- SFG FRC 2027 | Program starts from 19th Dec. 2026 | Admissions open for Entrance Test Click Here to know more →
- Prelims Test Series (PTS) for Prelims 2027 starts 11th Oct. 2026 Click Here to know more →
- [Pre-order] Ethics Redbook 3rd Edition: Delivery starts from 10th October onwards Click Here to Read More →
- 21 Sept. | GS Advance Program (GSAP) for UPSC 2027 Mains starts from 11th Oct. Click Here to Read More →
Source: The post is based on the article “Digital lending: No clarity, awaiting RBI response, say bank & fintechs” published in Indian Express on 5th December 2022
What is the News?
Two months after the Reserve Bank issued guidelines on digital lending, banks, non-banking financial companies and fintech players are still awaiting clarity on many aspects including the First Loss Default Guarantee(FLDG) system.
What is the First Loss Default Guarantee(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 fintech but from their own books. FLDG helps expand the customer base of traditional lenders but relies on the fintech’s underwriting capabilities.
What are the concerns related to FLDG?
In the report by the RBI-constituted working group on digital lending, the group laid down the risks of FLDG agreements with unregulated entities. The other concern is that FLDG costs are often passed on to customers.
