How Technology is Enhancing India’s Financial Institutions to Redefine their Lending Processes

By Ramasubramanian V, Senior Vice President of Technology, NOVAC Technology Solutions

India’s lending space has seen tremendous growth over the past few years, fueled by the rising credit demand in the consumer and business segments. But partial technology adoption laid bare some fundamental structural issues. High Non-Performing Assets (NPAs), delayed processing of loans, isolated user data, and biased underwriting procedures stretched the NBFCs and small lenders’ systems.

These inefficiencies in the value chain of lending have led to lower operational efficiency and a lack of trust such that the lender and borrower, resulting in friction and delays. Technology, as powerful an enabler as it is for cutting down time on processes and bringing transparency into the lending cycle, has proven tricky for financial institutions to embed into their day-to-day operations This article delves into how technology is reshaping lending in India, resolving legacy problems and setting the stage for lenders to leap into a stronger, data-driven future.

The drawbacks in India’s Lending Sector and how Technology is contributing to the transformation
Regulatory authorities such as the Reserve Bank of India (RBI) have introduced a number of mandates and measures to provide transparency and accountability in the space of digital lending, as well as concentrate on borrower protection and platform engagement. In recent times, developments like the Unified Lending Interface (ULI) for inclusive credit access and managing India’s financial system through high-value datasets powered by a Digital Public Infrastructure (DPI) are encouraging.

Lenders have been made unsustainable to scale in the market by certain challenges, making it hard for them to do so, manage credit risks, and provide a seamless borrower experience. Technology comes in as a white knight to lift the lending sector from the quagmire of obstacles.

High default rates and NPA burdens
One of the most pressing issues is the high level of Non-Performing Assets (NPAs), especially among NBFCs and Small Finance Banks (SFBs). Inadequate credit assessments, over-lending, and economic disruptions have led to mounting loan defaults, weakening a lender’s balance sheet and restricting their ability to disburse credit to borrowers, resulting in a vicious cycle of limited liquidity and delayed loan approval time.

Automated Early Warning Systems
Financial institutions need to secure their infrastructure with comprehensive early warning systems with multiple triggers to detect potential NPAs and enable timely remedial actions. With some features in digital lending solutions, like an in-built scorecard threat that automatically assesses for high-risk borrower profiles and high NPA ratings, can strengthen the lending operational workflows without jeopardizing the lenders’ liquidity.

The RBI and the Government of India have implemented and calibrated policy measures, including reinforcing the regulatory and supervisory framework and the 4R approach (Recognition, Resolution, Recapitalization, and Reforms) for public sector financial institutions. Identification of NPAs, resolution, and value recovery from stressed financial accounts, and recapitalization are the key objectives of the 4 R Approach. The combined efforts of technology and government mandates can resolve stressed assets.

Siloed, Manual Processes
Financial institutions using manual lending processes continue to operate with disconnected systems across departments from loan origination, underwriting, credit disbursals, and collections resulting silos. Processes are still heavily dependent on reports and manual verification, house visits, etc, resulting in delays, human errors, inconsistent decision-making, and a lack of transparency.

Loan Origination and Disbursal Platforms
Current lending products now provide end-to-end Loan Management Systems (LMS) that automate credit application intake to loan disbursal, consolidating all discrete systems under one umbrella. These systems connect with outside data sources such as credit bureaus and financial systems to facilitate instant loan approvals, real-time risk evaluation, reduce turnaround time, and minimize human error.

KYC and fraud detection challenges
Know your Customer (KYC) processes haven’t evolved much and are often outdated and inconsistent. Partial adoption of technology and manual verification opens the door to identity fraud and errors in documentation. Lenders can struggle to segregate fraudulent borrowers and false identities in time to avoid any risks.

Digital Onboarding and Fraud Prevention
With technologies such as Video KYC, Aadhaar e-KYC, and digital document collection, the whole loan disbursal process can be made easier. Also, vast database connectivity like CIBIL, Central KYC Records Registry (CKYCRR), UTI Infrastructure Technology and Services Limited (UTIITSL) for PAN Data, and Goods and Services Tax Network (GSTN) can facilitate real-time borrower identification verification, background checks, fraud risk assessment, and onboarding time reduction from days to minutes.

High-level APIs utilize pattern recognition, deploy Machine Learning (ML), and behavior analysis to detect suspicious activity early in the transaction lifecycle. With additional biometric authentication verifies that only legitimate borrowers to access and utilize their accounts, while improving security and establishing privacy.

Regulatory Compliance Challenges
The lenders have to comply with a vast and changing set of rules, ranging from complying with RBI mandates such as Digital Lending Guidelines 2025 to ensuring data privacy and adhering to consumer protection laws. Through manual record-keeping and nonstandard loan audit trails, and makes adherence to rules becomes resource-consuming and susceptible to breakdowns in systems, inviting penalties and reputational loss to financial service firms.

RegTech (Regulatory Technology) tools
These are custom-built tools that are made to assist financial institutions in reporting, tracking, and regulatory compliance with ease. The digital lending solution also offers auto-reporting to the RBI and Financial Intelligence Unit (FIU-IND), ongoing checks for compliance with data privacy, such as the Digital Personal Data Protection (DPDP) Act, and generates an end-to-end audit trail for every lending activity so that it is easy to inspect.

The Road Ahead
To continue the momentum that technology has infused into India’s lending landscape, increased partnership among public financial institutions and private sector players is needed. With growing API frameworks enabling easy integration with government and financial databases, strategic partnerships will ensure shorter innovation cycles, while ensuring regulatory checks and standardization across all processes

Another no less significant consideration is the necessity of developing digital literacy and understanding of financial terms among borrowers, particularly in the underserved or rural segments. While online lending platforms have broadened access to credit, most first-time borrowers are not aware of loan conditions and terms. Financial literacy programs that lenders, regulators, or fintechs start will be crucial in reducing borrowing and defaults.

As Artificial Intelligence (AI) and automation grow in importance to lending operations, there needs to be an appropriate balance between human discretion and software efficiency. A combined strategy has the potential to build borrower confidence and preserve standards, and ensure transparency.

With innovation further establishing itself in financial services, India’s lending industry is looking towards a brighter, more resilient future where technology is an integral support beam for financial practices done more ethically and sustainably for the benefit of institutions as well as borrowers.