RBI’s Progressive Approach: FLDG Guidelines and the Future of Fintech

The Fintech community in India has received a significant boost with the recent clarification by the Reserve Bank of India (RBI) on the First Loss Default Guarantee (FLDG) guidelines in Digital Lending. This move demonstrates the RBI’s progressive attitude towards fostering innovation while safeguarding the interests of all stakeholders involved.

In this blog, we will explore the key highlights of the RBI’s guidelines and discuss how they pave the way for the future of fintech in India.

FLDG Guidelines: A Game-Changer for Fintech

The RBI’s clarification allows Regulated Entities (REs) and Lending Service Providers (LSPs) to provide loss protection against a portfolio of assets without falling foul of synthetic securitisation. This decision opens up new possibilities for collaboration between REs and LSPs, creating a conducive environment for innovation and growth in the Fintech sector.

Key Highlights

The recent FLDG (First Loss Default Guarantee) circular by the RBI has ushered in a new era of possibilities for the Indian fintech industry. Let’s delve into the key highlights:

• Restructuring for Stability: FLDG’s 5% Limit Ensures Sustainable Fintech-Lender Partnerships: While the 5% FLDG limit may seem restrictive, it brings legitimacy and stability to fintech-lender partnerships. With the previous industry norms ranging from 15-30% or even higher, this new limit necessitates restructuring but ensures a sustainable lending environment. From a fintech perspective, this is a significant development as it allows the revival of businesses that have been struggling for the past several months. Additionally, it addresses the capital constraints faced by many fintech companies, allowing them to operate more efficiently.
• Empowering Innovation: FLDG Guideline Unlocks Fintech-NBFC Collaboration: The FLDG guideline allows fintech to leverage their existing data, customer insights, and user base to build innovative lending models in collaboration with NBFCs. This newfound legitimacy marks a significant milestone for the Indian fintech industry.
• The Resurgence of FLDG: Exploring the Choice Between 5% FLDG and 20% Co-lending for Fintech (who secured an NBFC license)-NBFCs: While co-lending gained momentum during the uncertain period of FLDG, with fintech obtaining NBFC licenses or entering into partnerships, the resurgence of FLDG adds an intriguing dimension. Observing how such fintech-NBFCs strategise with the choice between 5% FLDG or 20% co-lending will be interesting.
• Prominent Role at the Table: FLDG Empowers LSPs in Serving Underserved Segments: FLDG grants LSPs a prominent position at the lending table, eliminating their previous disadvantage. This empowers new models to evolve without the fear of regulatory repercussions. Imagine a synergy between a tech-savvy LSP (Lending Service Provider), an innovative NBFC, and a well-established player, collectively addressing the needs of underserved customer segments.
• From Risk to Sustainability: FLDG is a logical step, allowing LSPs to confidently offer financing based on their deep understanding of merchant repayment capabilities. The previous non-transparent and disproportionate FLDG requests posed a risk to the ecosystem. With limited FLDG and transparent portfolios, the model is ready for sustainable growth.
• Leveling the Field: Enlisting FLDG Portfolios for Fair Fintech Opportunities: Requiring FLDG portfolios to be enlisted on LSP websites promotes a level playing field, benefiting younger fintech. This transparency empowers REs to have a clear understanding of the contingent liabilities associated with LSPs. It promotes responsible lending practices and fosters a culture of trust and accountability within the Fintech community.

While the RBI’s guidelines provide flexibility and room for innovation, it is crucial for the Fintech community to operate within the set guardrails and not attempt to circumvent regulations. 

[Suggested Reading: RBI’s FAQs on Digital Lending Guidelines: A Comprehensive Analysis]

Conclusion

The RBI’s recent clarification on the FLDG (First Loss Default Guarantee) guidelines is a significant milestone for the Fintech community in India. It showcases the regulator’s progressive approach and commitment to fostering innovation while maintaining control and mitigating risks. By providing clarity and guidance, the RBI has set the stage for increased collaboration, product innovation, and credit penetration in the digital lending space. As the Fintech industry moves forward, it is essential for all stakeholders to embrace these guidelines, build trust, and continue to drive responsible growth in the sector. The future of Fintech in India looks brighter than ever before.

Let’s embrace this era of new possibilities and collectively drive financial inclusion to greater heights!