Digital loan aggregation platforms are looking at a stress build-up in their books given that Covid-19 is expected to cause around 10-15% of defaults in lenders’ books across categories.
Industry insiders believe the FLDG cover these players offer lenders is going to leave them with large commitments to their banking partners if borrowers do not repay. FLDG or ‘first loan default guarantee’ is an extremely popular term in fintech parlance. Every new-age technology player who wants to partner with large banks or NBFCs offers this guarantee to lenders.
Skin in the game
The practice of offering FLDG began when fintechs wanted to partner with banks to start lending to sections traditional lenders never catered to, such as freelancers, blue-collar workers, micro businesses and others. By offering this guarantee, these players managed to onboard banks, which got some security in case the loans started going bad. Through this arrangement, in case there is an NPA, the first hit is always taken by the originator. It is an assurance that players sourcing loans have some skin in the game and aims to ensure that borrower quality is not diluted.
Sources in the industry pointed out that fintech lenders give a guarantee of around 5% of the loan book created through them. Now, with the moratorium ending, the fintech players have found out that even if 10 percent of the loans are not repaid on time and get classified as NPAs, they will have to pitch in their full 5 percent guarantee.
This is something their internal operational models were never designed to support.
“These (FLDG) models were developed considering the financial parameters of borrowers, which have gone for a toss due to Covid19,” said a-Mumbai based fintech consultant.
If these fledgling fintechs have to take this blow on their balance sheets, many might not survive, he added.
Seeking a breather from banks
The Business Correspondents Federation of India (BCFI) represents bank mitras or banking agents as an industry body. Sources have pointed out that they are looking to have conversations with their banking partners on reducing the FLDG cover.
“Our experience shows that around 10 percent of the borrowers have availed a moratorium fully as they have not paid a single instalment since March. If some of these loans turn into NPAs then we may have to compensate the banks, which can cause a lot of stress to our balance sheets,” said Sasidhar Thumuluri, Chief Executive of Sub-K Impact Solutions, a Hyderabad-based business correspondent, which sources loans for major banks. Thumuluri is also the BCFI chairman.
Industry sources said that while the April-May period hardly saw any collections, some repayments started flowing in from June onwards. While June saw 20 percent collection, the rate climbed steadily through the subsequent months to reach around 80 percent in September.
Thumuluri said that while some people were hoarding cash, a few were looking for additional credit to jumpstart their business. A third category of borrowers cited the moratorium and the Supreme Court case as an excuse to not repay. These issues have made collections difficult, he said.
Given the circumstances, these players are trying to negotiate with banks to lower their FLDG arrangements so that the pain from this scenario can be softened, he added.
Another top executive at a fintech firm that also works closely with banks said that the 5 percent FLDG is pretty high and there is a need for some conversations with banks on lowering this number.
However, given the overall economic situation and the stress on the economy, banks may find it difficult to accommodate the fintech lenders.
