New guidelines lend much-needed clarity to FLDG usage
Stricter rules on FLDG cover and NPA recognition to curb volume in higher-yield segments
City Air News
Jun 12, 2023 10:40
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Mumbai, June 12, 2023: The guidelines on first loss default guarantee (FLDG) in digital lending, announced by the Reserve Bank of India (RBI) on June 8, 2023, helps resolve ambiguity around its use by banks and non-banking financial companies (NBFCs) as part of their co-lending arrangements. It also provides much-needed regulatory sanctity, even though there could be a near-term impact on business volume.
Furthermore, permitting lending service providers (LSPs) to offer FLDG will enable lenders to continue working with non-NBFCs and non-regulated entities provided they are incorporated as a company.
However, the RBI has tightened norms on the extent and form of FLDG cover, and recognition of non-performing assets (NPAs) in partnership models. These include limiting FLDG to 5% of loan portfolio and not allowing corporate guarantees as a form of FLDG. This could dampen business volume in segments where FLDGs are currently higher than the permissible limit.
Says Ajit Velonie, Senior Director, CRISIL Ratings, “We estimate that a substantial proportion of partnership/co-lending arrangements where FLDG is present — especially those with unsecured personal loan and business loan lenders — currently carry an FLDG cover of above 5%. These segments would be affected by the new guidelines. On the other hand, secured asset classes such as home loans and loan against property, where FLDG is typically within 5%, may not see much impact.”
Says Subha Sri Narayanan, Director, CRISIL Ratings, “With the guidelines coming into effect immediately, we expect the co-lending market to see a drop in volumes in segments with relatively higher FLDG as the industry adjusts to the new normal. The market may see sourcing lenders adapting their business models to align with the revised regulations. For instance, in some asset classes, a higher hurdle rate could be offered to offset the impact of the cap on the FLDG cover. However, the situation we believe, could take some time to stabilise.”
