a significant step in refining the regulatory framework governing Non-Banking Financial Companies (NBFCs) by notifying the Reserve Bank of India (Non-Banking Financial Companies – Income Recognition, Asset Classification and Provisioning) Amendment Directions, 2026. This amendment introduces comprehensive guidelines concerning loan portfolios that fall under Default Loss Guarantee (DLG) arrangements, marking a shift in how such mechanisms are treated from a prudential perspective.
Background and Evolution of DLG Framework
Historically, Default Loss Guarantee arrangements were categorized as synthetic securitisation transactions, which the RBI generally prohibited due to concerns regarding risk transfer and regulatory arbitrage. However, recognizing the evolving landscape of financial services and the need to support innovative lending models, the regulatory authority made selective exceptions to this prohibition.
The first such exception was introduced through a circular dated June 08, 2023, specifically for digital lending arrangements. This move acknowledged the unique characteristics of digital lending platforms and the role of technology service providers in facilitating credit delivery. Subsequently, the regulatory framework was further expanded on August 06, 2025, when DLG arrangements were also permitted for co-lending transactions through specific Directions issued on that date.
These selective permissions created a patchwork approach to DLG arrangements across different lending models. The latest amendment represents the RBI's effort to harmonize and standardize the prudential treatment of such arrangements across the NBFC sector.
Regulatory Authority and Legal Framework
The Amendment Directions have been issued by the Reserve Bank under the powers vested through Chapter III B of the Reserve Bank of India Act, 1934, along with all other enabling provisions available to the central bank. The regulator has concluded that these modifications are necessary and serve public interest, thereby exercising its statutory authority to issue binding directions to NBFCs.
The notification bears reference number RBI/2025-26/210 DOR.STR.REC.413/21-07-001/2025-26 and was formally issued on February 13, 2026. These Directions amend the Reserve Bank of India (Non-Banking Financial Companies – Income Recognition, Asset Classification and Provisioning) Directions, 2025.
Key Amendments: Introduction of Paragraphs 36A, 36B and 36C
The substantive changes introduced through this amendment involve the insertion of three new paragraphs—36A, 36B and 36C—under a newly created section titled "C1. Provisioning for portfolios covered by Default Loss Guarantee (DLG) arrangements."
Paragraph 36A: Integration of DLG in ECL Framework
The newly inserted paragraph 36A establishes the foundational principle for treatment of loan portfolios backed by Default Loss Guarantee arrangements. This provision applies specifically to loan portfolios covered under:
- Chapter III of the Reserve Bank of India (Non-Banking Financial Companies – Credit Facilities) Directions, 2025
- Part B of the Reserve Bank of India (Non-Banking Financial Companies – Transfer and Distribution of Credit Risk) Directions, 2025
Both these referenced Directions were issued on November 28, 2025, creating a cohesive regulatory architecture for DLG arrangements.
Under the new framework, NBFCs are permitted to factor in the Default Loss Guarantee while computing provisions under the Expected Credit Loss (ECL) framework. This consideration is allowed across all stages of asset classification, representing a significant departure from earlier treatment where such arrangements were not recognized for provisioning purposes.
However, this permission comes with important conditions. The NBFC must ensure compliance with requirements specified under Indian Accounting Standards (IndAS). Critically, the IndAS framework mandates that:
- The DLG arrangement must be an integral component of the contractual terms governing the loan
- The DLG should not be accounted for or recognized as a separate element
This requirement ensures that DLG arrangements are genuinely part of the original lending transaction rather than subsequent risk mitigation add-ons, thereby preventing potential misuse or circumvention of prudential norms.