Content authored by practitioners with experience at Amazon India, Intuit QuickBooks, and the Tata Group. Meet the team →
RBI's June 2023 guidelines cap FLDG cover at 5% of the loan portfolio and require documented contractual structure. NBFCs running multiple LSP partnerships must reconcile, every month, per-partnership FLDG corpus, invocations linked to write-offs, replenishments, and recoveries net of partnership tagging — and prove the 5% cap is respected on the live portfolio.
Tag every loan account to its originating LSP partnership at disbursement. Compute monthly partnership-level loss as write-off plus NPA provisioning movement minus recovery. Invoke the FLDG corpus up to the contractual threshold and recognise the offset in the NBFC's profit and loss account. Track replenishment within the contracted timeline and recompute corpus as a percentage of live portfolio outstanding to monitor the 5% cap.
LSP partnership master with FLDG percentage, form of holding (cash, BG, FD), invocation and replenishment timelines, and recovery netting rules. Partnership tag on every loan account driving collection routing. Monthly write-off register tied to partnership for invocation source-of-truth.
Monthly per-partnership FLDG reconciliation tying invocations to write-offs, replenishments to bank evidence, recoveries to source accounts; closing corpus position and 5% cap compliance check; audit-ready evidence chain for both NBFC and LSP auditors.
RBI’s June 8, 2023 guidelines on Default Loss Guarantee in digital lending brought FLDG out of the grey-area of contractual side-letters into a defined regulatory construct. The previous ambiguity — about whether FLDG was permitted, in what form, at what limit — had been holding back partnership-led digital lending at scale. The guidelines codified three things: a 5% cap on the cover, permitted forms of corpus holding, and explicit anti-circumvention rules around implicit and open-ended guarantees. For an NBFC running multiple LSP partnerships, monthly reconciliation of the FLDG corpus is now the artefact that proves the partnership is operating within the regulatory frame.
Quick reference: the RBI 2023 frame
| Parameter | Rule |
|---|---|
| Maximum cover | 5% of the loan portfolio amount under the partnership |
| Permitted forms | Cash deposit, bank guarantee, or FD lien-marked to the regulated lender |
| Invocation | Within the contractually agreed timeline post-default |
| Tenor of cover | Tied to the underlying loan tenor |
| Disclosure | NBFC must disclose total portfolio under DLG cover in its annual financial statements |
| Prohibited | Implicit guarantees, open-ended cover, layered structures designed to bypass the cap |
Why the 5% cap matters operationally
The 5% cap is computed on the loan portfolio amount, not on the loss. This means that for an NBFC with ₹1,000 crore of outstanding under a partnership, the maximum FLDG corpus that can be held against it is ₹50 crore. If the partnership runs at a 4% loss rate, the FLDG corpus absorbs the entire loss with some margin to spare; the NBFC bears no net credit cost. If the partnership runs at a 7% loss rate, the FLDG corpus absorbs the first 5% and the NBFC bears the residual 2% directly. The credit risk has not been transferred — it has been mezzanined.
This is why the partnership tag on every loan account is operationally non-negotiable. Without it, the live portfolio under the partnership cannot be computed daily, the 5% cap cannot be tracked, and recoveries cannot be routed back to the right corpus.
Accounting treatment under Ind AS 37 and Ind AS 109
The two counter-parties recognise the FLDG asymmetrically.
On the LSP’s books: The FLDG is a financial guarantee under Ind AS 37 and Ind AS 109. The LSP recognises an initial obligation at fair value (typically the discounted expected payout) and re-measures at each reporting date. When a default crystallises and the NBFC invokes the guarantee, the LSP recognises a liability equal to the invoked amount, settles it from the corpus, and accrues replenishment cost.
On the NBFC’s books: The underlying loans remain on the NBFC’s books at gross value. The FLDG corpus is recognised as a credit-risk-mitigating collateral — it does not reduce the loan exposure but does reduce the expected credit loss the NBFC must provide for the FLDG-covered slice. When a default crystallises, the invocation flows into the NBFC’s P&L as a recovery against the write-off, neutralising the loss up to the corpus available.
The economic outcome: the NBFC bears credit risk above the FLDG slice; the LSP bears credit risk up to the FLDG slice; the regulated capital sits on the NBFC’s books in line with RBI’s intent.
The monthly loss-share waterfall
At each month-end, for each LSP partnership:
- Compute partnership loss = write-offs in the month + NPA provisioning movement on partnership accounts − recoveries on partnership accounts in the month.
- Apply the FLDG cover up to the corpus available. The first slice flows from corpus to NBFC P&L as offset against the loss.
- Recognise NBFC residual for anything beyond the FLDG slice — this is the NBFC’s net credit cost for the month.
- Invoice the LSP for replenishment within the contracted timeline (typically T+15 or T+30 from invocation). Replenishment restores the corpus to the contracted percentage of live outstanding.
- Confirm closing corpus vs the 5% cap on live partnership outstanding. A breach must be cured immediately.
Try modelling the per-partnership P&L offset using the framework in the TDS mismatch estimator — the same open-item closure and aged-receivable discipline applies to FLDG invocations and replenishments.
Recovery netting: the most error-prone step
Contracts vary on how recoveries are treated. The typical patterns:
- Recovery flows back to FLDG corpus: recoveries on previously written-off partnership accounts replenish the corpus to the extent of prior invocations on those same accounts. The NBFC’s offset is recognised when the invocation was made; the LSP’s corpus is replenished when the recovery materialises.
- Recovery offsets future invocations: recoveries reduce the gross loss before invocation. This is operationally simpler but accounting-wise more nuanced.
- Recovery split: a contractual share goes to the corpus, the rest to the NBFC as servicing income.
Whichever pattern applies, partnership-level tagging on every collection event is the only way to route the recovery correctly. A recovery on a written-off account that was originated through Partnership A but gets mis-tagged to Partnership B distorts both corpora and both P&L outcomes.
Disclosure in financial statements
The NBFC’s annual financial statements must disclose, as a minimum:
- Total loan portfolio under DLG cover at the reporting date
- Total DLG corpus held against it, by form (cash, BG, FD)
- Reconciliation of opening corpus to closing corpus with invocations, replenishments, and recoveries
- Per-LSP composition where material
The audit expects this disclosure to tie back to the per-partnership reconciliation maintained through the year — month by month, partnership by partnership. Producing it at year-end without monthly discipline is the single largest source of restatement risk.
How TransactIG handles the FLDG surface
TransactIG configures each LSP partnership as a parameter set — FLDG percentage, form of holding, invocation timeline, replenishment timeline, recovery routing rule. The engine tags every loan account to its originating partnership at disbursement, routes collections by partnership at day-end, computes the monthly loss-share waterfall, generates the partnership-level invocation file, tracks replenishment against bank evidence, ties recoveries back to source accounts, and produces the audit-ready FLDG reconciliation pack from the same data lineage. New partnerships onboard as new configuration; the 5% cap is enforced as a live monitor against the partnership’s outstanding balance.