Asked September 02, 2016

Private limited company connecting with NBFC

  • 1 Answer

Hi. Ours is a private limited company and we are connecting a partner NBFC with clients for loans. Even though loans will be given through the NBFC books, we will assume a certain level of defaults. I have read about FLDG structure where we can take the first x% hit on defaults. I wanted to know how is the legal structure set for this, as in would it be a simple agreement between us and NBFC and we will put some capital in a separate account (against FLDG) and that's it. Or there could be specific legal hurdles in this? Thanks

Answer 1

Sir, like you know, the First Loss Default Guarantee scheme (FLDG), is a concept where the

Guarantor bears a limited amount of default to increase the credit worthiness of the customer.

This is a very easy scheme for a single business entity as they can deposit an amount of

money in the bank in lieu of FLDG, which can be made up by charging a small fee from the

customers for this service.

However, now that you are planning to partner with another NBFC, the concept of single

business entity no more exists. Due to this new partnership the FLDG structure also gets split

between the partners like how other liabilities would be shared. Therefore, at this juncture

mild legal hassles would arise as to the percentage or contribution of each partner and

splitting the fund in the event dissolution etc.

This being said, the law behind FLDG structure is not codified and this is purely a business

concept. First Loss Default Guarantee structures are governed only by the relevant clauses of

each contract between parties. Hence it is advised that to prevent legal hassles the counsels of

both the NBFCs must sit down together and draft a strong contract for First Loss sharing and

make sure that no loop hole is left out. Any dispute regarding the same can be later governed

by this contract with the relevant act being the Indian Contracts Act 1872. Any default on

part of the parties then, would amount to breach of contract and suit can be filed for


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