• The Reserve Bank of India (RBI) has approved the First Loss Default Guarantee (FLDG) framework, allowing fintech to partner with banks and non-Banking financial companies (NBFCs).

ABOUT FLDG FRAMEWORK

• The First Loss Default Guarantee (FLDG) framework is also known as Default Loss Guarantee (DLG).
• 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.

RBI GUIDELINES

• The RBI, after examining FLDG, permitted the arrangements between banks and fintechs or between two regulated entities (REs).

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.

• The central bank said an RE can enter into DLG arrangements only with an LSP or other REs with which it has entered into an outsourcing (LSP) arrangement.
• The LSP-providing DLG must be incorporated as a company under the Companies Act, 2013.
• The RBI has allowed banks to accept DLG in digital lending only.
• if the guarantee is in the form of a cash deposit, or fixed deposits in a bank with a lien in favour of the RE, or a bank guarantee in favour of the RE.
• Banks and NBFCs should ensure that the total amount of DLG cover on any outstanding portfolio does not exceed 5% of the amount of that loan portfolio.