First Loss Default Guarantee (FLDG) System

About the First Loss Default Guarantee (FLDG) system:

• What is it? 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 the fintech but from their books.
• FLDG helps expand the customer base of traditional lenders but relies on the fintech’s underwriting capabilities.

What is FinTech?

• Financial Stability Board (FSB) has defined FinTech as “technologically enabled innovation in financial services that could result in new business models, applications, processes or products with an associated material effect on financial markets and institutions and the provision of financial services”.

Q1) What is Non-Banking Financial Company ?

It is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares  issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business,

Source: Banks and NBFCs stop lending to apps under the loan default guarantee model

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