The Reserve Bank of India (RBI) on August 10 said it had given an “in-principle approval” for the working group’s recommendations on the first loss default guarantee (FLDG), among others.
The recommendation pertaining to FLDG is under examination with the RBI, the regulator said on August 10, while announcing the first set of norms to regulate digital lending in India.
Further, regulated entities shall ensure that financial products involving contractual agreement, in which a third party guarantees to compensate up to a certain percentage of default in a loan portfolio of the entity, shall adhere to the extant guidelines laid down by the RBI. Boards of regulated entities shall ensure that the extant regulatory instructions are complied with in both letter and spirit, the regulator said.
Also read: RBI releases first set of norms for digital lending
FLDG is a lending model between digital lending fintechs and their partner banks and non-banking finance companies. Under these agreements, the fintech promises to compensate the partners up to a pre-decided percentage in case customers fail to repay the loans. This is in exchange for the partners lending through the fintech from their own books. FLDG is also seen as a validation of the fintech's underwriting capabilities for loans disbursed.
In the report by the RBI-constituted working group on digital lending, the regulator had laid down risks of FLDG agreements with unregulated entities. The other concern is that FLDG costs are often passed on to customers.
Another recommendation that requires further examination is surrounding a self-regulatory organisation or SRO, the RBI said. An SRO that has to be set up will have to frame a code of conduct for recovery, a model standardised Lending Service Provider (LSP) agreement for balance sheet lenders and put in place a Code of Conduct for responsible advertising and marketing standards for all digital lending applications (DLA).
The SRO also needs to frame an institutional mechanism for training and accreditation of recovery agents in consultation with the RBI. It also needs to maintain a ‘negative list’ of LSPs which are non-compliant with regulatory and statutory provisions, engaged in unfair practices including but not limited to use of false statements, harassment, and unauthorised sharing of credit information, the RBI said.
Additionally, the RBI said that ‘Travel rules’ need to be refined for better comprehension of the payment transaction. Banks shall monitor accounts regularly operated from a different/ overseas IP address which is not consistent with the KYC profile of the account holder, the regulator added.
Here is a list of digital lending recommendations that the RBI said needed “wider consultation:”
- Balance sheet lending using DLAs to be restricted to RBI- registered entities only.
- Setting up of an independent body styled as Digital India Trust Agency (DIGITA).
- Setting up of a National Financial Crime Record Bureau.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
