RBI Approves FLDG Guidelines For Digital Lenders As per the guidelines, the RBI has decided to permit arrangements between regulated entities and lending service providers or between two regulated entities involving default loss guarantee
By Teena Jose •
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The Reserve Bank of India, on Thursday, has approved the First Loss Default Guarantee (FLDG) guidelines for digital lenders. FLDG is a lending model between fintech firms and their partner banks and non-banking companies where an initial hit on a default is taken by the fintech firm that originated the loan.
In a statement on developmental and regulatory policies, RBI said that, "The proposed regulatory framework is in tune with our objective of maintaining a balance between innovation and prudent risk management. The move comes after extensive consultations with various stakeholders and detailed guidelines will follow."
As per the guidelines, the RBI has decided to permit arrangements between regulated entities and lending service providers or between two regulated entities involving default loss guarantee (DLG). The limits are aimed at reining in the risk of large slippages in tie-ups between lenders and fintechs.
According to the reports, the RBI has allowed regulated entities to enter into default loss guarantee arrangements, but within limits. A default cover could be provided for up to 5%of the loan portfolio of the entity. It further added that the lenders shall invoke DLG and initiate loan restructuring, within a maximum overdue period of 120 days.
The central bank also advised that banks and non-banking financial companies are required to take a cooling period of 12 months from borrowers subject to compromise settlements, adding that the period for farm credit will be approved by the board of the lender.
Reportedly, the RBI also proposed to issue a 'comprehensive' regulatory framework governing compromise settlements and technical write-offs for all its regulated entities. According to RBI, this framework will also rationalise the existing prudential norms to implement resolution plans in respect of exposures affected by natural calamities.
Mostly, the industry players responded to the RBI's new guidelines in a positive way. Commenting on this new development, Sathvik Vishwanath, co-founder and CEO, Unocoin said that, "The RBI's FLDG guidelines for digital lenders are a positive step towards ensuring transparency, accountability, and fair practices in the digital lending space. These guidelines aim to protect the interests of borrowers and promote responsible lending practices. By setting clear guidelines, the RBI is addressing concerns related to predatory lending, hidden charges, and unfair collection practices. This instills confidence in borrowers and encourages them to avail digital lending services without fear of exploitation. Moreover, the guidelines promote healthy competition among digital lenders, fostering innovation and improved services. They also emphasize the importance of data privacy and protection, enhancing trust in the digital lending ecosystem. Overall, the RBI's FLDG guidelines create a level playing field, safeguarding the rights of borrowers while promoting a transparent and inclusive digital lending environment."
Sachin Jasuja, founding partner, investment product at Centricity also opined that, "The Reserve Bank of India's (RBI) recommendations on the First Loss Default Guarantee (FLDG) are an important step towards improving the financial landscape and establishing stability. By prioritising risk management, transparency, and solid governance practises, these recommendations indicate the RBI's commitment to defending stakeholders' interests and promoting a vibrant financial ecosystem. Compliance with FLDG laws is more than a legal need; it is a strategic requirement for organisations trying to survive in the face of changing market dynamics and develop confidence in the financial industry. This is an encouraging move that will boost credit penetration and the digital lending ecosystem."
Mentioning this as another comforting and well-meaning guideline from the regulator, Anand Kumar Bajaj, founder, MD and CEO of PayNearby said that, "Considering the pros and cons of the challenges that the industry was facing, the regulator has once again put the right format on the table, keeping the default loss guarantee (DLG) cover limited to 5%. This ensures that regulated entities (REs) can confidently make sound credit decisions. The inclusion of a 5% cap, along with clear definitions of time in the agreement and the deposit method, exemplifies a commitment to good governance and aligns with regulatory expectations for the industry. This practice ensures absolute clarity and demonstrates compliance with the regulator's guidelines. Furthermore, this guideline serves as a catalyst for encouraging partners of regulated entities to participate in a more expansive and inclusive provision of micro-sized loans."
"RBI's fresh guidelines are a welcome move and extremely encouraging for the ecosystem. This will further enhance deeper partnerships and collaboration between legacy institutions Banks, regulated entities, NBFCs and new age fintech's thus helping further democratise access to credit and fuel growth for the unserved and underserved. As pioneers in digital escrow solutions, this continues to be an exciting segment for us and we will continue to enable this ecosystem powering secure collections and transactions," stated Subhrangshu Neogi, executive director and co-founder , Escrowpay.
Asserting to the fact that the new guidelines will bring a positive impact in the ecosystem, Kamaljeet Rastogi, CEO, SahiBnk, Powered by Manipal Business Solutions, said that, "As pioneers in serving the underserved and underbanked segments, this opens even further lending opportunities for us in partnership with banks and NBFCs to serve Bharat. The recent guidelines introduced by the RBI are a positive step forward and provide great encouragement for the overall ecosystem. These guidelines will foster stronger partnerships and collaboration between traditional banks, regulated entities, non-banking financial companies (NBFCs), and innovative fintech firms. We are dedicated to playing an active role in this ecosystem and ensuring its continued success."
