Banks, NBFCs stop lending to apps under loan default guarantee model

February 21, 2023

Banks and non-banking financial companies (NBFCs) have almost paused tie-ups with fintech players, or digital lending apps, under the first loan default guarantee (FLDG) structure for lending in the absence of clarity on contractual agreement from the Reserve Bank of India (RBI).

Broadly, lenders have taken the approach that FLDG cannot be done with non-regulated entities (fintech players that do not come under the RBI’s ambit). Under FLDG, a credit-risk sharing agreement, a third party guarantees to compensate up to a certain percentage of default in a loan portfolio of the regulated entities – banks and NBFCs. Banks cannot lend directly to lending apps which have recently come under the scrutiny of the RBI and the government for unfair lending practices.

However, many experts feel that the RBI’s reservation on FLDG is justified as it may lead to systemic risk, as many lending apps are outside the RBI rules on lending. “The regulator’s argument is that this (FLDG) is leading to renting of licenses, which the regulated entities have. This arrangement could result in higher NPA. There is a possibility of a bigger risk ballooning that might impact all the regulated entities,” said an expert.

The RBI recently gave a list of lending apps working with non-bank lenders registered with the central bank to the government. The Ministry of Electronics and Information Technology later banned 94 loan apps based on this list.