By Nirav Choks
The Reserve Bank of India’s (RBI) decision to allow Default Loss Guarantee (DLG) arrangements in digital lending is a significant opportunity for India’s fintech sector
The new guidelines provide clarity on lending arrangements between fintechs, banks and NBFCs, allowing fintechs to showcase their underwriting capabilities and gain the trust of traditional financial institutions
It will lead to increased credit penetration, foster innovative fintech lending models, and encourage deeper partnerships between banks, NBFCs and fintechs
In the last decade, fintechs in India have grown from niche players to mainstream solution providers. The fintech industry in the country is now on the brink of another significant opportunity to scale up new advances in technologies and speed up financial inclusion.
The Reserve Bank of India’s (RBI’s) recent decision to allow Default Loss Guarantee (DLG) arrangements in digital lending comes as a welcomed move for India’s fintech sector. The default loss guarantee guidelines released by the RBI are a boon to the fintechs that have been waiting for more clarity on their lending arrangements with banks and Non-Banking Financial Companies (NBFCs). We will break down the new rules and analyse their impact on India’s booming FinTech sector.
Deconstructing RBI’s Guidelines For FLDG
The First Loss Default Guarantee (FLDG) guidelines released by the RBI have created a watershed moment for fintechs in the country. This is the first time the RBI has approved the FLDG programme, a credit-risk sharing arrangement that fintechs in India use to form partnerships with banks and NBFCs.
According to the new rules, the RBI has given a green signal to the FLDG scheme, a guarantee that an unregulated entity offers to regulated lenders if the borrower defaults. In this lending arrangement, a certain percentage of the default loan portfolio of registered entities such as banks and NBFCs is guaranteed by a third party such as a fintech or a Lending Service Provider (LSP).
FLDGs allow fintechs to showcase their prowess in underwriting and gain the trust of banks and NBFCs. Previously, the FLDG guarantee provided by fintechs to their banking partners had even gone up to 100 per cent. Such arrangements expose the banks and NBFCs to high risks and exorbitant losses. Especially in cases where the borrower defaults and the fintech is unable to compensate as agreed. In September 2022, the RBI cracked down on such arrangements, permitting FLDGs only between Regulated Entities (REs).
