A platform considering embedded credit usually gets comfortable with the idea before it gets comfortable with the fine print. The idea is straightforward: merchants get working capital inside a screen they already use. The fine print question worth answering before any contract is signed is who actually stands behind a loan if a merchant doesn’t pay it back.
The short answer is that in most structures, the regulated lender, usually an NBFC, carries that exposure, not the platform. The fuller answer depends on what the two sides agree to, and on a specific RBI framework that limits how much risk a platform can take on even if it wants to. The risk-sharing structure is agreed before the loans go live, not after a default happens.
Key Takeaways
- In a typical embedded lending partnership, the regulated NBFC funds the loan and carries the primary default risk, while the platform facilitates access and shares data.
- A platform doesn’t automatically take on credit risk just by putting a lending product inside its interface.
- Some partnerships include a Default Loss Guarantee (DLG), where an eligible Lending Service Provider, which could be the platform, agrees upfront to cover a defined share of losses.
- RBI’s current digital-lending rules cap DLG cover at 5% of the amount actually disbursed out of the specific loan pool the guarantee applies to, not the platform’s entire loan book.
- Whether a platform carries any default exposure, and how much, is a term to negotiate and document before launch, not a default outcome of embedding credit.
Who Actually Makes the Loan?
The regulated lender, usually an NBFC, is the lender of record: the entity whose balance sheet funds the loan, and whose name sits on the loan agreement. In most embedded structures, the credit journey itself sits inside the platform’s interface, but the regulated lender still has to be clearly identified to the borrower, and it’s the lender’s name that appears on the loan documentation. Since the lender is the lender of record, it also carries RBI’s regulatory and reporting obligations for that loan, including borrower disclosures and credit bureau reporting.
A marketplace that puts a lending product inside its interface is facilitating access to credit, not extending it. That distinction decides whose balance sheet the loan sits on and who needs RBI’s lending licence, and it determines where the regulatory responsibility for the lending relationship sits.
It doesn’t mean the platform has no role at all: under RBI’s rules, a platform can be engaged as a Lending Service Provider (LSP), carrying out functions like customer acquisition, servicing or recovery on the lender’s behalf, while the regulatory responsibility and the licence requirement stay with the lender. A platform that wants to fund loans directly from its own books, rather than facilitate someone else’s, would need to operate through its own regulated lending structure, a different business than running a marketplace or a supply chain.
What Is a Default Loss Guarantee (DLG), and When Does It Apply?
DLG is the Reserve Bank of India’s term for a contractual arrangement where an eligible Lending Service Provider, sometimes the platform itself, sometimes another regulated entity acting as one, agrees to compensate the lender for a defined share of losses on a specific, earmarked pool of loans. The industry called the same mechanism FLDG (First Loss Default Guarantee) for years; DLG is the regulatory term RBI now uses.
Not every platform can offer a DLG simply by agreeing to it. Under RBI’s current digital-lending framework, a lender can enter into a DLG arrangement only with an eligible Lending Service Provider, or another regulated entity acting in that capacity, and that LSP has to be incorporated as a company. The guarantee also isn’t written against the lender’s whole loan book: the lender earmarks a specific, fixed pool of loans covered by the DLG arrangement, called the DLG set, and the 5% cap runs against the amount actually disbursed out of that pool at any given time, not the pool’s full value. For example, if ₹10 crore has actually been disbursed from the DLG set, the maximum DLG cover at that point is ₹50 lakh. The guarantee has to be backed by cash deposited with the lender, a fixed deposit with a lien marked in the lender’s favor, or a bank guarantee.
A DLG arrangement isn’t mandatory, and it isn’t automatic. Plenty of embedded lending partnerships run without one. Where one exists, it covers a defined slice of losses up to that 5% ceiling, and RBI requires the lender to invoke it within 120 days of a loan going overdue unless the borrower cures the default before then. None of this shifts the underwriting decision, the lending itself, or the lender’s regulatory responsibility onto the platform, and it doesn’t replace the lender’s own credit appraisal.
