Fintechs seek FLDG cover for co-lending deals, too

Fintech companies say that such an extension will allow more skin in the game and give banks the confidence to enter into more such tie ups.

The RBI recently allowed digital lenders to take first loss default guarantee (FLDG) on loans while capping the guarantee cover to not more than 5% of the total loan portfolio. All entities regulated by the central bank will have to ensure invocation of default guarantees within 120 days of a loan falling overdue.

“There is a proposal in the works that digital lenders are compiling which seeks further clarity on the FLDG rules and asks for 5% guarantee cover to be extended to co-lending arrangements as well,” the CEO of a digital lending company told ET.

Another official said that 5% FLDG cover in co-lending partnerships will attract more capital to non-bank lenders and allow them to have better pricing in such deals.

A Crisil report had said that limiting FLDG to 5% of loan portfolio and not allowing corporate guarantees as a form of FLDG could dampen business volume in segments where FLDGs are currently higher than the permissible limit.

A substantial number of partnerships and co-lending arrangements where FLDG is present -especially those with unsecured personal loan and business loan lenders – carry an FLDG cover of more than 5%.”We expect the co-lending market to see a drop in volumes in segments with relatively higher FLDG as the industry adjusts to the new normal,” said Subha Sri Narayanan, director at Cisil Ratings. “The market may see sourcing lenders adapting their business models to align with the revised regulations. For instance, in some asset classes, a higher hurdle rate could be offered to offset the impact of the cap on the FLDG cover. However, the situation we believe could take some time to stabilise.”

At the time of issuing the working group recommendations for digital lending firms in August 2022, the regulator had said that the recommendation relating to FLDG was under examination. As per the FLDG model, the first hit on a default is taken by the fintech firm that started the loan.