News reports suggest that the Reserve Bank of India (RBI) is actively studying the contractual relationships between its regulated entities i.e., banks/NBFCs and lending service providers (LSPs). The latter provide lending-related services such as loan origination, underwriting and collections to regulated balance sheet lenders like banks and NBFCs. Specifically, the RBI appears to be soliciting information on the scale and level of loss-sharing arrangements among banks/NBFCs and LSPs. One such prominent arrangement is First Loss Default Guarantee (FLDG). FLDG is a credit enhancement feature that obliges LSPs to compensate lenders for a pre-determined level of default, say the first 10 percent loss on the portfolio originated.
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