RBI permits FLDG between banks and NBFCs and fintechs

The First Loss Default Guarantee (FLDG) programme, a lending model between fintech companies and their partner banks and non-banking financing companies, has received approval from the Reserve Bank of India (RBI). Under this approach, the fintech company that originated the loan bears the initial burden of a default.

According to the RBI, before continuing to lend to borrowers who are subject to compromise settlements, banks and non-banking financial institutions must give them a chance to cool off.

The non-farm credit cooling period was set by the central bank to be at least 12 months, and the board of the lender would decide on the term for agricultural loans.

According to the RBI, lenders may agree to compromise settlements for loan accounts identified as fraudulent or held by willful defaulters. An agreement with the borrower to fully satisfy the lender’s claim in cash is referred to as a compromise settlement.

After reviewing the first loss default guarantee (FLDG) mechanism, the RBI also released a regulatory framework for default loss guarantee (DLG) for digital lenders on Thursday.

The RBI has placed restrictions on the default loss guarantee agreements that regulated firms may enter into. A default protection could be offered for as much as 5% of the entity’s loan portfolio.

The central bank further stated that after a maximum overdue time of 120 days, the lenders must invoke DLG and begin loan restructuring.

The regulated businesses will be in charge of designating specific loan assets in the portfolio as non-performing assets and making the ensuing provisions, the central bank noted.

The RBI stated in 2022 guidelines that it opposed such agreements because they would tempt lenders to take on excessive risk.

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