We all came to know that RBI regulated FLDG last week.
But people asked me what is FLDG?
This Conversation between a Fintech and a Lender explains FLDG in a layman terms.
Fintech: I have an exciting model where I can bring a good amount of Borrowers.
Lender: Interesting! Tell me more
Fintech: I have more than 1000+ borrowers. Can you give a loan to them?
Lender: Ok, fine, I will underwrite with my credit policies.
I will give a 1% commission to you for the borrowers whom I have disbursed. (Direct Sales Agent DSA model)
After few months!
Fintech: You have given loans only to a few borrowers. I know them very well as my way of underwriting is entirely different.
Can you give loans to all of my borrowers, which I am sourcing to you?
Lender: How can I trust your underwriting policy?
Fintech: I will share mine. But if you still have doubts, I will make a margin deposit (20-30 Lakhs) in an escrow account.
You can deduct the money from the escrow account whenever my set of customer defaults. (First Loss Default Guarantee FLDG – The Default Guarantee is a fixed % of the loan defaults)
Lender: That’s great that you are sharing the risk. But who will take care of collections if your borrower defaults continuously?
Fintech: Since I know the borrowers well, I will take care of the collection too.
Lender: Super. Then let’s sign the contract.
Fintech: Since I am taking more responsibilities like sourcing, underwriting and collections – can you increase the commission %.
Lender: Cool. Let’s go with 5% of the disbursed amount.
All three stakeholders – Borrower, Fintech and Lender are benefited from the FLDG model.
Note: The numbers mentioned are arbitrary !