How Should Risk-Sharing Terms Actually Get Negotiated?
- The DLG set and the cap: Confirm which specific loans sit inside the guaranteed DLG set, since that pool is fixed once it’s earmarked, and get the cap stated in rupees: 5% of what’s disbursed out of that pool, not the platform’s full loan book.
- The trigger: Where a DLG is invoked, it must happen within the prescribed 120-day overdue period unless the borrower cures the default before then; confirm whether the contract sets an earlier trigger within that window.
- The form of the cover: RBI permits only cash deposited with the lender, a fixed deposit with a lien in the lender’s favor, or a bank guarantee. Confirm which permitted form the partnership will use.
- The tenor: The guarantee has to stay in force for at least as long as the longest-tenor loan inside that DLG set, so confirm what happens once that set matures and whether a new DLG set needs to be earmarked for the next cycle of loans.
What Happens When a Merchant Misses a Payment?
The regulated lender carries the regulatory responsibility for collections and recovery, since the loan is on its books and RBI’s reporting and grievance-redressal obligations attach to that lender regardless of who else is involved. In practice, the lender can engage a Lending Service Provider, which could be the platform itself, to carry out the actual servicing, follow-up or recovery work under a contract and the lender’s oversight, though the lender stays accountable for what that LSP does. Whether the platform carries any financial exposure through a DLG, and how that’s invoked, is a separate, negotiated question from who contacts the merchant or sends the notice. Both are worth confirming before launch, not after the first missed payment.
How GLAAS Structures This
GLAAS works with B2B platforms, including textile marketplaces, distribution networks and supply-chain operators, to put working capital in front of their merchants without the platform funding the loans or running the credit business itself. In these embedded-credit partnerships, GLAAS operates through Gromor Finance, its own RBI-licensed NBFC, as the regulated lender of record: Gromor Finance funds and underwrites the loans, carrying the regulatory responsibility that comes with doing so. GLAAS’s co-lending arrangements with banks and NBFCs sit outside this piece and follow a different structure.
Risk-sharing terms, including whether a DLG applies and on what terms, are structured per partnership and set out in the underlying agreement rather than fixed across every platform GLAAS works with. Since launch, GLAAS has disbursed ₹1,500 Cr+ across 110,000+ loans to 13,000+ MSMEs.
If you want the specific terms for your platform rather than the general shape of them, that’s worth a direct conversation. Get in touch with us.
Frequently Asked Questions
1. Does my platform need to become an NBFC to share in credit risk through a DLG?
No. A DLG arrangement doesn’t require the guarantor to hold a lending licence. It does require the guarantor to be an eligible Lending Service Provider, incorporated as a company, or another regulated entity acting in that capacity. The entity extending the loan still needs to be a regulated lender, such as an NBFC or bank.
2. What’s the difference between DLG and FLDG?
They refer to the same mechanism. FLDG (First Loss Default Guarantee) is the older industry term. RBI formally uses DLG (Default Loss Guarantee) for the regulated framework.
3. Does a DLG mean the platform is underwriting the loans?
No. A DLG is a loss-sharing guarantee, not an underwriting arrangement. The regulated lender still has to carry out its own credit appraisal on every loan, and RBI’s rules specifically bar a DLG from substituting for that. The guarantee changes who absorbs a defined share of the loss if a loan goes bad; it doesn’t change who decided to approve the loan in the first place.
4. Is there a limit on how much risk a platform can guarantee?
Yes. Under current RBI rules, DLG cover is capped at 5% of the amount actually disbursed out of the specific pool of loans the guarantee applies to (the DLG set), not 5% of a platform’s entire loan book, regardless of what the two parties might privately agree to.
5. Who contacts a merchant if they miss a repayment?
In most structures, the regulated lender carries the regulatory responsibility for collections and recovery, but it can engage a Lending Service Provider, which may be the platform itself, to carry out that work day to day under its oversight. The exact division of responsibility depends on the partnership agreement and is worth confirming before launch.