First Loss Default Guarantee system

CalendarToday
timer
1 min read
First Loss Default Guarantee system Blog Image

Overview:

Two months after the Reserve Bank issued guidelines on digital lending, banks, NBFCs and fintech players are still awaiting clarity on many aspects, including the FLDG system.

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

 


Q1) What Is Financial Technology (Fintech)?

Financial technology (better known as Fintech) is used to describe new tech that seeks to improve and automate the delivery and use of financial services. Fintech is utilized to help companies, business owners, and consumers better manage their financial operations, processes, and lives by utilizing specialized software and algorithms that are used on computers and, increasingly, smartphones.

Source: Indian Express