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.

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.

This segregation of responsibilities leads to greater specialisation across the lending value chain.