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Mahesh

10/06/23 07:34 AM IST

RBI gives green signal to first loss default guarantee (FLDG) framework

In News
  • The Reserve Bank of India (RBI) has granted its approval for First Loss Default Guarantee (FLDG) framework.
Major Guidelines
  • FLDG scheme allows Indian fintechs to partner with banks and NBFCs.
  • Regulated entities must ensure that the total amount of default loss guarantee cover on any outstanding loan portfolio does not exceed five percent of that portfolio.
  • It is the responsibility of the regulated entity to recognize individual loan assets in the portfolio as non-performing assets and make the necessary provisions accordingly.
  • Furthermore, the RBI has directed regulated entities to establish a board-approved policy before entering into any DLG arrangement.
  • It is important to note that the DLG arrangement cannot act as a substitute for credit appraisal requirements.
  • Robust credit underwriting standards must be maintained irrespective of the guarantee cover.
  • Under the framework, RBI directed that RE shall ensure that the total amount of DLG cover on any outstanding portfolio which is specified upfront shall not exceed 5% of the amount of that loan portfolio.
  • In the case of implicit guarantee arrangements, the DLG Provider shall not bear a performance risk of more than the equivalent amount of 5% of the underlying loan portfolio.
  • Also, the RE shall invoke DLG within a maximum overdue period of 120 days, unless made good by the borrower before that.
Source- Live Mint

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