Two months after the RBI issued guidelines on digital lending, banks, NBFCs and fintech players are still awaiting clarity on many aspects, including the First Loss Default Guarantee (FLDG) system.
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Dimensions of the Article:
- What is FLDG System?
- Issues with FLDGs
What is FLDG System?
- FLDG is an arrangement between a fintech company and regulated entity (RE), including banks and non-banking finance companies, wherein the fintech compensates the RE to a certain extent if the borrower defaults.
- Under this, the fintech originates a loan and promises to compensate the partners up to a pre-decided percentage in case customers fail to repay.
- The bank/NBFC partners lend through the fintech but from their own books.
- FLDG helps expand the customer base of traditional lenders but relies on the fintechs underwriting capabilities.
- FLDG is also seen as a validation of the fintechs underwriting capabilities for loans disbursed.
Issues with FLDGs
- A report by an RBI-constituted working group on digital lending has laid down risks of FLDG agreements with unregulated entities.
- The other concern is that FLDG costs are often passed on to customers.
-Source: The Hindu