RBI gives green signal to first loss default guarantee (FLDG) framework; here's how will fintech, banks, NBFCs benefit

• The Reserve Bank of India (RBI) has granted its approval for the First Loss Default Guarantee (FLDG) framework.
• Popularly, FLDG scheme allows Indian fintechs to partner with banks and NBFCs. This decision is seen as a big positive for data-tech NBFCs and fintechs.

First Loss Default Guarantee (FLDG)

• 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/NBFC partners lend through the fintech but from their books.

Advantages

• 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

• Application of new technological advancements to products and services in the financial industry.
• Refers to the application of software and hardware to financial services and processes, making them faster, easier to use and more secure.
• It includes everything from payment processing solutions to mobile banking apps.
• Eg. include mobile banking, peer-to-peer payment services, automated portfolio managers or trading platforms.

Prelims Takeaway

• First Loss Default Guarantee (FLDG)
• FinTech