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The RBI has decided to put in place a framework permitting default loss guarantee arrangements in digital lending, the guidelines for which will come out “very shortly”, according to Governor Shaktikanta Das.
“Based on extensive consultations with various stakeholders, and in tune with our objective of maintaining a balance between innovation and prudent risk management, it has been decided to put in place a regulatory framework for permitting default loss guarantee arrangements in digital lending,” sadi the RBI as part of its statement on Developmental and Regulatory Policies.
Businessline had, on May 29, reported that a regulatory framework for First Loss Default Guarantee (FLDG) would be issued shortly and is likely to be more enabling than prohibitive.
Digital lenders had presented to the regulator on the urgency of the situation and why allowing FLDG arrangements is crucial, given that the industry is pivoted around it and several companies have built their business models on it.
Benefits
”We are optimistic that the guidelines, as and when they are introduced will provide the right guardrails required for the continued growth of the digital lending sector. An FLDG framework will strengthen the cause of financial inclusion by supporting wider partnerships between multiple financial service providers,” said Jatinder Handoo, CEO of Digital Lenders Association of India (DLAI).
FLDG has remained a point of contention since the time digital lending guidelines were issued in August 2022. The central bank had then said that the working group’s recommendation pertaining to FLDG is under examination.
In his statement, Das said the move has been taken with a view to further promote responsible innovation and prudent risk management, and that the new framework will facilitate orderly development of the digital lending ecosystem and enhance credit penetration.
”It will bring in more clarity as digital lending is going to stay and increase substantially in scale. If non-regulated entities are allowed to offer FLDGs with necessary safeguards, it could provide further impetus to digital lending,” said Karthik Srinivasan, Senior Vice-President, Group Head, Financial Sector Ratings, ICRA.
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