Key Terms & Concepts — UPSC Mains
First Loss Default Guarantee (FLDG)
"An RBI-permitted risk-sharing arrangement, capped at 5% of a loan portfolio, in which a digital lending app guarantees a regulated lender's defaults."
First Loss Default Guarantee (FLDG) is a risk-sharing arrangement in India's digital lending ecosystem, under which a Loan Service Provider (LSP), typically a fintech app, guarantees to absorb a defined share of a regulated lender's (a bank's or NBFC's) losses if borrowers default. The Reserve Bank of India formally permitted and capped such arrangements through its Default Loss Guarantee Guidelines, issued 8 June 2023, which limit the DLG cover any LSP may provide to 5 per cent of the outstanding loan portfolio it services. FLDG sits alongside the RBI's broader Digital Lending Guidelines (issued 2 September 2022), which govern the contractual relationship between regulated lenders and the app-based service providers that originate and service loans on their behalf. Together, these frameworks discipline how default risk is shared between the visible lending app and the regulated financial institution actually extending the credit. What FLDG and the 2022 Guidelines do not address is borrower-level exposure: neither framework limits how many concurrent loans a single borrower can hold across different apps, or slows the instant re-borrowing (a new loan taken specifically to repay an old one) that critics argue is producing a debt-trap pattern among low-income app-lending borrowers, structurally similar to India's 2010 Andhra Pradesh microfinance over-indebtedness crisis.
A precise regulatory-architecture fact for GS3 financial-inclusion answers, useful for distinguishing lender-side risk regulation from the borrower-side exposure gap that remains unaddressed.
- 1 RBI Default Loss Guarantee Guidelines issued 8 June 2023
- 2 Caps a Loan Service Provider's guarantee at 5% of the outstanding loan portfolio
- 3 Complements the RBI's Digital Lending Guidelines (2 September 2022)
- 4 Governs lender-to-app risk sharing, not borrower-level concurrent exposure
- 5 App-based lenders originate roughly four in five personal loans in India (2026)
- 6 Regulated apps charge 10-36% annual rates; unregulated apps have been documented far higher
- 7 Does not limit concurrent borrowing or instant re-borrowing across apps
Critics argued that while FLDG disciplines how a bank shares default risk with its app partner, it does nothing to prevent a borrower from taking a new app loan specifically to repay an old one, a debt-trap pattern FLDG was never designed to address.
