Digital Lending Apps and First Loan Default Guarantee (FLDG) - UPSC Notes

Understanding Digital Lending Apps

• Digital lending is a process that involves offering and repaying loans via online platforms or mobile applications.
• Popular digital lending apps in India include platforms like KreditBee, EarlySalary, and PaySense, among others.

Defining First Loan Default Guarantee (FLDG)

• FLDG refers to a credit-sharing agreement between digital lending apps and their partner banks or NBFCs.
• Under these agreements, digital lending apps offer credit guarantees to their partners to cover a certain amount in the event of a default.
• Regulated entities like banks and NBFCs provide loans from their own funds through these fintech or digital lending apps.

Problems Associated with FLDG:

• Fintech or digital lending apps are not regulated by the RBI, which can make agreements between regulated and unregulated entities risky.
• Several apps have recently faced scrutiny from the RBI and the government due to unfair lending practices.
• Many experts agree with the RBI's concerns about FLDG as it could lead to systemic risk.
• FLDG has led to practices like license renting, which can increase the risk of non-performing assets.
• FLDG costs are often passed on to consumers, raising further issues.
• There are also concerns about the management and storage of customer data by fintechs, which requires more clarity.
• The lack of clarity leads to increased business costs and compliance costs for fintechs.

Image source: RBI

Looking Ahead:

• Industry experts believe that the FLDG model is crucial for new-age fintech as it helps them grow their business and revenue.
• FLDG also aids in expanding the customer base for traditional lenders.
• Rather than imposing a complete ban, the RBI could propose more clarity and appropriate regulations so that banks can leverage the opportunities provided by fintech.