First
Loss
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Default kers
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Guarantee a n
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Why in news ?
The Reserve Bank of India (RBI) has
granted its approval for First Loss
Default Guarantee (FLDG) framework. . c o m
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The Players
Banks NBFCs
. c o m
LSPs
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ICICI Bank
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Bajaj Finance Bank Bazaar
HDFC Bank
Axis Bank tr- T
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L&T Finance Ltd
Tata Capital
Cred
Early Salary
Moneytap
First Loss Default Guarantee (FLDG)
An arrangement whereby a third
party such as a financial technology
(fintech) player (LSP or lender
. c o m
service provider) compensates
n k e rs
lenders if the borrower defaults.
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Lending Service Providers
Lending service providers are new-age players
using technology platforms in lending.
They are agents of a bank or NBFC who carry out
. c o m
one or more of a lender’s functions (in part or
n
full) in customer acquisition, disbursement, k e rs
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servicing, monitoring, and recovery of specific
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loans or loan portfolios on behalf of banks or
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NBFCs as per the outsourcing guidelines of the
RBI.
Need for FLDG
RBI had initially showed concerns about the First Loss Default
Guarantee (FLDG) system because it believed that this model
might bring about risks that could impact the whole financial
system.
. c o m
e
A committee formed by RBI mentioned in its 2021 report that
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some fintech companies were directly lending money either
in collaboration with a bank or a Non-Banking Financial
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Company (NBFC), or on their own.
These fintech companies were doing so without meeting the
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main business requirements to be officially regulated. i.e. it
was happening beyond the control of RBI regulations.
Need for FLDG
There were increased operational risks due to lenders depending
more and more on third-party service providers.
In September 2022, the RBI introduced guidelines regarding digital
lending. However, these guidelines did not give any specific details
. c o m
rs
about the FLDG system.
a n e
Because of the lack of clear instructions, regulated entities like
k
banks stopped creating such arrangements with fintech companies.
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This situation posed a risk to the fintech companies' operations. The
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fintech industry was urging the RBI to permit FLDG arrangements.
To tune with our objective of maintaining a balance between
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innovation and prudent risk management, RBI has
How it works?
In an FLDG arrangement between two entities — often two
regulated entities (REs). Or, in the case of digital lending,
between the regulated entity and fintech lending service
providers (LSPs), the LSP guarantees to compensate the RE
. c o m
e rs
for loss due to default up to a certain threshold of the loan
n k
portfolio.
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Since losses only to a certain threshold are covered under
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or FLDG.
T
this arrangement, it’s called as first loss default guarantee
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How it works?
The total default guarantee provided by FinTechs
should not exceed 5 percent of the portfolio
amount.
FLDG arrangements can only be carried out between . c o m
RBI-regulated entities and LSPs or between two
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regulated entities that have entered into an
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outsourcing agreement. T
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REs are allowed to invoke FLDG within a maximum
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overdue period of 120 days, highlighting the RBI’s
commitment to timely default resolution.
How it works?
REs can accept DLGs only if FinTechs provide a hard
guarantee in the form of cash deposits, bank guarantees, or
fixed deposits maintained with scheduled commercial
banks.
. c o m
The RBI instructs LSPs to publish details of the total
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FLDG has been offered on their websites.r a
number of portfolios and respective amounts on which
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REs remain responsible for recognizing individual loans in
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the portfolio as Non-Performing Assets (NPA) and making
necessary provisioning, regardless of the FLDG cover at
the portfolio level.
For Customers
Now that the Reserve Bank of India (RBI) has
allowed First Loss Default Guarantee (FLDG)
contracts for digital lending, it's possible that Loan
. c o m
Service Providers (LSPs) might officially charge for
n k e
this to compensate for potential losses. This means
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borrowers might have to pay more for their loans.
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For Industry
The new First Loss Default Guarantee (FLDG) guidelines
from the Reserve Bank of India (RBI) act as a driving force
for fintech innovation and the expansion of financial
services in India.
. c o m
e
These guidelines offer clear directions, set limits, and
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foster an environment conducive for partnerships,
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cooperation, and the creation of revolutionary financial
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products. T
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Considering the potential for the growth in the future,
India's fintech sector is heading towards a promising and
optimistic direction.
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