First Loss Default Guarantee (FLDG) System : RBI
The Reserve Bank of India (RBI) has recently allowed the First Loss Default Guarantee (FLDG) system in the digital lending space.
- First Loss Default Guarantee (FLDG) system is also known as default loss guarantee (DLG).
- FLDG is a lending model between a fintech and a regulated entity.
- It is a new technology that seeks to improve and automate the delivery and use of financial services.
- It is a safety-net arrangement among banks, non-banking finance companies (NBFC), and lending service providers (LSPs), popularly known as fintech players) in the digital lending space.
- NBFC is a company incorporated under the Companies Act 2013 or 1956.
- They offer various banking services but do not have a banking license.
- Under this, a third party guarantees to compensate up to a certain percentage of default.
- The fintech originates a loan and promises to compensate the partners up to a pre-decided percentage in case customers fail to repay.
