A report by RBI has highlighted the risk of first loan default guarantee (FLDG) agreements where a regulated entity such as a bank or NBFC will tie up with an unregulated entity like fintech or digital lending apps. Banks and non-banking financial companies (NBFCs) have frozen the move for tie-ups with fintech, or digital lending apps, under the first loan default guarantee (FLDG) structure for lending as they seek more clarity from RBI.Â
Know more about this important development for the IAS exam Indian economy segment.
Digital Lending Apps
- Digital lending involves giving and recovering loans through web platforms or mobile apps.
- Some examples of digital lending apps in India are – Dhani, MoneyTap, Nira, etc.
What is a First Loan Default Guarantee (FLDG)?
- FLDG is a lending model and a credit-sharing agreement between digital lending apps and their partner banks and NBFCs.
- As per these agreements, the digital lending apps will give credit guarantees to compensate their partners up to a certain amount in case of default.Â
- Regulated entities such as banks and NBFCs lend from their own book through these fintech or digital lending apps.
Issues with FLDG:
- The fintech or digital lending apps do not come under the regulation of RBI. In this context agreement between a regulated and an unregulated entity might be risky.
- Recently there were apps that came under the scrutiny of RBI and the government, for their unfair lending practices.
- According to experts the RBI report on FLDG is justified as it might lead to systematic risk.
- FLDG has led to the emergence of practices like renting licenses which will increase the risk of non-performing assets.
- There are also concerns that FLDG costs are often passed on to consumers.
- There is also an issue of management and storage of customer data by fintechs where there is a need for more clarity.
- Lack of clarity also leads to increased business costs and compliance costs for fintechs.
Image source: RBI
Way Forward:
- Some fintech industry experts opine that the FLDG model is important for new-age fintech as it helps them expand their business and revenue.
- FLDG also helps expand the customer base for traditional lenders.
- Instead of a complete ban, more clarity and appropriate regulations can be proposed by the RBI so that banks can take advantage of opportunities offered by fintech.
Digital Lending Apps and FLDG Model:- Download PDF Here
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