The blog is a TL;DR of the webinar -‘Decoding RBI’s FLDG Guidelines’.

The RBI’s recent announcement of First Loan Default Guarantee (FLDG) guidelines under Digital Lending comes as a breeze for the fintechs. It provides much-needed clarity over the FLDG partnerships between regulated entities (REs) and lending service providers (LSPs).

Now, fintechs, LSPs and other non-REs can share risks or take guarantees of compensation up to a certain percentage in case of customers’ loan defaults. The default cover by LSPs is capped at 5% of the loan portfolio and must be invoked within 120 days.

Previously, there was no clarity over FLDG arrangements between REs like banks or NBFCs (non-banking financial companies) and fintechs/LSPs. Hence, several REs paused their tie-ups with fintechs and other digital lending platforms. It eventually led to stagnant business for many LSPs.

The latest update from the RBI is a progressive move that aims to foster FLDG lending partnerships. Therefore, we got talking with some of the industry experts as to how crucial the new update is for the fintech community.

We conducted a webinar – ‘Decoding RBI’s FLDG Guidelines’ facilitated by Aditi Olemann, Director of New Initiatives at Cashfree Payments.

We were joined by Anshu Agarwal, Global head of Finance at Branch International, Arihant Jain, Head of Data Science and Product at IIFL Finance, Pankaj Chaudhary, CBO at Niyojin, and Eklavya Gupta, Founder of Recur Club.

So, let’s get into the key takeaways from the discussion.

Decoding the RBI’s FLDG Guidelines – Webinar Highlights

Undoubtedly, the RBI’s take on FLDG demonstrates that the regulatory body wants to promote innovation but in a compliant way. The RBI’s new FLDG guidelines will help create a legitimate and stable framework for NBFC-LSP and NBFC-NBFC partnerships.

Eklavya Gupta highlighted that the new FLDG guidelines can promote strong partnerships between LSPs and lending partners bringing a good capital flow to customers. Previously, FLDG was a grey area which was causing operational issues for fintechs and LSPs.

It is of paramount importance that the RBI has recognised pure play FLDG lending and brought transparency to the system. He added that the capping of 5% is debatable and some may find it restrictive. However, in the long run, this can be negotiated or modified but as of now, it has empowered the fintechs.

Moreover, before the guidelines came, all kinds of FLDG ranging from 15% to 30% and even higher were taking place. Young fintechs with smaller capital sizes struggled to enter into lending space but the RBI’s new FLDG guidelines have restructured the framework.

While talking about fintech sizes, Pankaj Chaudhary said,

“Now, with the RBI’s FLDG guidelines, it is a level playing field.”

The capping is fixed for all large and small fintechs or LSPs irrespective of their capital sizes. Therefore, lenders will seek to partner with those LSPs that have the right ethics of working. LSPs do need to filter out customers from their target audience by doing a basic verification. If they have the right set of borrowers along with the right products and underwriting policies, lenders will like to partner with them.

He also mentioned that the key endeavour is that LSPs are not lending and this has not changed with new guidelines. The RBI’s recognition will help this framework prevail and lead to the creation of legal and compliant structures. Now onwards, smaller fintechs need not argue with REs for lower default guarantees owing to smaller capitalisation.

However, he believes that the capping needs to improve as 5% FLDG from fintechs is less from an NBFC point of view, no matter what, the risk underwriting lies with lenders.

Underwriting Process and Reporting of NPAs

The RBI’s new FLDG guidelines also clarify which one between the REs and the LSPs will be responsible for the underwriting process and reporting of NPAs (non-performing assets).

Arihant Jain stated the importance of a robust underwriting process. The lenders and REs must focus on credit policies without diluting their standards. On the other hand, LSPs can work on innovation and new-age solutions.

He said,

“Although September 2022 guideline did not mention FLDG, the RBI categorically mentioned that the underwriting policies should lie with lenders. Now the new FLDG guidelines that came in June have clarified it.”

Fintechs attract customers that NBFCs can’t, so the former can do the first layer of filtering. However, banks and NBFCs have to carry the full-fledged underwriting. Prudent underwriting is the need of the ecosystem and is not required just for a few partnerships.

Other than 5% capping and FLDG amount collection within 120 days, the RBI’s FLDG guidelines also state that recognition of NPAs (non-performing assets) is the lender’s responsibility. REs have to report when the customer defaults or does not pay back the loan. NPAs will be counted under REs and they cannot offset it with the LSPs.

Will Co-Lending Model (CLM) Co-exist?

Since there was a huge confusion around FLDG that has paused pure play FLDG lending, the co-lending models (CLMs) were trending. Many NBFCs partnered with other lenders (banks and NBFCs) and also many fintechs acquired NBFC licenses.

So, now with the RBI’s new FLDG guidelines, the question is which type of lending will survive? Moreover, they also empower LSPs with two choices –

1. One is to partner with an RE at 5% FLDG
2. Secondly, if the fintech has an NBFC license then it can also enter into a CLM with banks with 20% risk sharing

Anshu Agarwal thinks both FLDG lending and CLMs are here to stay and both will co-exist. He pointed out that there are large masses who look out for credit and traditional banks or NBFCs can still not suffice that demand. Especially when it comes to unsecured personal loans, it is here that the new-age lenders and LSPs can tap the market.

He also added that although the changes are quite new and may witness changes and modifications in the near future, the digital lending game will evolve. The RBI’s move has provided flexibility and an opportunity for LSPs to grow.

Wrapping Up Webinar’s Session on the RBI’s FLDG Guidelines:

Aditi Olemann wrapped up the session and shared that the RBI’s new FLDG guidelines are going to be a game-changer. Many young and smaller fintechs will jump into lending partnerships. In fact, many fintechs may not identify themselves as LSP but would become one eventually.

The overall sentiment regarding the latest announcement by the RBI has a positive response. The RBI has provided transparency which will help the financial sector to grow and avoid non-compliance in the long run.