The Reserve Bank of India (RBI) has allowed default loss guarantee (DLG) in the digital lending space.
Key points
- A default loss guarantee (DLG) is a safety-net arrangement among banks, non-banking finance companies, and lending service providers (LSPs, popularly known as fintech players).
- DLG is also known as First Loss Default Guarantee (FLDG).
- The RBI nod for compensating banks in case of default is expected to boost fintech activity in the financial sector.
- FLDG is an arrangement whereby a third party such as a financial technology (fintech) player (LSP) compensates lenders if the borrower defaults.
- The LSP provides certain credit enhancement features such as first loss guarantee up to a pre-decided percentage of loans generated by it.
- For all practical purposes, credit risk is borne by the LSP without having to maintain any regulatory capital.
- The loan portfolio backed by FLDG is akin to the off-balance sheet portfolio of the LSP wherein the nominal loans sit in the books of the lender without having to partake in any lending process.
- Lending service providers are new-age players who use technology platforms in the lending space.
- They are agents of a bank or NBFC who carry out one or more of a lender’s functions (in part or full) in customer acquisition, underwriting support, pricing support, disbursement, servicing, monitoring, recovery of specific loan or loan portfolio on behalf of REs as per the outsourcing guidelines of the RBI.
