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The Indian fintech industry has always been founded on innovation—and similarly, on navigating around rules. Not many tools have been subject to as much questioning and debate as the First Loss Default Guarantee (FLDG) model. After being a grey-area mechanism where fintechs could collaborate with regulated lenders, FLDG fell under the regulatory radar of the Reserve Bank of India, and many predicted its death. But let’s be explicit: FLDG is not dead. It’s changing—with tighter guardrails, clearer accountability, and perhaps greater legitimacy than ever before.
From a founder-VC lens, this evolution presents both a recalibration and an opportunity. The RBI’s Digital Lending Guidelines, released in 2023, have laid down a formal framework for FLDG structures. These include requirements that the guarantees be explicit, properly backed, and reported transparently. While the days of informal or backdoor risk-sharing arrangements are rightly over, the core of FLDG—that is, fintechs taking partial credit risk to support financial inclusion—is very much alive.
The Function of FLDG in India’s Credit System
FLDG has played a critical role in empowering new-to-credit and underserved cohorts to access formal credit. By providing regulated lenders with confidence that fintechs have skin in the game, it enabled greater willingness to lend in high-risk segments—whether micro-entrepreneurs, gig workers, or rural MSMEs. For fintech entrepreneurs, this meant the ability to establish user bases and credit performance histories that would otherwise take years through conventional underwriting designs.
From the VC’s point of view, FLDG-backed lending provided quantifiable traction, distribution-proof models, and unit economics that were earlier than necessary for early-stage bets. But what was lacking was formal recognition and systemic safeguarding. Most worried that an unregulated FLDG model would risk-shuffle unfairly or hide bad assets. The new regulatory framework solves exactly that.
What the New Guardrails Mean
The RBI now requires FLDG structures to be explicitly delineated, with capped guarantees, sound accounting and reporting through a board-approved policy. Guarantees cannot be open-ended anymore, and lenders are required to evaluate fintechs’ financial standing before forming such arrangements.
For founders, that implies the end of random promises—but also an opportunity to codify risk metrics, add discipline to collections, and improve governance. For VCs, these regulations lower compliance uncertainty, better align fintechs with the banking stack, and de-risk their portfolio businesses from regulatory blowback.
What we’re seeing now is the start of “FLDG 2.0”: a more accountable, compliant, and scalable version of the earlier model. If implemented smartly, it could increase trust between lenders and fintechs, and open up new, sustainable credit corridors.
The Path Ahead
The challenge now is to innovate within boundaries. Fintechs must develop sound internal credit models, apply alternative data effectively, and collaborate with lenders to develop risk bands that are logical in the context of the new FLDG cap. For instance, instead of extending 100% FLDG on a segment, fintechs can co-craft lower-FLDG models on segments with high repayment predictability.
The regulatory clarity also opens the door to new types of VC-backed experimentation. Funds are able to underwrite models in which risk-sharing is more clearly articulated and reputational risk is reduced. Founders, for their part, can structure more sustainable partnerships—where tech, not merely capital, propels underwriting results.
FLDG’s Formal Future
Regulation has interrupted the status quo, but it also created a foundation on which a sounder credit infrastructure can be built. FLDG has transformed from a shadowy go-around to a policy-abiding, legitimate tool. This transformation is not a step backward—it’s a reboot.
As a founder or an investor, if you were optimistic about credit innovation earlier, you should be even more optimistic now. The regulations are clearer, the playing field is more level, and the mission—to promote credit inclusion in India—is stronger than ever. The baton is now in our hands, the ecosystem, to leverage these guardrails not as shackles but as blueprints for scalable, responsible innovation.
