Digital Lending And First Loss Default Guarantee Scheme – New Rule Changes, And How The New Framework May Impact Borrowers And Fintechs

History

Banks have so far been hesitant to extend loans to certain categories of potential borrowers. These are entities without a proven track record which makes lenders assign them a higher probability of default. For each of such default, the lenders need to create covers in their own annual financial statements under prudential norms to retain their financial health and operability. Such sectors include MSMEs, the wage-earning/working class, agricultural workers, students, and other borrowers with limited or unavailable credit history. This is where fintechs stepped in as lending service providers (LSPs) providing a much needed balance in credit disbursals.

In a somewhat similar model to outsourcing, while banks/regulated entities (RE) with a licence to lend provide the capital, fintechs provide the technology platform meant for facilitating credit by leveraging their client base and reach. In terms of specific functions, the REs would provide the