First

Loss
. c o m
Default kers
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p r
Guarantee a n
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Why in news ?
The Reserve Bank of India (RBI) has
granted its approval for First Loss
Default Guarantee (FLDG) framework. . c o m
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The Players

Banks NBFCs

. c o m
LSPs

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ICICI Bank
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Bajaj Finance Bank Bazaar
HDFC Bank
Axis Bank tr- T
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L&T Finance Ltd
Tata Capital
Cred
Early Salary
Moneytap
First Loss Default Guarantee (FLDG)
An arrangement whereby a third
party such as a financial technology
(fintech) player (LSP or lender
. c o m
service provider) compensates
n k e rs
lenders if the borrower defaults.
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Lending Service Providers
Lending service providers are new-age players
using technology platforms in lending.
They are agents of a bank or NBFC who carry out
. c o m
one or more of a lender’s functions (in part or
n
full) in customer acquisition, disbursement, k e rs
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servicing, monitoring, and recovery of specific
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loans or loan portfolios on behalf of banks or
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NBFCs as per the outsourcing guidelines of the

RBI.
Need for FLDG
 RBI had initially showed concerns about the First Loss Default
Guarantee (FLDG) system because it believed that this model
might bring about risks that could impact the whole financial
system.
. c o m
e
 A committee formed by RBI mentioned in its 2021 report that
n k rs
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some fintech companies were directly lending money either
in collaboration with a bank or a Non-Banking Financial
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Company (NBFC), or on their own.
 These fintech companies were doing so without meeting the
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main business requirements to be officially regulated. i.e. it

was happening beyond the control of RBI regulations.
Need for FLDG
 There were increased operational risks due to lenders depending
more and more on third-party service providers.
 In September 2022, the RBI introduced guidelines regarding digital
lending. However, these guidelines did not give any specific details
. c o m
rs
about the FLDG system.

a n e
 Because of the lack of clear instructions, regulated entities like
k
banks stopped creating such arrangements with fintech companies.
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o p r
This situation posed a risk to the fintech companies' operations. The
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fintech industry was urging the RBI to permit FLDG arrangements.
 To tune with our objective of maintaining a balance between
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innovation and prudent risk management, RBI has

How it works?
In an FLDG arrangement between two entities — often two
regulated entities (REs). Or, in the case of digital lending,
between the regulated entity and fintech lending service
providers (LSPs), the LSP guarantees to compensate the RE
. c o m
e rs
for loss due to default up to a certain threshold of the loan
n k
portfolio.
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Since losses only to a certain threshold are covered under
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or FLDG.
T
this arrangement, it’s called as first loss default guarantee
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How it works?
The total default guarantee provided by FinTechs
should not exceed 5 percent of the portfolio
amount.
FLDG arrangements can only be carried out between . c o m
RBI-regulated entities and LSPs or between two
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regulated entities that have entered into an
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outsourcing agreement. T
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REs are allowed to invoke FLDG within a maximum

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overdue period of 120 days, highlighting the RBI’s

commitment to timely default resolution.
How it works?
REs can accept DLGs only if FinTechs provide a hard
guarantee in the form of cash deposits, bank guarantees, or
fixed deposits maintained with scheduled commercial
banks.
. c o m
The RBI instructs LSPs to publish details of the total
n k e rs
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o p
FLDG has been offered on their websites.r a
number of portfolios and respective amounts on which
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REs remain responsible for recognizing individual loans in
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the portfolio as Non-Performing Assets (NPA) and making

necessary provisioning, regardless of the FLDG cover at
the portfolio level.
For Customers
 Now that the Reserve Bank of India (RBI) has
allowed First Loss Default Guarantee (FLDG)
contracts for digital lending, it's possible that Loan
. c o m
Service Providers (LSPs) might officially charge for
n k e
this to compensate for potential losses. This means
rs
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borrowers might have to pay more for their loans.
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For Industry
The new First Loss Default Guarantee (FLDG) guidelines
from the Reserve Bank of India (RBI) act as a driving force
for fintech innovation and the expansion of financial
services in India.
. c o m
e
These guidelines offer clear directions, set limits, and
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foster an environment conducive for partnerships,
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cooperation, and the creation of revolutionary financial

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Considering the potential for the growth in the future,

India's fintech sector is heading towards a promising and
optimistic direction.
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