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Digital credit usage in India is growing rapidly. With online shopping, digital payments and easy access to loans, people are now looking to get financing quickly and with less hassle. So, new startups are creating different models of digital lending solutions so that they can reach more customers at a lower cost.
Creating a sustainable lending business by managing these four factors together: profitability, compliance, customer experience and risk management is now a big challenge. So, LSP, BNPL, NBFC and co-lending: these four models are the most discussed today. Each model has different advantages and limitations. The startups will take the model depending on their capital, technology, risk-taking ability and business goals, in case you are going ahead with NBFC registration in India.
LSP is an organization that does not lend money itself but rather supports lenders by providing technology and operational services under the RBI’s Digital Lending Guidelines. It basically creates first contact with the customer and simplifies the entire lending process digitally. They onboard customers through the app or platform, complete KYC, collect data, and provide pre-underwriting support.
In addition, LSPs often play a key role in collecting or servicing. They create a connection between the user and the NBFC/bank so that the customer can easily get a loan, and the lender can reduce the risk. However, everything has to be done under the approval and guidance of their partner NBFC or bank.
BNPL is a short-term credit facility where the customer can pay later in installments instead of paying immediately at the time of purchase. This option is given at the time of checkout on e-commerce, retail, or various digital platforms. The customer’s credit assessment is done digitally, and the loan is usually disbursed by the NBFC partner.
It is approved very quickly, so the user experience is good. Merchants are also keen to adopt BNPL, as it reduces cart abandonment and increases sales. This model has quickly become popular among the young consumer segment of India. However, cost control, fraud prevention, and compliance are important to survive as a business.
NBFC is a financial institution that can directly lend it under the control of RBI. To operate under this model, it is mandatory to have a certain amount of net-owned funds, and the registration of the institution must be done with special approval from RBI. NBFC has to strictly follow all the rules related to governance, capital adequacy, risk management, and reporting.
This structure is suitable for businesses that want to build their own loan book and have the ability to manage long-term credit operations. By becoming an NBFC, the startup or financial institution can create its own product structure and tailor policies according to customer behavior and risk patterns. However, in this model, regular NBFC audits, NBFC compliance, and capital raising are relatively more responsibilities to run the operation.
Co-lending is a joint lending model between banks and NBFCs. Here, both institutions share the loan amount, risk and income. Typically, NBFCs do fintech-driven onboarding and underwriting, and banks provide low-cost funding. Through this technology-based co-venture, loans reach places where neither the bank nor the NBFC could have reached separately.
This reduces the capital pressure of NBFCs and opens new customer groups for banks. In addition, the digital co-origination process makes loan approval faster and more transparent. However, to work in this model, clear coordination of rules, underwriting policies, and operations between the teams of both institutions is essential.
The table below briefly compares the key aspects of the four models:
It is important to clarify a few things in advance when a new startup wants to choose a lending model. First, the current stage of the startup and how much capital it has are important. LSP or BNPL is relatively easy in the early stages if there is less capital. NBFC or co-lending works if you are prepared to handle the complexities of the regulatory framework.
Tech infrastructure also plays a big role. Without the right API platform, underwriting model, and data analytics, no model is sustainable in the long run. NBFC or co-lending is advantageous if the startup has the risk-taking ability and the ability to handle NPAs. LSP or BNPL is more suitable if the goal is to enter the market quickly and acquire customers at a low cost. NBFC and co-lending provide a strong position in the long run if the intention is to build a complete loan book in the future.
Digital lending is changing rapidly. AI-based scoring, alternative data, and automation are making credit assessment more accurate. This reduces risk and speeds up approvals. The new regulatory rules are coming in the BNPL and NBFC sectors, which startups will have to navigate more carefully.
Collaboration between fintechs, banks and large digital marketplaces is increasing, making it possible to reach a larger customer base. Many startups are now opting for hybrid models, where LSP, BNPL and co-lending work together. Embedded finance is also rapidly gaining popularity in e-commerce, healthcare, travel, and MSME sectors. This will increase the profitability of lending models in the future.
