Lok Sabha Question No. 577 (UNSTARRED), answered on 2023-07-24
Subject: First Loss Default Guarantee Programme
Ministry: FINANCE
Asked by: Ritesh Pandey

## GOVERNMENT OF INDIA MINISTRY OF FINANCE

## LOK SABHA

## UNSTARRED QUESTION NO-577

ANSWERED ON- 24/07/2023

## FIRST LOSS DEFAULT GUARANTEE PROGRAMME

## 577. SHRI RITESH PANDEY

Will the Minister of FINANCE be pleased to state:-

(a) the safeguards and monitoring mechanisms established by the RBI to ensure that the First Loss Default Guarantee Programme effectively mitigates default risks and protects the interests of all stakeholders involved, including borrowers, fintech firms, banks, and non-banking finance companies;

(b)  the factors that influenced the RBI's decision to set the cooling off period for non -farm  credit  at  a  minimum  of  12  months  and  whether  the  RBI  has  considered  any potential challenges or unintended consequence associated with this period;

(c)  the  process  by  which  the  cooling  off  period  for  farm  credit  will  be  determined  and approved by the lender's board;

(d)  whether  the  RBI  intends  to  regulate  compromise  settlements  for  loan  accounts classified as fraud or belonging to wilful defaulters;

(e)  whether  the  measures  proposed  to  be  implemented  to  ensure  that  compromise settlements are fair and equitable for both lenders and borrowers; and

(f) if so, the details thereof?

## ANSWER

## THE MINISTER OF STATE IN THE MINISTRY OF FINANCE

## (DR. BHAGWAT KARAD)

(a):  The  Reserve  Bank  of  India  (RBI)  has  issued  the  Guidelines  on  Default  Loss Guarantee  (DLG)  in  Digital  Lending, vide its  Circular  dated  8.6.2023.  Safeguards  and monitoring mechanisms are provided in the said guidelines, which include, inter alia ,  the following:

- (i) Regulated entities (REs) are required to put in place a Board-approved policy before entering into any DLG arrangement.
- (ii) REs, at the time of entering into or renewing a DLG arrangement, are required to obtain adequate information that entity extending DLG would be able to honor it. Such information includes, inter alia, a declaration from the DLG provider, certified by the statutory auditor, on the aggregate DLG amount outstanding. The declaration is also required to contain past default rates on similar portfolios.
- (iii) REs shall accept DLG only in the form of cash, fixed deposits or bank guarantee.
- (iv) The  total  amount  of  DLG  cover  on  any  outstanding  portfolio  which  is  specified upfront shall not exceed five per cent of the amount of that loan portfolio.
- (v) REs are required put in place a mechanism to ensure that loan service providers, with whom they have a DLG arrangement, publish on their website the total number of portfolios  and  the  respective  amount  of  each  portfolio  on  which  DLG  has  been offered.
- (vi) DLG arrangement shall not act as a substitute for credit appraisal requirements.

(b) to (f): With a view to provide further impetus to resolution of stressed assets in the system,  RBI, vide its  circular  dated  8.6.2023,  has  issued  comprehensive  regulatory framework  governing  compromise  settlements  and  technical  write-offs  covering  all  the REs. The framework prescribes minimum cooling off period of 12 months as a general prescription  for  normal  cases  of  compromise  settlements  during  which  the  REs undertaking  settlement  or  write  off  shall  not  take  any  fresh  exposure  to  the  borrower entity. The same has been introduced as a disincentive to both the Regulated Entity and the  borrower  entering  into  compromise  settlement.  The  framework  provides  that  the cooling off period for farm credit exposures is to be determined by the REs as per their respective Board approved policies.

However, the compromise settlement is not available to borrowers as a matter of right; rather  it  is  a  discretion  to  be  exercised  by  the  lenders  based  on  their  commercial judgement. The guidelines seeks to ensure transparency of the whole process. The penal measures currently applicable to borrowers classified as fraud or wilful defaulter in terms of extant guidelines remain unchanged and shall continue to be applicable in cases where the banks enter into compromise settlement with such borrowers. Such penal measures entail, inter  alia, that  no  additional  facilities  should  be  granted  by  any  bank/  FI  to borrowers listed as wilful defaulters, and that such companies (including their entrepreneurs/  promoters)  get  debarred  from  institutional  finance  for  floating  new ventures for a period of five years from the date of removal of their name from the list of wilful  defaulters.  In  addition,  borrowers  classified  as  fraud  are  debarred  from  availing bank finance for a period of five years from the date of full payment of the defrauded amount.

Further,  the  prudential  guidelines  provide  sufficient  safeguards  with  regard  to  such settlements so as to ensure, inter alia fair treatment of all parties involved:

- (i) All decisions on compromise settlements are required to be taken by lenders as per their Board approved policies, instead of adopting an ad-hoc approach on a case to case basis;
- (ii) The circular further strengthens the  regulatory guidance by mandating that all such cases  of  compromise  settlement  involving  borrowers  classified  as  fraud  or  wilful defaulter must be approved by the Board;
- (iii) Such settlements shall be without prejudice to the criminal proceeding underway or to be initiated, if under consideration of the lenders against such borrowers;
- (iv) The extant penal provisions continue to remain applicable in such cases.
- (v) Wherever recovery proceedings are pending before a judicial forum, and settlement arrived at with the borrower shall be subject to obtaining a consent decree from the concerned judicial authorities.
- (vi) The Boards of lenders have been entrusted with the oversight of the overall trends in approvals  of  all  compromise  settlements,  including  specifically  the  breakup  of accounts classified as fraud, red-flagged, wilful defaulter and quick mortality accounts.

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