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RBI allows default loss guarantee arrangement between fintechs and banks
June 12, 2023
The Reserve Bank of India (RBI) Thursday allowed a ‘first loss default guarantee’ (FLDG) arrangement between regulated entities and lending service providers for digital lending.
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).
“Arrangements between Regulated Entities and Lending Service Providers or between two REs involving default loss guarantee (DLG), commonly known as FLDG, has since been examined by the Bank and it has been decided to permit such arrangements,” RBI said in a release.
It said the arrangement will not be treated as “synthetic securitisation” and will also not attract the provisions of “loan participation”.
Synthetic securitisation is a structure where credit risk of an underlying pool of exposures is transferred, in whole or in part, through the use of credit derivatives or credit guarantees that serve to hedge the credit risk of the portfolio which remains on the balance sheet of the lender.
Under the guidelines, the regulated entities can enter into default loss guarantee arrangements only with a lending service provider or other regulated entities with which it has entered into an outsourcing arrangement.
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