The choice of loan model depends entirely on the startup’s risk management, capital strength, compliance readiness, and market positioning. LSP, BNPL, NBFC and co-lending, each model has different goals and benefits. Therefore, it is important to clarify your operational capabilities, technical capabilities, and long-term goals before deciding.
Whether you are looking to start a business on an LSP, BNPL platform, NBFC, or co-lending model, Enterslice can help you with everything from licensing and regulatory approvals to tech setup and strategic planning. Our expert team provides complete support to build your business in a compliant, profitable, and scalable manner.
An LSP is a digital service provider that connects users with NBFCs or banks. They do not lend themselves but handle customer verification, KYC, app-based applications, underwriting support, and collection management. The entire process is technology-based, which results in faster approvals and a smoother experience. This allows startups to launch lending services with less capital.
An LSP connects customers to lenders through a platform but does not hold loans on its balance sheet. An NBFC lends directly and bears the entire risk. NBFCs require more capital, RBI approval, and strict compliance. The LSP model is tech-based and relatively less risky, while NBFCs offer more control and profit potential.
While credit scores are usually important in BNPL services, they are not always mandatory. Many NBFC and BNPL platforms are underwritten based on customer transaction behavior, small ticket size, e-commerce history, and alternative data. However, if you have a good credit score, you get higher limits, and approvals are faster. If you have a weak score, BNPL limits may be lower.
BNPL increases merchants’ sales quickly. Customers can buy products immediately, resulting in reduced cart abandonment. This increases the average order value and increases the tendency to buy again. E-commerce, retail, and service businesses are quickly adopting it, as BNPL integration is easy, and the customer experience is smooth. So, sellers get more conversions with less effort.
To start an NBFC, a minimum net-owned fund by the RBI is required. Apart from this, criteria such as company registration, director for fit-and-proper conditions, risk management system, audit framework, and IT framework have to be met. NBFCs cannot provide loans without RBI approval. The entire process is time-consuming and requires a strong compliance team.
The LSP model is considered the least risky for startups, as there is no balance sheet risk. The startup only handles technology, onboarding, underwriting support, and customer management. The risk of the loan is borne by the NBFC or bank. Therefore, LSP is more suitable for low capital, fast scaling, and low compliance pressure.
In co-lending, banks and NBFCs jointly lend and share risk in a predetermined ratio. Usually, the bank provides funds at a low cost, while the NBFC handles the customer's segment of understanding and underwriting. The interest and income of the loan are shared between both. So, the risk of NBFC is reduced, and the bank can expand its operations in new markets.
RBI has made data protection, clear customer consent, transparency of charges, direct fund transfer to bank account, and fair collection practices mandatory in digital lending. The relationship between LSP and NBFC has to be clearly disclosed. Loan service agreements, grievance handling, and transparent repayment terms are also important. Customer protection is at the heart of these guidelines.
Increasing defaults in BNPL increase the losses of the partner NBFC and reduce the income of the startup. In some cases, the merchant discount rate becomes less profitable. Profitability decreases due to increased chargebacks, fraud, and collection costs. If losses increase, the NBFC can reduce the limit, which puts pressure on the scaling of the startup. Therefore, strong underwriting is essential.
API-based systems speed up loan approval, KYC, conversion, EMI calculation, and collection. This reduces manual work and reduces errors. The platform can easily connect with various NBFCs, banks, and merchants. So, it is possible to provide services on a large scale at a low cost. Tech infrastructure plays a crucial role in scaling and customer experience.
NBFC models are generally difficult at the early stage, as they require high capital, large teams, and a strong compliance framework. Co-lending requires coordination and tech integration with both banks and NBFCs. LSP or BNPL models are easier for new startups to implement. NBFC or co-lending can be considered later when sufficient capital comes.
AI-based underwriting makes customer risk assessment more accurate. Using alternative data, such as transactions, behavioral patterns, and payment history, reduces defaults. Automated KYC, collections, and fraud detection reduce operational costs. This results in faster decision-making, reduced risk, and improved customer experience. It increases the profitability of lending businesses.
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