Reset Or Rejuvenation? Mapping India’s Digital Lending Course In 2026

The digital lending ecosystem in India spent most of 2025 learning to breathe differently. After two years of regulatory resets, liquidity swings and uneven demand cycles, the year became a litmus test for every participant in the credit chain.

Non-banks discovered that capital wasn’t scarce, but confidence in their risk models and lending partnerships was. Digital lenders realised that growth at any cost had quietly gone out of fashion and that everyone is tightening their margins.

Banks, meanwhile, held their ground — steady, cautious, and increasingly selective — while the credit appetite of consumers and MSMEs moved in sharp, unpredictable waves.

By mid-2025, it was clear that the sector had split into two worlds.

On one hand, there were players like CRED, Jio Financial Services, Flexiloans, JSW One, and Veefin that tightened underwriting, rebuilt collections muscle and focused on patient, measured growth.

On the other were players who struggled with compliance gaps, rising NPAs, funding-cost pressures or business models misaligned with the RBI’s sharper gaze.  For instance, NBFCs and fintechs, including Sarvagram, Kinara Capital, & Kiwi, among others, faced significant challenges. Adding to the turmoil, the Minister of State for Corporate Affairs, Harsh Malhotra, highlighted in a report that the IT Ministry (MeitY) has so far blocked access to 87 illegal lending apps.

But 2025 wasn’t merely a year of constraint. It was also the year when technology rewired the foundations of credit. AI-driven underwriting matured, digital public infrastructure deepened its grip on loan delivery, and platforms across ecommerce, payments, logistics and mobility quietly evolved into new distribution rails for small-ticket and working capital credit. As capital markets steadied in the final quarter, the system began showing signs of cautious optimism.

In the opinion of MSME lending platform Flexiloans’ cofounder Ritesh Jain, 2025 turned out to be a transformational year for most digital lenders. Growth was, on average, around 25% to 30%. Players who were focussed on profitability and unit economics found their way through it more easily.

“When you are looking for growth, you also have to manage NPAs, so net growth was there but it was a calibrated growth because of the experience with which we entered 2025.  We are now seeing much improved collection ratios and delinquency trends. Confidence is coming back for companies to scale from here,” he added.

Between 2020 and H1 2025, lending tech startups attracted over 36% of all fintech deals outpacing SaaS, banking, and insurance tech by a wide margin. Analysts believe that funding is expected to remain active in digital lending, largely because capital is the core raw material of the business.

Many are of the view that lending is inherently a scale business, and attracting capital requires reaching a certain size. Also, in the last few years, many growth stage fintech companies have slowed down, and private equity investors have plenty of options with large NBFCs approaching IPO stage. Thereby making equity capital scarce for a large chunk.

Regardless of the funding outlook, the stage is set for 2026 — a year where lending could move from defensive rebuilding to strategic expansion. The questions now are: Will credit growth broaden or stay concentrated? Can risk stay contained even as disbursement ambition grows? And will technology finally unlock structurally lower costs of origination and servicing?

Key Themes On The Radar

There are no fundamentally new white spaces left for fresh lending models in the digital ecosystem.

Manufacturing as a customer base will continue to sit largely with banks because the cost of lending is low and government incentives for manufacturers and exporters further reduce credit costs. NBFCs, meanwhile, are better positioned to capture growth across service-led MSME activity, while banks maintain a natural edge in traditional manufacturing loans.

This sets up the key themes for 2026: verticalisation of MSME baskets, deeper embedded finance, and a sharper push toward co-lending.

Lenders will increasingly build specialised products for one or two well-understood segments instead of attempting broad MSME portfolios. In parallel, embedded finance will scale, with MSME credit stitched directly into ERPs, payment systems and other digital touchpoints.

“Embedded finance will go even deeper into the ecosystem. We completely believe embedded finance is going to be the only successful model because the cost of acquiring and the cost of operating do not make sense for an independent fintech. The economics simply do not work, and most of them end up bleeding to death,” Moglix founder Rahul Garg told Inc42 in November this year.

Co-lending, however, will become one of the major themes of the year. With the RBI giving clarity and allowing FLDG up to 5%, lenders are preparing to scale. Co-lending has existed informally even before the guidelines, and clarity now only accelerates adoption.

Banks can tap into NBFC expertise, and with FLDG norms defined, there is little reason to hold back. But there’s also a feeling that banks will continue to move cautiously, so NBFCs cannot rely solely on bank partnerships.

“Historically, much co-lending has happened between NBFCs themselves as it scales faster — and even when banks participate, they typically prefer larger, better-rated NBFCs,” FlexiLoans’ Jain added.

Consolidations Among Lenders, Platforms

Some consolidation and exits should be expected, driven by the same pressures — risk, cost of funds and regulatory compliance — that have shaped the sector over the last few years.

Alternate credit platform Blacksoil Capital’s cofounder Ankur Bansal said, “Standalone platforms have very limited value, and companies with balance sheets, including ourselves, are always looking for new opportunities.  NBFCs that are not fundamentally strong may also face significant distress.”

Overall, the analysts believe that in the years ahead, the sector is unlikely to see “equal–peer mergers” the way insurance has started witnessing. Lending is not a winner-takes-all market; scale helps, but it does not eliminate the opportunity for others to grow. Instead, consolidation will be capability-led and product-led.

