rbi: Fintech companies ask RBI for clear First Loss Default Guarantee framework
The development comes months after the regulator notified the digital lending rules.
As part of the initial digital lending guidelines released in August last year, the RBI had said the recommendations pertaining to FLDG were “under examination”. It allowed FLDG structures to continue and asked entities to refer to securitisation of standard assets guidelines dated September 24, 2021.
The securitisation guidelines of September 2021 capped loan providers’ securitisation exposure to not more than 20% default guarantee, under any arrangement. However, in the case of some fintech partnerships, entities were offering almost 100% FLDG to banking partners and financial service companies.
“In a recent consultation with the RBI we have asked that FLDG be allowed between banks and non-banks and also among peer NBFCs (non-banking finance companies),” the chief executive of a Delhi-based fintech told ET on condition of anonymity. “The RBI prima facie looks okay with FLDG but it’s worried about contagion risks developing. If this is allowed between regulated entities then the regulator can always have a close supervisory watch on it.”
ET had reported on December 26 last year that as a result of the RBI’s lending guidelines, banks and NBFCs had also moved away from FLDG partnerships due to non-clarity, hurting new-age fintech NBFCs which were already struggling with high cost of funds. The fear was largely around being on the wrong side of the regulation, due to non-clarity.
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The issue about creating a detailed FLDG framework and operating guidelines for unregulated fintechs was also brought up in an industry meeting with RBI governor Shantikanta Das, along with senior officials of the central bank, last month, said people with knowledge of the matter. In addition, fintechs have requested the regulator to look into latency in credit bureau reporting and make it real time to safeguard the industry from credit risks.
RBI did not respond to ET’s queries until press-time on Monday.
Implement a framework for FLDG partnerships
In an FLDG structure, a third party taking the debt (here fintechs) guarantees to compensate up to a set percentage of default in a loan portfolio for the regulated entities.
“The clarity on FLDG structure is missing. If 100% FLDG is not allowed, then what is? If FLDG arrangements are stopped, then it hurts the bread and butter of lending fintechs and stifles (debt) funding for them,” said an industry executive, who has been part of the discussions and has made recommendations to the RBI.
While most fintechs are asking for FLDG structures to be brought in between regulated entities so as to ensure the regulator’s supervision, some are also batting for this securitisation structure between regulated entities and unregulated fintechs.
“While regulated entities (including fintech NBFCs) have switched to co-lending guidelines for now, there is still no understanding on FLDG arrangements between unregulated entities and regulated ones,” said another fintech founder, who participated in the consultation process and did not wish to be identified. “FLDG and risk-sharing have always existed. In niche use-cases loan service providers or unregulated fintechs have better knowledge of the credit risk and underwriting than banking partners.”
The fintech industry is also trying to understand whether there is a midway where unregulated entities can participate in the risk-sharing, the founder said, adding, “NBFCs and banks had no issues with these arrangements earlier.”
The RBI governor had clarified in September last year that the central bank’s top brass was still deliberating over how to treat rules around FLDG and that a decision would be taken after taking into consideration feedback from stakeholders.
“We have said that FLDG (first loss default guarantee) is under examination,” Das had said. “We have not decided because the consultations are not complete. We have received a lot of stakeholder feedback. But there were a lot of issues that required deeper examination within the RBI. That is a separate exercise which is going on and as and when we will take a view we will come out with that.”
While the industry is hopeful that the RBI will provide clarity on FLDG models, anxiety remains around timing and right framework.
In the past, the RBI has expressed concern about credit enhancement features including FLDG provided by some loan service providers, as they take on credit risk without maintaining the required capital.
Unregulated fintechs want to be regulated
With new lending guidelines having put responsibilities on regulated entities, fintechs without any NBFC licences have been feeling left out of the mix.
In consultations with the RBI, the industry has also sought rules to help even unregulated entities understand what they are allowed in the digital lending framework.
“The ask is to also give recognition to loan service providers (without a licence) and help them understand how they can navigate the ecosystem and operate in it. Fintechs want to be regulated and don’t want to operate in the uncertainty of newer guidelines disrupting business models,” said one of the fintech founders quoted earlier.
However, not everyone in the industry is of the same view.
“Instead of being called loan service providers, these fintechs can associate themselves with the role of existing direct selling agents or banking correspondents. Loan service providers can have the same connotation. More frameworks will just complicate the ecosystem,” said an industry executive, who has been in consultation with these fintechs.
Over the past year, several RBI guidelines, such as the one barring prepaid payment instruments from being loaded through credit lines, have caused wide-scale disruption in the industry. Besides, the RBI is continuing to scrutinise bank partnerships with fintechs.
Fintechs without licence also fear that if their role is reduced to that of direct selling agents or affiliate models, then venture funding may dry up for the larger digital lending industry.
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