Two months after the RBI issued guidelines on digital lending, banks, NBFCs and fintech players are still awaiting clarity on many aspects, including the First Loss Default Guarantee (FLDG) system.

What is FLDG System?

• FLDG is an arrangement between a fintech company and regulated entity (RE), including banks and non-banking finance companies, wherein the fintech compensates the RE to a certain extent if the borrower defaults.
• Under this, 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 fintechs underwriting capabilities.
• FLDG is also seen as a validation of the fintechs underwriting capabilities for loans disbursed.

Issues with FLDGs

• 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.

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