Everything You Need to Know About FLDG Guidelines
FLDG stands for First Loss Default Guarantee. It is a risk-sharing arrangement between a regulated entity (RE), such as a bank or non-banking financial company (NBFC), and a fintech lending service provider (LSP). Under an FLDG arrangement, the LSP agrees to compensate the RE for any losses incurred on loans that are originated by the LSP and then sold to the RE.
The FLDG arrangement can be used to encourage REs to partner with LSPs to offer digital lending products. The FLDG provides the RE with protection against default risk, which makes them more willing to lend to borrowers who may not be able to obtain loans from traditional lenders.
The Reserve Bank of India (RBI) has recently approved the FLDG framework for NBFCS. The framework sets out the terms and conditions under which FLDG arrangements can be made.
The key features of the framework are as follows:
- The FLDG can cover up to 5% of the loan portfolio of the RE.
- The FLDG must be invoked within 120 days of the default.
- The LSP must have adequate financial resources to meet its obligations under the FLDG.
- The FLDG must be reviewed and renewed every year.
The FLDG framework is expected to boost the growth of digital lending in India. It will make it easier for banks and NBFCs to partner with fintechs to offer digital lending products, which will help to expand access to credit for borrowers.
Here are some of the benefits of FLDG for NBFCS:
- It can help to reduce the risk of default for NBFCS.
- It can make it easier for NBFCS to expand their lending operations.
- It can help to increase competition in the lending market.
- It can make it easier for borrowers to obtain loans.
Overall, FLDG is a positive development for the NBFCS sector. It is a risk-sharing mechanism that can help to promote the growth of digital lending in India.
Here are some examples of how FLDG can be used:
- A bank partners with a fintech company to offer a digital lending product for small businesses. The fintech company originates the loans and then sells them to the bank. The bank is protected against default risk by the FLDG arrangement.
- An NBFC partners with a fintech company to offer a digital lending product for farmers. The fintech company originates the loans and then sells them to the NBFC. The NBFC is protected against default risk by the FLDG arrangement.
- A fintech company offers a digital lending product for borrowers with limited credit history. The fintech company guarantees the loans to the RE, which makes it easier for borrowers to obtain loans.
FLDG is a promising new development in the field of digital lending. It has the potential to make it easier for borrowers to obtain loans, expand the reach of financial services, and reduce the risk of default for lenders.
The FLDG (First Loss Default Guarantee) Guidelines are a set of regulations issued by the Reserve Bank of India (RBI) that govern the use of FLDG arrangements in digital lending. The guidelines were issued in June 2023 and are intended to promote the growth of digital lending by providing a framework for risk sharing between regulated entities (REs) and fintech lending service providers (LSPs)
In the context of NBFCS, FLDG can be used to encourage banks and NBFCs to partner with fintechs to offer digital lending products. The FLDG would provide the banks and NBFCs with protection against default risk, which would make them more willing to lend to borrowers who may not be able to obtain loans from traditional lenders.
The Reserve Bank of India (RBI) has recently approved the FLDG framework for NBFCS. The framework sets out the terms and conditions under which FLDG arrangements can be made.
The FLDG framework is expected to boost the growth of digital lending in India. It will make it easier for banks and NBFCs to partner with fintechs to offer digital lending products, which will help to expand access to credit for borrowers.
The key provisions of the FLDG Guidelines are as follows:
- FLDG arrangements can only be entered into between REs and LSPs.
- The FLDG can cover up to 5% of the loan portfolio of the RE.
- The FLDG must be invoked within 120 days of the default.
- The LSP must have adequate financial resources to meet its obligations under the FLDG.
- The FLDG must be reviewed and renewed every year.
The FLDG Guidelines are a significant development in the field of digital lending. They provide a clear framework for risk sharing between REs and LSPs, which is expected to boost the growth of digital lending in India.
Here are some of the key benefits of the FLDG Guidelines:
- They provide a clear framework for risk sharing between REs and LSPs.
- They make it easier for REs to partner with LSPs to offer digital lending products.
- They help to reduce the risk of default for REs.
- They help to promote the growth of digital lending in India.
The FLDG Guidelines are a positive development for the digital lending sector in India. They are expected to make it easier for borrowers to obtain loans and expand the reach of financial services.
Here are some of the things to keep in mind about the FLDG Guidelines:
- The FLDG can only be used for loans that are originated by the LSP and then sold to the RE.
- The FLDG does not cover losses due to fraud or willful default by the borrower.
- The FLDG must be reviewed and renewed every year.
If you are an RE or an LSP, you should familiarize yourself with t
Here are some of the benefits of FLDG for NBFCS:
- It can help to reduce the risk of default for NBFCS.
- It can make it easier for NBFCS to expand their lending operations.
- It can help to increase competition in the lending market.
- It can make it easier for borrowers to obtain loans.
Overall, FLDG is a positive development for the NBFCS sector. It is a risk-sharing mechanism that can help to promote the growth of digital lending in India.
If you are an RE or an LSP, you should familiarize yourself with the FLDG Guidelines. They are an important part of the regulatory framework for digital lending in India.
