Understanding First Loss Default Guarantee (FLDG) - CloudBankin – A digital loan software by Habile Technologies

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

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