What is the FLDG and how will it benefit digital lending?

Recent developments have given a shot in the arm of digital lending as the RBI has finally granted approval for the implementation of the ‘First Loss Default Guarantee’(FLDG) which allows the Fintech lending platforms to partner with banks and non-bank financial companies (NBFCs) on better terms. This means that two regulated entities can now share the risk involved in lending or in the case of digital lending, it would be a regulated entity and a Fintech lending service provider or LSP.

Great! But how can it actually help the case of digital lending?

Here are four ways :

1. Risk Mitigation

Digital lending platforms often cater to a diverse range of borrowers, including those with limited credit histories or unconventional profiles. This can result in higher risk levels. An FLDG provides an added layer of risk mitigation, reassuring digital lenders that a portion of potential losses from defaults is covered. This can encourage digital lenders to extend credit to a broader spectrum of borrowers.

2. Credibility and Trust

In the digital lending space, credibility and trust are crucial. Having an FLDG in place demonstrates to borrowers that the lender is backed by a credible guarantor. This can make borrowers feel more comfortable and confident when applying for loans through the platform.

3. Lower Borrowing Costs

Digital lending platforms may be able to offer loans at more competitive rates if they have an FLDG in place. The reduced risk exposure due to the guarantee can translate to lower interest rates or fees for borrowers.

4. Scaling Operations

As a digital lending platform scales its operations, the risk of defaults may also increase. An FLDG can help manage this risk, allowing the platform to continue growing while maintaining a healthy balance between risk and reward.

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