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Lending Models between

Fintech & Banks
(should bank also look at balance sheet
strength of Fintech or First Loss
Default Guarantee(FLDG) sufficient?)
Discussion between Bankers & Fintech
professionals

FIAKS community has 25,000+ years of experience consisting of 750+ CEO/CXO

Bankers from MNC, Private & PSU banks, 500+ fintech professionals,400+ brands,
300+ CXO cooperative Banks and 100+ founders/co-founders from 24+ countries.
https://fiaks.com

Disclaimer
The views and opinions expressed in this article are those of the authors in an individual capacity and do not necessarily
reflect, in any manner, the views, opinions, policies or position of Forum of Industry Academic Knowledge Sharing(FIAKS) or
Hrishanu Business Solutions LLP (“HBSL”) as well as they don’t reflect in any manner views, opinions, policies or position of
author’s employers. FIAKS and/or HBSL do not take any responsibility or liability for accuracy of any information/ detail
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same, neither FIAKS and/or HBSL and nor the author intends to constitute any endorsements or bring disrepute, defame,
derogate, incriminate. This article has been published for educational and knowledge sharing purpose.

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FIAKS community Question

Should bank also look at balance sheet strength of such Fintech or FLDG ( First
Loss Default Guarantee) sufficient ?

FIAKS Community Discussions

Banks have engaged with few Fintech for customer acquisition and part of
underwriting especially through various tools/analytics for personal loans. Banks
largely depends on the assessment done by Fintech to sanction such loans. These
Fintech also share risk incase defaults happens later. Should banks also look at the
balance sheet strength of such fintech or it is ok as long as fintech are able to
provide bank guarantee (FLDG - First loss default guarantee) to the extent of 10% of
the loans.??

Responding to this question FIAKS community expert said Banks don't "largely"
depend on fintech companies - there are 3 models here:

Model 1 (only bank model) : This this model fintech company primarily acts as a lead
generator/customer acquisition platform
Model 2 (joint model) In this model both players have equal say, the model is
developed and stacked on the Fintech platform to make decisioning faster and
seamless.
Model 3 (Only Fintech) This is only Fintech led model. In the last 18 months the
number of fintech players that I have met are mostly using Model 2

Also banks take a long hard look before deciding to work with any Fintech. They
understand the current strategy of the player and continue to monitor them. Book
health (ie ANR growth, Flow rates, early warning signals) are all looked at closely. So
I am not sure that we should assume that banks are not working on this.

Another member said three types of relationship between Bank and Fintech:
1. Fintech identifies clients for bank and bank does the due diligence and fintech
gets fee
2. Bank and fintech do co-lending. Here bank needs to know more about fintech and
loss guarantee needs to be worked out based on fintech financials
3. On lending through fintech with or without agreed first loss guarantee.

In 2 and 3 Fintech is doing financial intermediation. As such banks will have to be

prudent. Fintech should also be prudent particularly as their core competence may
not be finance.First loss default guarantee is a new concept and will be tested in the
next few years

Another expert banker said FLDG cannot be agreed or provided until Fintech with
partner bank or NBFC or investors check and duly look at balance sheet.

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Incase of heavy defaults, a portion of liability would fall on the specific FLDG Fintech,
hence they need to have a war chest in provision basis an agreed risk ratio of which
appropriation is done for loans given.

Commenting on this subject another FIAKS Community member said It’s not only
about FLDG. It’s also about brand and reputation. Banks are eventually liable. Some
fintechs are small startup’s and others have some funding / backing. It’s important to
look at not only the balance sheet but also to look at brand credibility, Funding and
the projected income/cash flows

One of the member asked what about those Fintechs that take a portion of the
liability? Isn't it about liability reward ratio end of day. There are companies that are
only for lead sourcing and algorithms that are passed to banks for loan servicing and
others like a lendingkart or capital float etc that also lend from their books.

Responding to it FIAKS community expert said legally, risk is of banks only. Sharing
of liability is just a way to communicate effectiveness of the tools. Fintech will never
assume unlimited liability. Sharing just cover a portion of liability limited by financial
strength of the fintech. These are usually capped and hence at last it is bank to take
take steps on how to derisk the business. One way is to limit the loan book from the
platform in proportion to risk perceived.

Fintech strength is tech and automated underwriting capabilities and in some cases
effective online sourcing. But most banks have started their efforts in these
distractions. I think they will master some of these areas slowly and give though
tome to fintech.Fintech will have to up the game

Adding to it FIAKS expert said personally I would relate this situation to Lab test
report ( a la Fintech assessment) and Doctor's (a la Bank's) diagnosis. The lab report
gives a large number of insights but states in the end before lab experts signature
"To be clinically correlated", I.e. person signing lab report cannot take even part role
of a doctor on diagnosis. In the same way Fintech tools/analysis would give
significant insights but Banks have to "Financially correlate for underwriting" and not
ask Fintech to be part of decision making.

Appreciating the above analogy another member said private banks are making a
serious effort but the speed is slow largely due to mindset and culture. Even if they
recruited right people it takes time for rest of the origination /ecosystem within to
make a shift. Thats where fintech are gaining.

Conclusion

Ms Anuradha Panditrao, Founder, Forum of Industry & Academic Knowledge sharing

(FIAKS) acknowledged the contributions of the FIAKS Community members to
creating intellectual pull by participating in the discussions. She said lab report and
doctor analogy to lending models by FIAKS Doyen makes it very simple to
understand and truly helping the community.

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FIAKS Community Experts (participated in the discussions):

• Mr Sunil Kulkarni, Joint Managing Director, Oxigen Services (India) Pvt Ltd

• Mr Rishi Prakash Mantri, Senior Vice President (Digital Payment –

Solutions & Design, YES Bank

• Mr Rahul Dayal, Senior Vice President & Head-Business Solutions Group

Liabilities, cards & BI, RBL Bank

• Mr Abhishek Mody, Associate Director-Payment & Digital Initiatives, IDFC

Bank

• Mr Ravi Virwani, Vice President – Rural Home Loans, Fullerton India Home

• Mr Aditya Soni, Business Leader-Payments, Fintech & Giftcards, Flipkart

• Mr Vaibhav Sangvi, Chief Technology Officer, Clix Capital

• Dr R Bhaskaran, Former Chief Executive Officer, IIBF

• Several other CEO/CXO Bankers & Fintech professional on FIAKS Forum

To join the FIAKS community. Visit https://fiaks.com

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