Banks, NBFCs stop lending to apps under loan default guarantee model

Banks and non-banking financial companies (NBFCs) have almost paused tie-ups with fintech players, or digital lending apps, under the first loan default guarantee (FLDG) structure for lending in the absence of clarity on contractual agreement from the Reserve Bank of India (RBI).

Broadly, lenders have taken the approach that FLDG cannot be done with non-regulated entities (fintech players that do not come under the RBI’s ambit). Under FLDG, a credit-risk sharing agreement, a third party guarantees to compensate up to a certain percentage of default in a loan portfolio of the regulated entities – banks and NBFCs. Banks cannot lend directly to lending apps which have recently come under the scrutiny of the RBI and the government for unfair lending practices.