What is First Loss Default Guarantee (FLDG)?

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Overview:

The Reserve Bank of India (RBI) has recently granted its approval for First Loss Default Guarantee (FLDG) framework.

About First Loss Default Guarantee (FLDG):

  • What is it? FLDG is 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.

What is FinTech?

  • Fintech, a combination of the terms “financial” and “technology,” is the application of new technological advancements to products and services in the financial industry
  • It refers to the application of software and hardware to financial services and processes, making them faster, easier to use and more secure.
  • The fintech industry includes everything from payment processing solutions to mobile banking apps.
  • Some examples include mobile banking, peer-to-peer payment services, automated portfolio managers or trading platforms.

 


Q1) What is FinTech?

Fintech, a combination of the terms “financial” and “technology,” is the application of new technological advancements to products and services in the financial industry. It refers to the application of software and hardware to financial services and processes, making them faster, easier to use and more secure.

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