Facts for Prelims (FFP)
Source: IE
Context: The RBI has allowed a Default loss guarantee (DLG) (also called first Loss Default Guarantee (FLDG), a safety-net arrangement among banks, non-banking finance companies (NBFCs) and lending service providers (LSPs).
LSPs: These are new-age technology platforms/ agents (of a bank or NBFC) in the lending space who carry out one or more of a lender’s functions on behalf of regulated entities (REs).
What is an FLDG arrangement?
- It is an arrangement whereby a third party such as a financial technology (fintech) player (LSP) compensates lenders if the borrower defaults.
- For all practical purposes, credit risk is borne by the LSP without having to maintain any regulatory capital.
Previous arrangement:
- RBI had expressed reservations about the FLDG arrangement because it felt that the model could pose a systemic risk.
- The RBI guidelines (2022) on digital lending did not provide clarity on the FLDG structure.
New guidelines:
- The RBI permitted FLDG arrangements between banks and fintech or between two REs.
- The LSP-providing DLG must be incorporated as a company under the Companies Act, 2013.
- Banks and NBFCs should ensure that the total amount of DLG cover on any outstanding portfolio does not exceed 5% of the amount of that loan portfolio.
Significance: This will facilitate the entry of small and medium fintech into the digital lending space in partnerships with banks or NBFCs.
