Understanding First Loss Default Guarantee (FLDG)

Published 27th June 23 on LinkedIN

We all came to know that RBI regulated FLDG last week.
But people asked me what is FLDG?

This Conversation between a Fintech and a Lender explains FLDG in a layman terms.

Fintech: I have an exciting model where I can bring a good amount of Borrowers.

Lender: Interesting! Tell me more

Fintech: I have more than 1000+ borrowers. Can you give a loan to them?

Lender: Ok, fine, I will underwrite with my credit policies.
I will give a 1% commission to you for the borrowers whom I have disbursed. (Direct Sales Agent DSA model)

After few months!

Fintech: You have given loans only to a few borrowers. I know them very well as my way of underwriting is entirely different.
Can you give loans to all of my borrowers, which I am sourcing to you?

Lender: How can I trust your underwriting policy?

Fintech: I will share mine. But if you still have doubts, I will make a margin deposit (20-30 Lakhs) in an escrow account.
You can deduct the money from the escrow account whenever my set of customer defaults. (First Loss Default Guarantee FLDG – The Default Guarantee is a fixed % of the loan defaults)

Lender: That’s great that you are sharing the risk. But who will take care of collections if your borrower defaults continuously?

Fintech: Since I know the borrowers well, I will take care of the collection too.

Lender: Super. Then let’s sign the contract.

Fintech: Since I am taking more responsibilities like sourcing, underwriting and collections – can you increase the commission %.

Lender: Cool. Let’s go with 5% of the disbursed amount.

All three stakeholders – Borrower, Fintech and Lender are benefited from the FLDG model.

Note: The numbers mentioned are arbitrary !

#fintech #FLDG #lendtech #manispeaksmoney

After smartphone penetration, people are not watching their SMS at all. They use SMS only for OTP related transactions. That’s it.

But What can a Lender see in your SMS after you consent to them?
Lender can see income, expenses, and any other Fixed Obligation like (EMIs/Credit Card).

1) Income – Parameters like Average Salary Credited, Stable Monthly inflows like Rent

2) Expenses – Average monthly debit card transactions, UPI Transactions, Monthly ATM Withdrawal Amount etc

3) Fixed Obligations – Loan payments have been made for the past few months, Credit card transactions.

It also tells the Lender the adverse incidents like
1) Missed Loan payments
2) Cheque bounces
3) Missed Bill Payments like EB, LPG gas bills.
4) POS transaction declines due to insufficient funds.

A massive chunk of data is available in our SMS (more than 700 data points), which helps Lender to make a credit decision.

#lendtech #fintech #manispeaksmoney

An interesting insight on vehicle loans for lenders.

A trend we are seeing today – the first-hand vehicle ownership is decreasing with time. Why? People are upgrading their vehicles in every few years because of technological advances. And, this can be seen more with the millennial generation.

So, what should a lender do in terms of financing?

– Estimating the residual value of the vehicle at the start of the financing period.
– Charging a borrower only for the residual value (which is the difference between the value after a few years and the current value)

Example: A bike currently is INR 1 lakh. You want to buy the vehicle for 2 years. A lender will estimate the residual value of that bike today and what it would be after 2 years. If the estimated residual value = INR 45,000, the lender will charge you only that (say, INR 55,000 with interest for this instance) during your tenure.

At the end of 2-year period, you have 3 choices:
1. Return the bike and upgrade to a new one without going through the struggle of selling it.
2. Pay the lump sum remaining amount to own the vehicle outright.
3. Extend the financing and own it by keep paying the EMIs for the remaining amount of the vehicle for the next 12 or 18 months.

Benefits for the borrowers?

– Flexibility to use a vehicle and upgrade to a new one.
– Affordability to not pay for the complete value of the vehicle with the intention to use for a lesser amount of time.
– Convenience in owning the vehicle.

Say goodbye to the old lending option and embrace the new way of financing for vehicle by lenders!

#vehiclefinancing #vehicleloan #lending #manispeaksmoney

How many of us know this?

1) Tiktok does Lending ( is it an entertainment company or social media company or a fintech company?
2) Youtube China does Lending
3) Top 100 internet companies in China(no matter what business they are in) do Lending

The team which was heading Lending in Tiktok was the Advertisement team. If we do Ads, we do X no of revenue. But if we do lending, we’ll get X+30% more revenue. This is on the same Ad spot.

Ad team has transformed into a lending team, and in today’s world, it’s possible because the subject matter expertise can be put in as an API and given to you.

Embedded Lending as a service is becoming popular in India too, and I am happy to be part of this ecosystem.

#lendtech #fintech #tiktok #manispeaksmoney

In India, has everybody access to loans?

The answer is No. Only the top 10 crore people have access to many credit products in India. Almost all Banks focus on this market.

Once you go beyond that, the credit access rate has dropped significantly due to multiple factors.
1) Customers who are having low income(30-40K per month)
2) Not earning from an employer who belongs to Category A or B
3) Not from Tier 1 or 2 cities

NBFCs and Fintechs focus on the above segment, pushing another 10 crores of people.

But in India, 70 crores more people are formally or informally employed, which still needs to be tapped.

#manispeaksmoney #digitallending

Understanding First Loss Default Guarantee (FLDG)

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