Paytm Inks FLDG Pact To Boost Lending Play For Merchants

Paytm’s Parent One 97 Communication has made a strategic shift in its lending operations by offering a default loan guarantee (DLG) on the distribution of merchant loans.

As a result of this, it has entered into a first loss default guarantee (FLDG) agreement with SMFG India Credit. 

Notably, SMFG is the lending partner that disburses loans to merchants of the company. 

Paytm said that it has already taken approval from its board ‘to provide DLG of up to INR 225 Cr over time on loans disbursed by lending partners to merchants.

This marks a significant shift from its previous role as a distributor of loans to now providing a guarantee against potential defaults. 

Citing the reason behind this move, Paytm conveyed that there is increased interest and comfort from existing as well as new lenders to expand the partnership due to better asset quality trends and higher demand from our merchants. 

“Following the regulatory framework and the emerging market practice, we see an increased willingness from lenders to partner and allocate more capital in the DLG model. DLG model will help to increase disbursements with the existing partners and expand partnership with new lenders for the loan distribution,” the company said in its earnings release.

Although the potential losses of INR 225 Cr will occur over time, the company under the expected credit loss (ECL) model recognises the entire cost of DLG  upfront. Hence, there will be higher upfront costs and higher revenue over the life of the loan, the company added. 

It is pertinent to note that the FLDG mechanism is becoming increasingly popular among fintech companies in India as it covers the potential losses providing assurance to the financial institutions against the risk of their credit.

The announcement came on the same day the fintech major announced its consolidated profit after tax (PAT) of INR 930 Cr in Q2 FY25 as against a loss of INR 292 Cr in the year-ago period. 

For the same period, revenue from operations fell 34% year-on-year to INR 1,1660 Cr in the reported quarter from INR 2,519 Cr in the year-ago period. 

Sequentially, it rose over 10% from INR 1,502 Cr in the June quarter on the back of growth in its bread-and-butter payments and financial services business.