Over 190 million Indian adults have no access to formal credit. AI-powered digital lending is changing credit assessment, approval speed, and access — reaching borrowers the traditional system ignores.
India's Credit Gap
The World Bank estimates India's MSME credit gap at $530 billion. Approximately 40% of adults remain unbanked; of those banked, the majority have no credit history recognized by traditional credit bureaus. Traditional lending's answer is collateral — immovable assets that small borrowers rarely have. The result: a massive population excluded from formal credit, forced into informal lending at 24–48% annual interest rates.
Alternative Data: The Underbanked Borrower's Credit Story
Traditional credit scoring relies on bureau data: past loans, repayment history, credit card utilization. Most of the underbanked simply don't have this data. AI digital lenders use alternative data to build credit profiles:
- Transaction data: UPI/bank account cash flows reveal income stability, business seasonality, and spending patterns
- Telecom data: (with consent) call patterns, recharge frequency, mobile data usage — proxies for income and lifestyle stability
- GST returns: For MSMEs, GST filing history and declared revenue is a direct business health indicator
- Device and behavioral: Device age, app usage patterns, location consistency — behavioral signals correlated with creditworthiness
The AI Credit Decision Engine
Modern digital lending credit models combine 500–1000 features into ensemble models (gradient boosted trees + neural networks) that make credit decisions in under 60 seconds. For the first loan, approval rates among previously unbanked applicants average 35–55% — dramatically higher than the near-0% they would achieve through traditional channels. Default rates, critically, are comparable to or lower than traditional secured loans.
Regulatory Landscape: RBI's Digital Lending Guidelines
The RBI's Digital Lending Guidelines (2022) addressed the explosion of predatory lending apps. Key requirements: all loan disbursements and repayments must flow through regulated entity bank accounts; third-party lending apps cannot hold borrower funds; interest rates and fees must be disclosed in standardized formats; digital lenders must implement a cooling-off period and grievance redressal mechanism. These guidelines have cleaned up the market while protecting legitimate innovation.
The Embedded Finance Frontier
The next phase of digital lending is embedded — credit offered at the point of need within non-financial apps. A kirana store owner using a GST accounting app gets offered working capital credit calibrated to her declared turnover. An e-commerce seller receives inventory financing based on her sales history. An Uber driver gets vehicle repair financing through the driver app. Embedded finance makes credit invisible, contextual, and friction-free.
Arjun architects financial technology solutions for banks and NBFCs, specializing in fraud detection, regulatory compliance, and real-time payment systems.