Fintech tie-ups: Clarity on default guarantee awaited

TWO MONTHS AFTER the Reserve Bank of India (RBI) issued guidelines on digital lending, banks, non-banking financial companies and fintech players are still awaiting clarity on many aspects, including the first loss default guarantee (FLDG) system and challenges that banks face while collaborating with fintechs.

On the other hand, hundreds of illegal lending apps, which are not under the RBI ambit, are yet to be reined in by state governments.

Banks, NBFCs and fintechs have sought clarification from the RBI on FLDG, on which RBI has advised the regulated entities to follow its September 2021 directions on securitisation, especially, synthetic securitisation. FLDG is a lending model between a fintech and a regulated entity in which a third party guarantees to compensate up to a certain percentage of default in a loan portfolio of the regulated entities (RE). Synthetic securitisation means a structure where credit risk of an underlying pool of exposures is transferred through the use of credit derivatives or credit guarantees to hedge the credit risk of the portfolio.