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Relief for fintechs as RBI okays default guarantee with a cap

June 13, 2023

Relief for fintechs as RBI okays default guarantee with a cap
In a significant development, the Reserve Bank of India (RBI) has finally granted approval for the implementation of first loss default guarantee (FLDG), which allows fintech lending platforms to partner banks and non-banking financial companies (NBFCs).

The central bank, however, has capped the FLDG amount at 5% of the loan portfolio.
 
According to RBI’s circular, regulated entities (REs) must ensure that the total amount of default loss guarantee (DLG) cover on an outstanding portfolio does not exceed 5% of the loan portfolio. “In the case of implicit guarantee arrangements, the DLG provider shall not bear performance risk of more than 5% of the underlying loan portfolio,” it added.
 
In a nutshell, loan service providers (LSPs), or fintechs, can allocate 5% of their loan portfolio to the RE, safeguarding against losses if a customer defaults on payments.
 
The development comes as a respite for many fintechs that have been struggling to sustain operations in the wake of RBI’s stringent digital lending guidelines over the past year.
 
While a section of industry insiders lauded RBI’s move for offering clarity and transparency on FLDG, some lingering confusion persists on its interpretation, triggering concerns over potential “loopholes”.
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