rbi: Fintech companies ask RBI for clear framework for First Loss Default Guarantee
The development comes months after the supervisory authority announced the digital loan rules.
As part of the first digital lending guidelines released in August last year, the RBI had said the recommendations related to FLDG were “under examination”. It allowed FLDG structures to continue and asked entities to refer to Standard Asset Securitization Guidelines dated September 24, 2021.
The securitization guidelines from September 2021 limited loan providers’ securitization exposure to no more than 20% default guarantee, under any arrangement. However, in the case of some fintech partnerships, entities offered almost 100% FLDG to banking partners and financial services companies.
“In a recent consultation with the RBI, we have requested that FLDG be allowed between banks and non-banks and also among peer NBFCs (non-banking finance companies),” the CEO of a Delhi-based fintech told ET on condition of anonymity. “At first glance, the RBI looks OK with FLDG, but it is concerned about the risk of contagion. If this is allowed between regulated entities, the regulator can always keep a close watch on it.”
ET had reported on December 26 last year that as a result of RBI’s lending guidelines, banks and NBFCs had also walked away from FLDG partnerships due to lack of clarity, hurting new-age fintech NBFCs that were already struggling with high funds. The fear was largely about being on the wrong side of the regulations, due to lack of clarity.
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The issue of creating a detailed FLDG framework and operating guidelines for unregulated fintech was also raised in an industry meeting with RBI Governor Shantikanta Das, along with senior central bank officials, last month, people with knowledge of the matter said. In addition, fintechs have asked the regulator to look at latency in credit bureau reporting and make it real-time to protect the industry from credit risk.
RBI did not respond to ET’s queries till press time on Monday.
ETechImplement a framework for FLDG partnerships
In an FLDG structure, a third party that takes the debt (here fintechs) guarantees to compensate up to a set percentage of defaults in a loan portfolio for the regulated entities.
“Clarity on the FLDG structure is lacking. If 100% FLDG is not allowed, then what is? If FLDG schemes are stopped, then it hurts the bread and butter of lending fintechs and stifles (debt) funding for them,” said an industry leader , which has been part of the discussions and has given recommendations to the RBI.
While most fintechs are calling for FLDG structures to be brought in between regulated entities to ensure regulator oversight, some are also fighting for this securitization structure between regulated entities and unregulated fintechs.
“While regulated entities (including fintech NBFCs) have moved to co-lending guidelines for now, there is still no understanding of FLDG arrangements between unregulated entities and regulated entities,” said another fintech entrepreneur, who participated in the consultation process and did not want to be identified. “FLDG and risk sharing have always existed. In niche cases, loan service providers or unregulated fintechs have better knowledge of credit risk and guarantees than bank partners.”
The fintech industry is also trying to understand whether there is a middle ground where unregulated entities can participate in risk sharing, the founder said, adding, “NBFCs and banks had no problem with these arrangements in the past.”
The RBI governor had clarified in September last year that the central bank’s top managers were still discussing how rules around the FLDG should be handled, and that a decision would be made after taking into account feedback from stakeholders.
“We have said that FLDG (first loss default guarantee) is under investigation,” Das had said. – We have not decided because the consultations are not finished. We have received a lot of feedback from stakeholders. But there were many issues that required deeper investigations within the RBI. It is a separate exercise that is ongoing, and as and when we take a view we will come out with it.”
While the industry hopes that the RBI will provide clarity on FLDG models, there are still concerns about timing and the right framework.
In the past, the RBI has expressed concern over 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 putting onus on regulated entities, fintechs without any NBFC licenses have felt left out of the mix.
In consultation 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 request is to also give recognition to (unlicensed) loan service providers and help them understand how to navigate the ecosystem and operate in it. Fintechs want to be regulated and don’t want to operate in the uncertainty of new policies that disrupt business models, ” said one of the fintech founders quoted earlier.
However, not everyone in the industry is of the same opinion.
“Instead of being called loan service providers, these fintechs may associate themselves with the role of existing direct sales agents or bank correspondents. Loan service providers may have the same connotation. Multiple frameworks will only complicate the ecosystem,” said an industry leader, 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 lines of credit, have caused widespread disruption in the industry. Also, RBI continues to scrutinize bank partnerships with fintechs.
Unlicensed fintech firms also fear that if their role is reduced to direct sales agents or affiliate models, venture funding could dry up for the larger digital lending industry.
