Why Paytm is betting on FLDG model to boost lending and revenue

By assuming a portion of loan default risk through its newly adopted First Loss Default Guarantee (FLDG) model, Paytm seeks to improve lending volumes and profitability, while giving hesitant partners some assurance.

“We are confident that our FLDG-backed lending will be a cornerstone for growth, enabling us to expand our credit offerings while maintaining profitability,” Paytm CEO Vijay Shekhar Sharma said during an analyst call on Tuesday. Paytm announced it will provide a DLG (default loan guarantee) of up to Rs 225 crore for its lending partner, SMFG India Credit Co. Ltd.

The FLDG model involves Paytm guaranteeing a portion of the loans it facilitates for its lending partners. If the borrower defaults, Paytm covers the first part of the loss. This allows lending partners to take on more loans with confidence, knowing a portion of the risk is mitigated.

Mitigating risk through FLDGs, sourcing partners such as Paytm, can expand their customer base and increase the volume of loans they issue. This is particularly beneficial when dealing with borrowers who may have limited credit history or higher perceived risks.

As Paytm group CFO Madhur Deora explained during the call “Some new partners find it easier to start with an FLDG-backed model. This flexibility has opened doors to more partnerships, which we expect to scale significantly in the coming quarters."

“Our lenders are very confident of the business, and the timing of FLDG's launch coincides with improved asset quality. This gives us a unique opportunity to expand lending without requiring additional equity or capital investment,” Sharma added.

Sharma emphasised that the move is partly driven by industry practices and regulatory requirements: “We wanted to ensure our model is aligned with industry standards. While we didn't face challenges in audits, we believe this change enhances our market positioning.”

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Paytm's revenue generation under the FLDG model comes from an upfront sourcing fee, followed by collection revenues throughout the loan lifecycle. According to CFO Madhur Deora, "The overall take rate, net of FLDG costs, still works out to be over 5% across the life of the loan, mainly in our merchant lending business."

The model also allows Paytm to realise higher collection revenues, as Deora further explained: “We expect a significant amount of collection revenue to accrue over the life of the loan. Even though we expense the FLDG costs upfront, the collection revenues far outweigh these costs, resulting in higher profitability.”

Even though Paytm may cover the initial loss if a borrower defaults under the FLDG agreement, it actively participates in the loan collection process. When the borrower repays the loan, including instances where collections occur after a delay, Paytm earns fees for facilitating these repayments.

However, in FLDG loans, the upfront cost creates a slight drag initially, which is recovered later through collections. Deora added, "It’s important to note that the FLDG cost is entirely expensed in the quarter it’s issued, but we see net profits growing as collection revenues flow in over the 12 to 18-month tenure of these loans."

While FLDG does introduce some risk—since Paytm is responsible for initial losses—Deora assured that their conservative approach in estimating potential defaults keeps the model sustainable. “In scenarios where default rates remain in a reasonable range, we expect the net take rate to stay above 5%,” he noted.

Moreover, Paytm’s strategy doesn’t rely exclusively on FLDG-backed loans. “We’re happy to do business with or without FLDG. It’s about aligning with the preferences of different lending partners, and we’re seeing significant demand regardless,” Sharma explained.

Additionally, the execs noted that the FLDG model does not require additional capital investment because the money is "in a rotation," meaning that it is consistently recycled through collections and re-lending.

The company is also optimistic about scaling its partnerships and deepening its foothold in the lending ecosystem.

In Q2 FY2025, Paytm distributed Rs 3,303 crore in merchant loans, up from Rs 2,508 crore in Q1. About 50% of these loans were to repeat borrowers​.

Revenue from financial services grew by 34% QoQ, reaching Rs 376 crore, driven by higher collection bonuses and increased demand for merchant loans​. Enhanced mobile payment penetration among merchants led to better collection efficiency, boosting Paytm's collection bonus​.