Fintech companies are helping lending partners re-enter the unsecured lending space by agreeing to share the risk of loan defaults.

A key driver of this revival is the default loss guarantee (DLG)—a risk-sharing arrangement that fintechs are leveraging to keep credit flowing. Previously known as the first loss default guarantee (FLDG), this model isn’t new, but it is regaining traction amid today’s challenging lending environment.

Unsecured lending has long been a core revenue stream for fintechs, but regulatory crackdowns have slowed its growth. Now, the DLG scheme is providing a way to restore momentum.

How the DLG Scheme Works

Under the DLG model, fintechs cover the initial tranche of losses if a borrower they sourced defaults. This added layer of security makes lenders more comfortable extending credit—especially to borrowers with limited credit histories, a common scenario in digital lending.

The model benefits both sides: lenders reduce their risk exposure, while fintechs maintain healthy lending volumes and strengthen partnerships.

Industry leaders acknowledge the pressure on unsecured lending but see DLG as a viable solution. Rohit Arora, CEO and Co-founder of Biz2X, said “Unsecured consumer lending portfolios are under stress, as lenders don’t want to absorb the first loss. DLGs provide that for lenders.”

Another industry executive emphasised the continued demand for unsecured lending despite regulatory challenges. “With such a large gap being there, I don’t think such interventions will reduce the unsecured lending attractiveness or market.”

With traditional banks adopting a cautious approach following repeated advisories from the Reserve Bank of India (RBI), fintech lenders have emerged as the preferred choice for personal loans in FY25.

According to a recent report by the Fintech Association for Consumer Empowerment (FACE), a self-regulatory fintech lenders captured approximately 76 per cent of personal loan sanctions by volume between April and September 2024 — a rise of 9 percentage points compared to the same period in FY24. The average ticket size for fintech loans stood at around ₹9,200, dominated by small-ticket loans catering to first-time and underserved borrowers.

By comparison, banks reported an average loan size of ₹4.4 lakh for the same period. Although fintech loans accounted for just 12 per cent of the total personal loan disbursement value in H1 FY25, banks retained a 61 per cent share of the sanctioned value.

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