Despite rollout of digital lending norms, fintechs still await clarity on several issues

Even after RBI’s digital lending norms became effective on December 1, the fintech industry is still awaiting clarity on several issues, such as FLDG (first loss default guarantee), creation of an SRO (self-regulatory organisation), management and storage of customer data, and restrictions on customer engagement.

FLDG is a lending model between fintechs and regulated entities, wherein fintechs guarantee a certain percentage of compensation to lenders in case of a default.

“There are certain developments that are more forward-looking like FLDG, etc., so we’re waiting for those to come into play before they can be implemented,” said Sanjay Kao, Executive Vice-President, APAC at Lentra.

First loss default guarantee

“Specific guidelines on whether FLDG arrangements between RE and Non-RE are allowed and the limits on risk sharing would be helpful,” said Sanjeev Chandak, Co-founder and CEO of ftcash.

This will ensure that fintechs are meeting the credit demand--especially of dependent borrowers, such as micro and small businesses, while at the same time adhering to regulatory guidelines, he added.

Industry bodies have been in talks with the regulator regarding the scope of FLDG as the securitisation guidelines are wide and includes various compliances for securitisation transactions, market participants said.

Data storage and management

Another point of contention is the management and storage of customer data, including restrictions on which channels of communication can be used by fintechs to reach out to, engage, or update customers on transactions.

“One of the areas where there is definitely a need for clarity is suppression of customer information. We get RBI’s intent but how that has to be implemented is unclear because suppression would mean deleting customer data. But if the data has to be audited, then how will the two co-exist,” said Ankit Mehra, CEO and co-founder of GyanDhan.

While fintechs have been implementing the same as per their interpretation or understanding, the ambiguity and lack of standardisation has created issues in terms of compliance and execution, he said.

Business impact

While most fintechs have made technical, procedural, and other adjustments to their operations or business model to comply with the digital lending norms, it has led to increased compliance costs, operational intensity and disruptions, in certain business segments.

Further, the lack of clarity on certain issues has also led to these entities being more selective and cautious in their business approach. “In places where additional explanation is needed, people have opted for a more cautious approach rather than treading in the grey areas,” said Avinash Godkhindi, MD and CEO of Zaggle. 

Even as they then await clarity on these issues, fintechs are praying that once these regulations are in place, they will continue for some time without a lot of changes, so that the industry can get back on track to grow its business.