The recent arrest of Pavitra Walvekar, chief executive officer of Kudos Finance and Investment, has brought into focus first loan default guarantee (FLDG), a widely used, and sometimes controversial, arrangement in the lending business.

Under this model, a firm without a lending licence partners with a non-banking financial company (NBFC) and gets a credit line, which is used to provide loans to the firm’s customers. It parks a sum, typically 8-15% of the disbursed amount, with the NBFC as security against these borrowers’ failure to repay.

The model helps tech companies offer credit without applying for an NBFC licence, which is a comprehensive process.

In the case in question, Walvekar’s Kudos Finance, an NBFC, allegedly flipped the FLDG concept by working with fintechs flush with dodgy Chinese money and taking very high guarantees. The Enforcement Directorate (ED) took Walvekar into custody on December 17 for allegedly allowing these fintechs to misuse Kudos’ licence.

The case, part of the investigations into dubious Chinese instant loan apps, is registered under the stringent anti-money laundering act. Walvekar was produced in a special court in Hyderabad on December 18.