First Loss Default Guarantee (FLDG) System: RBI
Two months after the Reserve Bank issued guidelines on digital lending, banks, NBFCs and fintech players are still awaiting clarity on many aspects, including the FLDG system.
- FLDG is a lending model between a fintech and a regulated entity in which a third party guarantees to compensate up to a certain percentage of default in a loan portfolio of the regulated entities (RE).
- 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 the fintech but from their own books.
- FLDG helps expand the customer base of traditional lenders but relies on the fintech’s underwriting capabilities.
- 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.