In 2025, embedded lending is blowing up in India’s financial ecosystem. From ride-hailing apps offering instant loans to e-commerce checkouts giving you EMI options on the fly, credit is being injected into everyday digital experiences. It’s smooth, it’s convenient, and it’s frictionless. But as this rapid expansion continues, a major question lingers: who’s really managing the credit risk?
🔸 What Is Embedded Lending?
Embedded lending refers to the seamless integration of credit products into non-financial platforms. Think of platforms like Flipkart, Zomato, or Ola offering loans or pay-later options at checkout, without redirecting you to a bank or NBFC. It’s made possible by APIs, fintech integrations, and powerful underwriting algorithms that assess creditworthiness in real time.
But here’s the kicker: it’s not traditional banks calling the shots. It’s often fintech companies, BNPL providers, or digital marketplaces stepping into the lender’s shoes—or at least acting like they are.
🔸 Why Embedded Lending Is Booming in 2025
Several factors are fueling this boom:
- Rising Digital Transactions: With UPI hitting over 12 billion transactions monthly, embedded finance rides on the back of this growth.
- Consumer Demand for Instant Credit: Gen Z and millennials want things now—not later. Embedded lending feeds into that urgency.
- Tech Infrastructure: India Stack, Aadhaar eKYC, Account Aggregators, and open banking APIs make it incredibly easy to assess and distribute loans digitally.
- SaaS + Fintech Partnerships: SaaS platforms like Razorpay, Pine Labs, and Mswipe are teaming up with NBFCs and fintechs to build credit offerings directly into merchant ecosystems.
In short: everyone wants a piece of the lending pie—and embedded lending is the fastest route to grab it.
🔸 The Players: Who’s Offering the Loans?
Here’s the complexity. In an embedded lending stack, multiple players are involved:
- Front-End Platform: The app or platform offering the loan experience (e.g., Zomato, Ola, Flipkart).
- Lending Partner: A registered NBFC or bank underwriting the loan (e.g., InCred, Capital Float).
- Tech Facilitator: A fintech middleware company handling APIs, credit scoring, KYC, and data analytics (e.g., Setu, Perfios).
So, when you take an embedded loan, you’re not always dealing with a bank directly. The actual risk is shared—or sometimes blurred—between platform, lender, and tech player.
🔸 Who Bears the Credit Risk?
Now to the million-rupee question.
In traditional banking, the institution issuing the loan carries the credit risk and follows strict RBI norms. In embedded lending, however, it’s murky:
- Some platforms offer First Loss Default Guarantee (FLDG) to the NBFC, absorbing the first layer of losses if borrowers default.
- Fintechs may use alternate credit scoring models, sometimes too optimistically, resulting in underestimation of borrower risk.
- Certain platforms act as co-lenders, sharing risk but with limited balance sheet capacity.
If things go south—defaults rise or users ghost their EMIs—who absorbs the blow? The accountability is not always clear, especially to regulators or customers.
🔸 The Regulatory Dilemma: RBI’s Headache
The RBI is already wary of this boom. Here’s why:
- Unregulated Lending Interfaces: Many embedded lending journeys blur the line between regulated and unregulated entities.
- Lack of Transparency: Users often don’t know who the actual lender is or what the terms are.
- Data Privacy Concerns: Embedded lenders use alternative data from phones, behavior, and social profiles to assess credit.
The RBI, in its digital lending guidelines, has mandated that only regulated entities (REs) can disburse credit. But enforcement in the embedded finance jungle is easier said than done.
🔸 Is Embedded Lending Creating a Credit Bubble?
Some experts believe we’re inching toward a mini credit bubble. Why?
- Aggressive Lending to Thin-Files: Many borrowers don’t have formal credit history. AI-based models may overestimate repayment ability.
- Short-Term, High-Volume Loans: These loans are often small-ticket but high in frequency—raising portfolio risk for NBFCs.
- Sachet Credit Culture: Just like sachet shampoo, sachet loans (e.g., Rs. 500-1000) are now common, but defaults on such a scale can still be painful.
India’s previous NBFC crisis in 2018 (think IL&FS) and the BNPL shakeout of 2022 taught us that unchecked credit can blow up fast.
🔸 The Tech Side: Credit Scoring Algorithms & Risks
Embedded lending heavily relies on:
- AI & ML for Credit Decisioning
- Behavioral & Alternative Data: Location, transaction patterns, app usage, etc.
- Instant KYC & E-Mandates
While this is a leap in speed and scale, there’s also risk of:
- Bias in algorithms
- Overreliance on limited data points
- Systemic risk if models fail during economic shocks
Imagine an economic downturn where job losses spike—these algorithms may fail to catch early signs of distress, leading to mass defaults.
🔸 Global Lessons: What India Can Learn
China’s embedded lending boom via Alipay and WeChat eventually triggered a major regulatory crackdown. Even in the US, Apple Card and Affirm have seen rising delinquencies.
India must:
- Build robust co-lending frameworks
- Strengthen accountability across the value chain
- Make credit risk disclosures mandatory
- Ensure real-time credit reporting across embedded lenders
🔸 Where Does Embedded Lending Go from Here?
This space isn’t slowing down—in fact, it’s poised for deeper penetration. Expect to see:
- B2B Embedded Lending: For merchants and SMEs through POS machines
- Sector-Specific Credit: Agri-tech, EdTech, HealthTech loans integrated into platforms
- Embedded Insurance + Lending: Bundled products to de-risk defaults
But for it to become sustainable, the focus must shift from just onboarding users to actually managing the credit lifecycle responsibly.
🔸 Conclusion: The Need for Guardrails
Embedded lending is not inherently bad—it democratizes credit and brings millions into the fold. But the way credit risk is currently handled in India’s embedded lending boom is far from perfect. Until there’s regulatory clarity, better transparency, and stronger credit evaluation models, we’re riding a high-speed train without brakes.
It’s time for all stakeholders—platforms, lenders, tech players, and regulators—to align and ensure that the embedded credit revolution doesn’t end in a credit collapse.
