FLDG explained: first loss default guarantee in Indian fintech lending

A first loss default guarantee is an agreement where one party takes the first losses if borrowers do not repay. The lender, a bank or an NBFC, funds the loans. The fintech that found the customers promises to cover defaults up to a stated limit.

The RBI calls the wider idea a default loss guarantee, or DLG. Many news stories still use FLDG.

The idea is old. Guarantees of this type have long existed in lending, but the digital lending boom made them common in India, because fintech apps could reach many borrowers that banks did not have the tools to assess on their own.

Lenders worry about loans to new borrowers with little credit history. A guarantee from the fintech shows it believes in its own screening, and it lowers the lender's risk.

For the fintech, it can win partners and get more loans funded than it could otherwise. For the lender, it is a cushion.

Lenders also use it to test a new partner. A fintech that is willing to back its own scoring with real money is easier to trust than one that is not. If the guarantee gets used up quickly, that tells both sides something about the quality of the loans.

Suppose a fintech brings in a pool of loans. The agreement says the fintech will make good the first part of any losses, up to a set percent of the pool. Losses above that fall on the lender.

The fintech backs the promise with cash, a fixed deposit or a bank guarantee, so the lender can draw on it. How much the fintech has set aside shows how serious the promise is.

The RBI first allowed default loss guarantees in a regulated form in its digital lending guidelines of 2022 and then gave detailed conditions in a notification in June 2023.

In plain words, as of November 2026: the total cover is capped at 5 percent of the loan pool; the party giving the cover must be a company incorporated in India; the cover must be backed by cash, a fixed deposit or a bank guarantee; and the guarantee must be on a defined portfolio and not extend beyond the life of that portfolio. Later RBI directions have kept the framework, but details do change, so confirm with the latest text.

The guidance also says the lender, not the fintech, remains responsible for the loan under the RBI's rules. A guarantee can reduce the lender's loss, but it does not move the regulatory duty for the loan away from the lender. Disclosure matters too: lenders are expected to publish on their websites the guarantee arrangements they have, and the total cover given.

The fintech is on the hook for losses even though it does not own the loans. If many borrowers default, it must pay out, which can turn a profitable-looking business into a loss quickly.

A 5 percent cap limits the exposure per pool, but a fintech with many pools carries many caps. That is why investors ask how much guarantee a fintech has given in total.

There is also a cash risk. If the guarantee must be backed by a deposit, that money is tied up and cannot be used for growth. A fintech that has locked away a large part of its cash in guarantees may find it harder to raise or spend on new products.

The accounting depends on the structure and on auditors' judgement. A fintech may report the fee income when it earns it but record the expected cost of the guarantee as a provision or a liability.

So when you read revenue or profit for a lending fintech, look for notes on guarantees. A business can look profitable until losses hit the guarantee. Our guide on reading startup financials helps with this.

Investors in a lending fintech often ask for the guarantee figure as a share of the loans originated, and for the actual payouts made. A rising payout ratio is an early sign that the underwriting is weakening, even before the headline numbers show it.

Before the rules, some arrangements had guarantees with no cap, or had unclear terms. The cap and conditions pushed fintechs to rethink their models. Some moved to co-lending or to lending from their own NBFC.

Fintech and lender relationships since then have varied, and the market keeps adjusting.

Some fintechs also reduced the size of each pool, or tightened who they lend to, so that their expected losses stayed well inside the cap. Others moved to a model where the lender takes more of the risk and the fintech earns a smaller fee, which can make revenue lower but steadier.

Insurance is bought from a third party, which spreads risk across many customers for a premium. FLDG is a promise from the fintech itself, so the risk stays with a single company.

Co-lending is another structure. In co-lending, a bank and an NBFC each fund a share of a loan and each bears its own share of the loss. In an FLDG arrangement, the lender funds all the loan and the fintech covers the first losses up to a limit. The two can look similar in a press release, so check which one is described.

The RBI has treated them separately. Co-lending has its own framework, while default loss guarantees are covered in the digital lending rules. Details can change, so confirm in the latest directions.

When a lending fintech announces a partnership, ask who bears the first loss and how much. Ask whether the guarantee is within the RBI's cap and whether it is backed by cash or a deposit.

This guide is general information, not legal, tax or investment advice. Check with a qualified professional.