Digital lending models

Digital lending uses technology to make the lending process faster, cheaper, and accessible to previously underserved borrowers. Traditional bank lending required physical visits, paper documentation, and weeks of processing. Digital lenders can disburse loans in minutes using a fully digital journey, from application, to credit scoring, to disbursement.

India's digital lending ecosystem has grown dramatically, driven by four forces: the Account Aggregator framework (for frictionless financial data consent), GST data (for cash flow lending to SMEs), Aadhaar-eKYC (for digital identity verification), and UPI (for disbursement and repayment). These "stack" elements together create the India Stack, a public digital infrastructure that has significantly lowered the cost of credit delivery.

RBI's Digital Lending Guidelines (2022) introduced significant regulatory guardrails after a period of rapid, sometimes exploitative, growth, capping fees, mandating borrower-lender relationship transparency, and restricting the roles of third-party lending service providers.

Digital lending models:

1. Balance Sheet Lending (NBFCs / Fintechs with NBFC licence) The lender uses its own or borrowed capital to lend. Examples: Bajaj Finance, Lendingkart, Capital Float. Risk stays on lender's books.

2. Marketplace / P2P Lending Platform connects borrowers with individual lenders. RBI regulates P2P NBFCs. Caps on per-borrower and per-lender exposure.

3. Co-lending (RBI Master Direction, 2020) Bank and NBFC jointly lend. Bank provides ~80% of loan; NBFC takes ~20% on its books. Bank benefits from NBFC's origination and underwriting; NBFC benefits from lower cost of funds.

4. FLDG (First Loss Default Guarantee) Fintech/LSP provides a credit guarantee to a bank up to a certain percentage of the portfolio. Controversial, RBI capped FLDG at 5% of the portfolio to prevent credit risk migrating entirely to fintechs without commensurate capital.

5. Lending Service Provider (LSP) Model (post-2022 RBI Guidelines) LSPs (fintechs) source customers and support underwriting but don't touch the loan proceeds. All disbursements and repayments must flow through the regulated lender's account, directly to/from the borrower. No flow of funds through fintech's own accounts.

Credit products in digital lending: Personal loans, BNPL (Buy Now Pay Later), salary advances, merchant cash advances, supply chain finance, affordable housing loans.