In recent days, across India, dozens of lending apps have mushroomed which ensure instant loan approval and immediate funds transfer.
In such a delicate and delightful ecosystem, designed to simplify the approval process, resulting in quick lending, Indians lay hands on quick credit.
But recently, such a framework has caught the eye of the financial regulator of the country, RBI (Reserve Bank Of India) and it has questioned the very relevance of this set-up.
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The RBI deposes “renting out books” and the risk evaluation is also not adequate.
Being the regulator of the banking sector, RBI perceives a lot of risks and then the borrower’s connivance also lands out of control.
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Then, to the horror, commonly linked to all Indians, fintech companies also suffer losses due to such default cases. Actually, REs ( Registered Entities) fail to determine uncertainties properly, at length and beforehand.
FLDG (First Loan Default Guarantee) Unveils RBI:
Dire straits and to come out of this, this concept is thought.
The growing number of instances (and circumstances) of default compelled the RBI to bring up the very concept which calls for a mutual understanding between a fintech agency and the bank.
The fintech agency agrees to pay the lender (banks) some amount of the loan if the borrower fails to pay back within the stipulated time.
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Before this, the REs used to legally underwrite the loans which was equalled to 100% of the default perils, while settling the accounts with their fintech partners which brought them to conflict on the question of risk sharing.
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This practice made the lending process unclear and more chaotic which had many shortcomings:
- The lending process was suspicious.
- The risk was misjudged.
- Evaluation protocols were not in place.
Such a loose system was often referred to as “lazy banking”. REs earned through a part on interest and displayed lofty assets but did not put effort into it.
At this juncture, some REs showed a leaning towards a digital model of credit while their digital partners kept an eye on consumer behaviour and together, this ushered the banking system into a new horizon.
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Relevance of FLDG Norms:
Unveiled by RBI, some of the norms of FLDG are as follows:
1). Lenders join hands with the agencies which ensure a guarantee for a part of the instalment on loans given through apps.
2). This assurance will be limited to 5% of the loan amount which can be in the form of cash or liquid collaterals and this acts like a safety zone for the lending agencies and also undermines the risks involved.
3). Such transactions will occur between the borrower and REs (Regulated Entities).
4). Such a trend would blur the role of the fintech, as no middlemen would be there.
5). The significance of FLDG is immense, as it revitalizes the areas of risk management for lenders who venture into app-mediated lending. This also makes the banking institution reassess their credit limit and scan their collection procedures and partner with the agencies that absorb the default shock(s).
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As a result, sensible lending occurs which gives space to a resilient credit growth pattern in the long run.
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Save this, this scheme also shows the commitment of the Central Bank to shield and sustain the welfare of the borrowers and foster financial inclusion.
Finally, as the defaults are taken care of, RBI has ensured the safety of consumers as well, as their rights and privileges are looked after herein.
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RBI has provided relief from unwarranted harassment and unbearable debt burden for the consumers.
What does FLDG want from the REs (Regulated Entities) ?
The boards of the banks and other regulated entities need to be watchful of their associations with the fintech agencies. Most of the banks retain an eye of suspicion but then the credit support in certain areas benefits the lenders apparently.
Such areas are identified as healthcare, education, finance, MSMEs etc.
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The fintech companies themselves become more alert and careful when they decide on loans.
As a result, in the coming years, the REs will have a better understanding of these sectors and would connect with such consumers directly.
As for fintech, this is a challenge as they help in lending and honouring the rules directed by the regulator and benefit the REs (registered entities).
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This will also make the loan service costlier for the fintech companies, as they would need to deposit the cash with the lender as per the rules or some sort of fixed deposit when a scheduled bank is involved, as a loan guarantee and this all goes to the lenders’ (banks’) benefit.
What does it mean for fintech?
Clearly, fintech companies will need to restructure their whole service setup and would need to improve the lending experience of the consumers.
Their share decreases with the signing of FLDG their role and control are shaken here.
They now find it hard to design innovative loan products or get accustomed to the changing environment.
They face grave challenges here to stay afloat.
But then, as the silver lining, banks and NBFCs can collaborate with fintech to reap the benefits of the latter’s tech prowess as we see co-lending and co-branded cards in circulation.
Such a collective approach unlocks a win-win situation for both parties.
The time is ripe for fintech to look for alternative business models.
They can float their own NBFCs and can partake in lending activities and can manage direct relationships with the end consumers.
Further, by riding high on tech wave, data analytics and by glimpsing into the customer networks, fintech can be a great help to banks in locating potential customers for lending money to.
The Pace Of Change Gives Rise To Challenges:
The landscape of digital finance undergoes swift change and this compels the regulators to respond to such challenges by framing laws.
FLDG is one such step but those making laws should also give space to agility and alter the prevalent rules accordingly. In short, the regulators’ updates should be in synchronization with the apps’ updates and officials should not stick to yearly circulars and notices for this matter.
In the bottle of FLDG, the hidden message is clear that only the banks (as REs) reserve the right to lend and if fintech agencies need to switch to this side, they need to adhere to the “RRR” concept, translating to risk, reward and regulations”, as specified by RBI.
Well, dear reader, fintech news updates in India are right here.
