Fintech firms in need of clarity by RBI on their stance on digital lending norms

People involved in fintech who uses the first loss default guarantee (FLDG) model extensively are facing concerns after the newly released digital lending norms by Reserve Bank of India. This comes in with the Reserve Bank of India’s stance on the first loss default guarantee (FLDG) model. 

The fintech firms are now planning to seek the RBI’s clarity on the stated stance. 

RBI released detailed guidelines on digital lending in the previous week. 

RBI stated that in regards to the industry practice of offering financial products, which involves contractual agreements like FLDG, regulated entities must stick to provisions of the master direction on securitisation of standard assets, especially synthetic securitsation. 

According to RBI, synthetic securitisation is a structure where transfer of credit risk of an underlying pool of exposures occurs partially or in whole. These facilitates a boundary to the credit risk of the potfolio, which remains on the balance sheet of the lender. 

FLDG refers to the standing model which involves a third-party providing guarantee to compensate up to a certain percentage of default in a loan portfolio of the regulated entity. 

RBI issued the regulatory framework on implementation of the Recommendations of the Working Group on digital lending on 10 August 2022. 

Back then people were looking forward to the RBI to provide clarity on how regulated entities would possibly undertake FLDG based risk sharing on pooled accounts. 

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