The most likely scenarios involve larger players acquiring smaller, specialised lenders to fill product gaps. For example, a big NBFC with a diversified portfolio may acquire a digital lender that has built depth in one niche—whether it is unsecured MSME loans, invoice financing, or a category like EV or solar. Conversely, a large digital lender with scale in one product could also acquire a traditional lender to add secured capabilities or distribution strengths.

In essence, consolidation will be driven by build-versus-buy decisions. Players that need new capabilities — whether digital workflows, underwriting strengths, or product specialisation — will choose to acquire rather than build from scratch. This form of targeted M&A is more likely than any large-scale merger of equals.

Where Lies The Edge In Lending Tech?

For digital lending startups, the biggest challenge and moat-building opportunity remains managing credit risk as they balance growth and portfolio quality, particularly for lenders chasing similar customer segments without the advantages banks enjoy.

Large banks and bigger NBFCs, which provide wholesale funding to these entities, have already begun tightening their exposure. This creates a situation where smaller NBFCs struggle to raise fresh debt, and that itself turns into a credit risk for their lenders. In other words, liability stress at the NBFC level can easily become a balance sheet risk for the institutions that fund them.

In such a situation, analysts suggest a core strategy which encompasses around 3Cs: collection, compliance and cost.

Strengthening collection capabilities: Outsourcing collections, which was common in older fintech models, is no longer viable. In 2026, artificial intelligence will play a bigger role, replacing some of the human effort in recovery and collections. AI is already beginning to play a role in improving collection efficiency and will continue to do so through call center automation and predictive processes. However, whether this increases recovery rate is unclear at the moment.

Managing cost structure: Cost of funds is a major friction point because of heavy competition especially in segments like MSME or merchant lending and small-ticket loans. To scale, lenders will have to keep acquisition costs low. This requires deeper integrations and partnerships with these platforms to source leads and applications more efficiently.

Navigating compliances: Robust compliance processes and systems have effectively become a differentiator for lending startups.

Oxyzo cofounder Vasant Sridhar believes one should look at regulatory costs purely as a P&L item. “Treat it as a cost that adds value. Because by doing all these things, the idea is that customer experience and lifetime value improves.” he said.

Will AI Shore Up Margins, Risks? 

With AI in the picture, specialisation has become critical. For example, supply chain finance requires a different loan origination and management structures compared to traditional EMI loans.

Fintech startups can play an important role partnering with banks that cannot dedicate the same time and energy to product development. For instance, APIs have been instrumental in connecting the ecosystem, enabling collaboration between banks and fintechs. This can be extended into AI-powered models.

“Most MSMEs today use some form of digital tool or platform. Some sell on Amazon or Flipkart, some operate through their own ERP systems, and restaurant businesses generate data through platforms like Swiggy and Zomato. All of this creates digital trails that will become critical for AI-led models in 2026,” added Fexiloans’ Jain.

At the same time, along these lines, AI adoption will reshape infrastructure as regulations evolve. More companies will begin building internal systems around AI and compliant data usage, bringing structure to underwriting, automation and governance.

“At least on the customer service, reconciliation, credit modelling and parts of sales, AI will start taking a sizable chunk of the role from the people who are playing it today,” said Lenden Club’s co-founder Bhavin Patel.

But the cost savings are also immense, particularly within customer support and recovery teams. Automation is the name of the game in this regard. Platforms like Paytm, PhonePe, CRED, BharatPe and even B2B lenders like InCred, Aye Finance, FlexiLoans and others are all eyeing modern AI models as a core focus area for 2026, having already built their lending models and algorithms in the pre-GenAI era.

Most lending platforms will prefer to engage customers for other products under their umbrella and AI systems can easily find patterns that help unlock better cross-selling and upselling.

AI is now woven into underwriting, collections and core operations, and the question for 2026 is not adoption but boundaries. Regulators will need to outline how far lenders can automate without slowing innovation.

Lending Is Never Without Its Risks 

As with any fintech sector, there are risks. Markets and models  evolve and regulators take a different view of things when such evolution reaches critical mass.

For instance, today credit on UPI is now being seen as a strong product for delivering credit, one cannot ignore the underlying risks. Premji Invest’s partner Bijith Bhaskar cautioned that allowing free-flowing credit simply because UPI makes it easy could create systemic issues, as the recent consumer credit cycle has shown.

Further, clarity is needed on what types of products will be permitted — whether they should be simple revolvers or EMI-led. EMI products, similar to consumer durable loans, could take off rapidly once the framework is clear. If such products are offered on UPI, the scale could be significant.

Overall, across the market, there is a shared belief that the hardest part is behind us. If regulatory stability holds, lenders expect credit demand to rise on both consumer and MSME sides. Voices from the ground underline the nuances. Some export-linked small enterprises tied to US-facing sectors may see near-term pressure, though policy support and trade movements could soften the impact.

Despite bullishness for some AI-driven efficiencies and the opportunity on the MSME and manufacturing side, the broader sentiment in the ecosystem is one of cautious optimism. Hope is clarity, not churn, shapes the course for lending in 2026.