KYC + FLDG: Every fintech's dream come true?

Hey there,

The apprehension that the Indian middle-class of the ’90s and early ’00s felt in taking a loan from a bank was real. In the pre-digital, pre-fintech era, taking a loan meant lengthy processes and tedious paperwork.?

Things changed, and how, in the last 10 years or so, thanks to the rise of Digital Lending.?

As the ecosystem grew stronger, so did the regulatory frameworks. The RBI worked tirelessly with various stakeholders over the last few quarters to maintain equilibrium in the Digital Lending industry.?

One of the most important outcomes of the effort has been the formalisation of First Loss Default Guarantee (FLDG), a ground-breaking framework for digital lending. This directive, which came out a couple of weeks ago, has the potential to transform the Digital Lending industry!

Let’s see?how.?

But first, the What.?

What really is the FLDG arrangement???

FLDG is a loss-sharing agreement between an LSP & its partner RE where the former shares some proportion of loss due to default in the portfolio sourced by the LSPs. Two REs can also enter into an FLDG agreement??

The formal FLDG arrangement came out of work being done in the area for the last few quarters, and the highlights are:

1. Explicit enforceable agreement needs to be in place between the LSP and the RE to cover the following points:

• DLG Cover: Total amount of DLG cover? shall not exceed 5% of the total outstanding loan portfolio
• Form of DLG cover: DLG cover can be accepted only through cash, fixed deposits or bank guarantees in favour of the RE
• Timeline of Invocation: The RE can invoke DLG within a maximum overdue period of 120 days
• Disclosure Requirements: LSPs need to disclose the total number of portfolios they hold and the amount of each portfolio on which FLDG has been covered on their website.

2. Loan defaults need to be classified as NPA while reporting, even if the LSP has made partial compensation under the DLG contract

3. While entering or renewing a DLG contract, the RE should exercise due diligence to obtain adequate information about the DLG provider and also the terms of the contract to ensure consistency and compliance. The LSP providing DLG should be incorporated as a company under the Companies Act, 2013.

4. Proper rigor will be maintained in the underwriting methods during the loan decisioning and disbursal processes, irrespective of the terms of the DLG contract or any compensation made because of it

Thanks to FLDG, the relationship between the borrower, LSP, and the RE becomes a tad bit interesting.? Here’s how it will work:

All loan servicing, repayment, etc., shall be executed by the borrower directly into the RE’s bank account without any pass-through account/ pool account of any third party.

However, you and your customers may still have some questions around the

FLDG process which we’ve tried to answer below:

?FLDG for the win, for everyone!?

The BFSI industry stalwarts have been bullish about how FLDG can positively catalyse the next stage of credit availability and NPA-reduction in the Indian BFS sector. Add to it the overall improvements in borrower experience through the reduction of predatory lending and informed decision-making, and we certainly do have a winner!?

In conclusion, the India growth story needs organic, sustainable drivers, and FLDG could just be the shot in the arm that was needed!??

Go live with Video KYC in just 2 weeks!?

Devang Badiyani (Joint General Manager), HDFC Ltd, talks about how they achieved a remarkably swift implementation of the Video KYC solution, going live in 2 weeks! This success was attributed to perfect documentation of the project's scope and effective coordination and communication between the tech teams of HDFC Ltd and IDfy.

Watch the video to know more