Two months after the Reserve Bank issued guidelines on digital lending, banks, non-banking financial companies and fintech players are still awaiting clarity on many aspects, including the First Loss Default Guarantee (FLDG) system and challenges that banks face while collaborating with fintechs. On the other hand, hundreds of illegal lending apps, which are not under the RBI ambit, are yet to be reined in by the state governments.
Banks, NBFCs and fintechs have sought clarification from the RBI on First Loss Default Guarantee (FLDG), on which RBI has advised the regulated entities to follow its September 2021 directions on securitisation, especially, synthetic securitisation. FLDG is a lending model between a fintech and a regulated entity in which a third party guarantees to compensate up to a certain percentage of default in a loan portfolio of the regulated entities (RE).
Synthetic securitisation means a structure where credit risk of an underlying pool of exposures is transferred through the use of credit derivatives or credit guarantees to hedge the credit risk of the portfolio. “This is an issue on which we have written to RBI asking for more clarity as the guidelines just refer to the earlier issued securitisation norms. We are yet to hear from RBI on it,” said a large NBFC player.
According to Aditya Kumar, co-founder and CEO, Niro, a fintech firm, the RBI has been vague about FLDG and there is no clarity on what is permissible and what is not permissible as far as these partnerships are concerned. “The RBI needs to provide clarity on what it means and what is the importance of these co-lending regulations by non-regulated entities,” he said.
On September 2, the RBI came out with guidelines on digital lending aimed at protecting customers from unethical business practices, such as mis-selling, breach of data privacy, unfair business conduct, charging of exorbitant interest rates, adopted by digital lenders. However, as per the findings of an RBI Working Group, released in November 2021, as many as 600 out of 1100 lending apps currently available for Indian Android users across 80 application stores are illegal apps. The working group set up by the RBI has proposed stringent norms for digital lenders, including a separate legislation to prevent illegal digital lending activities.
The RBI asked the regulated entities like banks to ensure that Lending Service Provider (LSP) and Digital Lending App (DLA) comply with the guidelines. As per the guidelines, the regulated entities will have to disclose upfront the rate charged to the borrower of a digital loan, ensure that borrowers are aware of the products at the time of on-boarding and capture the economic profile of the borrowers before offering the loans.
“There is a significant confusion because the RBI has been very stringent on those guidelines as far as the data storage, confidentiality, role and responsibility of digital partners are concerned. Since all the responsibility is on lenders, we have to be very careful,” said a private sector lender.
On storage of data, the guidelines said that the REs should ensure that LSPs or DLAs engaged by them do not store personal information of borrowers except some basic minimal data. These guidelines were applicable to the existing customers availing fresh loans and to new customers getting on boarded from September 2. However, the RBI gave regulated entities time till November 30 to put in place adequate systems and processes to ensure that existing digital loans were also in compliance with the guidelines.
Even bringing the existing loan contracts under the RBI’s directions is taking time, said another banker. Technologically, banks, NBFCs and fintechs operate on different platforms. Bankers said the process of integration of fintechs’ platform with their own is also taking time. “The systems of banks and fintech have to be aligned for co-lending. We have submitted our concerns to the RBI on the challenges we are facing in collaborating with fintechs,” said a public sector banker.
Two associations of digital lenders — Digital Lenders’ Association of India (DLAI) and Fintech Association for Consumer Empowerment (FACE) — had earlier made representation on FLDG to the RBI. In a letter written to the RBI in September, DLAI said the scope of FLDG restriction as per the digital lending guidelines is not clear as the securitisation guidelines are very wide in its ambit and includes various compliances prescribed for credit enhancements for securitisation transactions undertaken by REs.