BACKGROUND

While the Reserve Bank of India (“RBI”) had in its August 10, 2022 press release stated that it is examining the First Loss Default Guarantee (“FLDG”) structures, the Digital Lending Guidelines issued by the RBI on September 2, 2022 neither permitted nor expressly prohibited loss sharing arrangements such as FLDGs, but recommended that provisions of paragraph 6(c) of the Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021 dated September 24, 2021 (“Securitisation MD”) be adhered to for financial products involving contractual agreements such as FLDG. Paragraph 6(c) of Securitisation MD prohibits Regulated Entities (“RE”) from undertaking or assuming exposure under “synthetic securitisation” structures. This led to industry-wide confusion regarding the permissibility of loss sharing arrangements such as FLDG.Continue Reading FIG Paper (No.18 – Series 2) RBI’s New Default Loss Guarantee Guidelines: Late but Not lost