Feels Like Da Good-times

Since the new FLDG circular was announced yesterday, fintech founders and NBFC partners have been doing silent fist pumps and involuntary Macarenas out of sheer joy. After a tough FY23 with DLG, and the start of FY24 with revised KYC guidelines, this is indeed a win for the industry - with significant efforts put in by DLAI and other influencers in the eco-system.

While decoding the circular is easy with it's succinct points, here's my take on what it will mean for the industry:

1. Itne paise me itnaich milega:

While FLDG legitimacy means fintechs do not have to shut their lending partnerships and line up for licences, but the devil as always, lies in the details. The biggest detail in bold and underline here is the limit of 5%! ! For more context, the current industry norms for FLDG are way higher - at a 15-30% (depending on loan types, segments), with exceptions going up to even a whopping 100%. A phenomenal amount of restructuring of fintech-lender partnerships would be required to adhere to this limit.

2. Qubool Hai!

While the risk proportion for fintech is curbed at 5%, the remarkable thing about this guideline is the legitimacy offered to fintech-lender partnerships. Fintechs can now come out of the regulatory closet and truly leverage their existing data, customer insights and recurring users, to build innovative lending models with NBFC partners. This could very well be a watershed moment for the Indian fintech industry.

3. To co-lend or to FLDG:

When a dark cloud was cast on FLDG for close to a year - co-lending was silently growing as the new mode, with lots of large fintechs applying for NBFC licenses or acquiring NBFCs to get into co-lending. Many of these co-lending arrangements with larger NBFCs would range from a 5-20% share from the originator NBFC. With FLDG firmly back in the race, it will be interesting to see how these newly anointed fintech-NBFCs strategize. 5% FLDG with no liability on books or 20% co-lending as an NBFC? My hunch is - we'll see hybrid models evolving.

4. A seat at the table

An interesting way to look at this regulation is that an LSP now legitimately has a seat at the lending table and is no longer are on a backfoot. This enables new models to evolve without the constant fear of regulatory crackdown. Imagine a tech-first LSP with knowledge and access of a customer segment, an new-age NBFC with the ability to stitch together a tailored lending product, and a large NBFC with deep pockets, coming together- it'll be an unbeatable trio solving for the underserved customer segments in India.

5. Putting money where your mouth is:

Fundamentally, FLDG makes sense. An LSP with years of experience serving a segment is able to provide an FLDG because they have calculated confidence on the repayment capabilities of their merchants. However, non-transparent and disproportionate ask for FLDG by lenders was putting the entire ecosystem at risk of implosion. With limited FLDG and transparency on % of FLDG on each portfolio, the model is now ready for sustainable scale.

6. A Level playing field

The requirement of enlisting FLDG portfolios in LSP websites makes engagements easier for younger fintechs, by taking away the competitive edge that LSPs with deeper pockets had. It would not longer be a game of 'put more money and build biggest loan book' - actual quality of customers acquired, quality of customer insight would play a bigger role.

At the end of the day, the FLDG circular is a reason to celebrate. It truly shows that our regulators understand the crucial role that fintechs are playing in India's lending growth, and that they are ready to move with the times. As for the 5% limit - it signals that the REs need to remember they are still the ones in charge of their loan books.