Hello everyone, 

Welcome to the 63rd edition of The Pattern, a weekly newsletter where we untangle the latest rumblings from the world of finance, technology and the economy. Let’s get started. 

Hello FLDG, our old friend 

There’s nothing else anyone is talking about. Since yesterday, the FinTech circle has been abuzz with the surprise (and yet, heavily expected) announcement of the FLDG guidelines announced by the Reserve Bank of India. 

FLDG - First Loss Default Guarantee - is an arrangement where by digital lending participants such as FinTechs, lending apps, and other companies can lend by utilising the balance sheet prowess of regulated entities like banks and NBFCs by offering to cover a certain percentage of the portfolio in case of a default. 

FLDG took wings post-Covid as digital lending had its strongest flight ever, and FinTechs and enterprises alike looked to offer digital credit on their platforms. However, offering credit requires a licence and a massive balance sheet - FLDG solved for it by helping procure capital from the REs with banks getting the safety net they needed to enter into such partnerships. 

So far, FLDG has been a grey area with the RBI being ambivalent about the nature of such arrangements as well as their structure. The regulator has promised clarity and the guidelines released yesterday have provided the same. 

What do the guidelines say? 

First and foremost, the announcement of the guidelines makes FLDG legitimate! This is the biggest impact as it confirms to the entire ecosystem that the regulator will not come breathing fire if they do enter such arrangements within the contours of the guidelines. 

Second, the guidelines have expanded the scope of FLDG arrangements to allow not just regulated entities but also Lending Service Providers (LSPs) that tend to be FinTechs/platforms who tend to work with lenders on “customer acquisition, underwriting support, pricing support, servicing, monitoring, recovery of specific loan or loan portfolio on behalf of REs,” according to the bank’s Digital Lending Guidelines. 

The full text of the guidelines can be found here and there are good summaries of the same here and here . 

The most interesting bits that jumped out for me include:

1. LSPs will have to necessarily declare all their DLG arrangements on their websites along with the total portfolio and the respective amount of DLG offered on each portfolio. 

2. NPA recognition is a must irrespective of the DLG and loans with defaults cannot be set off against the DLG without them being recognized formally as delinquent accounts.

3. REs need to put together a board approved DLG policy before they enter any such arrangements. 

Clearly, it’s a big positive for the FinTech sector overall and the compliance/re-structuring will be worked out as we move forward. Congratulations to the regulator for yet again affirming that India’s financial sector and its regulators are ahead of the curve. 

This is all from me this week. Leaving you a longlist of interesting developments and reads for the weekend. 

Between the digits

Rs 773 crore - The revenue for Dreamfolks, the largest domestic lounge company in the country. Most of this money has come from banks who’ve paid for free lounge access that their customers enjoy through credit cards - a problem in the making for banks. 

2% - NBFC loan-growth year-on-year in Q4. This is due to a slowdown in urban and semi-urban markets. Rural India, however, continues to show some strong growth. 

Rs 36,600 crore - Microfinance industry’s bad loan pile reduced by around a seventh to Rs 36,600 crore from Rs 42,000 crore at the end of December. 

Reading list

1. Increase in ransomware cases in banks, RBI tells Parliamentary panel

2. RBI’s new KYC rules confound banks

3. Inside Amazon’s new seller strategy: A shadow fight with Meesho and boosting ‘new Cloudtails

4. What Broke ZestMoney – How India’s BNPL Poster Child Lost Its Zest

5. Personal loans apps on Google Play Store to undergo updates, strict guidelines rolled out to prevent data theft

6. Solving the $43 billion identity fraud problem with smarter identity decisioning

Thank you for reading. If you liked this edition, forward it to your friends, peers, and colleagues. You can also connect with me on Twitter  here  and follow  FinBox on LinkedIn  to never miss any updates.  

Cheers, 

Mayank

All opinions expressed are my own and do not necessarily reflect the views of FinBox or its promoters.