What is FLDG?
- First Loan Default Guarantee (FLDG) is a lending model serviced between digital-lending fintechs and their partner banks and NBFCs.
- Under these agreements, 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 fintech but from their own books.
RBI Framework
- Regulated Entities (REs) shall ensure that the total amount of default loss guarantee (DLG) cover on any outstanding portfolio which is specified upfront shall not exceed 5% of the amount of that loan portfolio.
- In the case of implicit guarantee arrangements, the DLG Provider shall not bear a performance risk of more than the equivalent amount of 5% of the underlying loan portfolio.
- The RE shall invoke DLG within a maximum overdue period of 120 days, unless made good by the borrower before that.
- In terms asset quality, recognition of individual loan assets in the portfolio as NPA and consequent provisioning shall be the responsibility of the RE as per the extant asset classification and provisioning norms irrespective of any DLG cover available at the portfolio level. The amount of DLG invoked shall not be set off against the underlying individual loans. Recovery by the RE, if any, from the loans on which DLG has been invoked and realised, can be shared with the DLG provider in terms of the contractual arrangement.
- Any DLG arrangement shall not act as a substitute for credit appraisal requirements and robust credit underwriting standards need to be put in place irrespective of DLG cover.
Benefits
- Expand the customer base of traditional lenders but relies on the fintech’s underwriting capabilities.
- Enhances the deeper partnerships and collaboration between legacy institutions (Banks, regulated entities, NBFCs) and new age fintech’s – democratises access to credit and fuel growth for the unserved and underserved.
- Strengthens credit penetration and boosts the digital lending ecosystem.
- Promotes more transparency and discipline in the digital lending environment.
- Widens the scope of resolution of stressed assets.
Related
PYQ 2020: What is the importance of the term “Interest Coverage Ratio” of a firm in India?
- It helps in understanding the present risk of a firm that a bank is going to give a loan to.
- It helps in evaluating the emerging risk of a firm that a bank is going to give loan to.
- The higher a borrowing firm’s level of Interest Coverage Ratio, the worse is its ability to service its debt.
Select the correct answer using the code given below:
(a) 1 and 2 only
(b) 2 only
(c) 1 and 3 only
(d) 1, 2 and 3
Scroll down for answer
Answer: (a)
