First Loss Default Guarantee : RBI
The Reserve Bank of India (RBI) has recently granted its approval for First Loss Default Guarantee (FLDG) framework.
- FLDG is a lending model between fintech firms and their partner banks and non-banking finance companies where the initial hit on a default is taken by the fintech firm that originated the loan.
- 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 or NBFC partners lend through the fintech but from their books.
- FLDG helps expand the customer base of traditional lenders but relies on the fintech’s underwriting capabilities.
- It will also rationalise the existing prudential norms to implement resolution plans in respect of exposures affected by natural calamities.
- Fintech, a combination of the terms “financial” and “technology,” is the application of new technological advancements to products and services in the financial industry
- It refers to the application of software and hardware to financial services and processes, making them faster, easier to use and more secure.