Why risk is becoming more distributed across India’s lending ecosystem

The lending ecosystem world over has become significantly more interconnected over the past decade. Traditionally, a financial institution was contacted by the borrower, who handled every stage of the lending journey, from customer acquisition and underwriting to funding, servicing and collections.

However, in this new era, collaboration is key as banks, non-banking financial companies (NBFCs), fintechs, and technology platforms work in partnership. While the customer journey spans multiple platforms rather than being concentrated within a single institution, lending risk is also distributed across multiple entities.

The model work such that some institutions originate customers, others provide capital, while technology firms enable customer acquisition, digital verification or data analytics. All these processes managed by niche organisations form a connected lending ecosystem that reflects the growing complexity and sophistication of India’s financial markets.

From traditional lending to specialised roles

As India’s financial sector expanded, specialised participants began to emerge. Banks typically operated as an all-encompassing entity, sourcing borrowers, evaluating applications, disbursing loans, servicing accounts, and carrying the credit exposure on their balance sheets.

This model offered clear institutional ownership but also required banks to develop expertise across every aspect of lending. This also posed challenges for expansion to unexplored markets and upgrading to newer technology in a short span of time.

NBFCs on then other hand faced investment and liquidity challenges, which hampered large scale expansion. However due to its small scale NBFCs, especially digitally forward NBFCs or FinTechs as we call them now were far more agile.

Over-the years NBFCs developed expertise in serving customer segments that often required more tailored underwriting approaches, including small businesses, self-employed professionals and first-time borrowers.

Fintechs introduced digital customer acquisition, automated onboarding and data-driven underwriting capabilities that significantly improved operational efficiency. This did not replace the traditional lenders while it did replace traditional ways of lending. These nimble and agile institutions began working alongside the existing banking and lending institutions. Banks retained their strengths in funding and balance-sheet capacity, while NBFC fintechs contributed technology, customer experience and faster decision-making.

They also add market expertise and distribution capabilities across specific geographies and borrower segments. Co-lending evolved from this arrangements where banks and NBFCs collaborate to extend credit while combining their primary strengths.

Technology expands the lending ecosystem

This segregation of responsibilities leads to greater specialisation across the lending value chain. Institutions are focusing on their comparative advantages while building on interoperable digital infrastructure to scale successfully, faster.

Technology platforms have become another important layer within this ecosystem with E-commerce marketplaces, mobility platforms, payment applications and enterprise software providers integrating financial services into their customer journeys. Credit is now be offered at the point sale, creating a more seamless borrowing experience. These platform-led ecosystems generate valuable operational data that complements traditional financial information. Such data is particularly useful for customer segments where conventional documentation may offer only a partial picture of financial activity.

Credit bureaus continue to provide important data related to historical behaviour of borrowers while digital payment systems offer more transactional data records. This is facilitated by the consent-based Account Aggregators that help enhance the analytics capabilities and improve borrower experience.

Data and coordination remain critical

However the critical aspect for effectiveness of this distributed model depends heavily on data quality and interoperability. Information must move securely, accurately and efficiently between institutions while maintaining customer consent and regulatory safeguards. Shared digital infrastructure including digital identity systems, payment rails and consent-based data-sharing frameworks plays an increasingly important role in enabling these interactions.

As the ecosystem continues to mature, coordination becomes as important as innovation. Clear governance frameworks, standardised data-sharing mechanisms and interoperable infrastructure will enable institutions to collaborate effectively while preserving customer trust and regulatory compliance.

The objective is not simply to increase the number of participants, but to ensure that each participant contributes to a more efficient and informed credit market. The effectiveness of this model will depend on alignment and data flow across participants.

Disclaimer: The information provided in this article is for informational purposes only and does not constitute financial, legal, or professional advice. While every effort has been made to ensure accuracy, readers should verify details independently and consult relevant professionals before making financial decisions. The views expressed are based on current industry trends and regulatory frameworks, which may change over time. Neither the author nor the publisher is responsible for any decisions based on this content.

Sachin Seth, Regional Managing Director, CRIF India & South Asia