Digital Lending Rails, Part 1: Building the Rails for Digital-Lending Growth, Lessons from India
Digital lending is reshaping access to finance for micro, small, and medium enterprises (MSMEs). But technology alone doesn’t create transformation—infrastructure does. India’s experience shows how a coordinated framework of digital identity, data standards, and secured-transaction systems can unlock credit at scale.
At Factfin, we study and design these systems. In our work across Asia, we’ve seen that innovation succeeds where enabling “rails” exist—and where lenders innovate responsibly in their absence.
India’s Foundational Infrastructure
India’s ecosystem didn’t emerge overnight. Over a decade, it built interconnected layers that today support one of the most advanced MSME-lending markets in the world.
Digital identity and e-KYC (Aadhaar): Instant, low-cost customer verification transformed onboarding.
E-invoicing and GST data: Created standardized, verifiable records of business transactions.
TReDS platform: The Trade Receivables Discounting System connected buyers, suppliers, and financiers, turning receivables into liquid assets.
Credit registries and India Stack APIs: Provided lenders with structured, consent-based access to borrower data.
This foundation made it possible for fintechs and banks to underwrite SMEs based on real-time cash flows rather than static collateral.
The Policy–Technology–Market Nexus
India’s success came from collaboration, not regulation alone. Policymakers defined open standards; technology providers operationalized them; and lenders proved the business case.
Initiatives like UPI and Account Aggregator embedded interoperability from the start, allowing multiple actors to share verified data securely. The outcome: innovation with control, and scale without excess risk.
Factfin applies this same principle in client engagements—helping lenders design digital-credit systems aligned with regulatory intent, and ensuring risk frameworks evolve alongside product innovation.
Lessons for Other Markets
While India’s infrastructure is unique, the underlying lessons are universal:
Policy alignment drives scalability. When regulators, DFIs, and private lenders share a roadmap, infrastructure investments compound rather than fragment.
Data visibility lowers credit risk. Transaction-level data transforms MSME finance from collateral-based to cash-flow-based.
Interoperability enables inclusion. Open standards encourage competition and innovation within a safe boundary.
Factfin’s Build–Run–Scale methodology reflects this logic: build new credit models that fit current realities, run pilots with strong governance, and scale proven models once frameworks mature.
Bridging the Gap Between Vision and Implementation
For many developing economies, the challenge is not ambition—it’s sequencing. Infrastructure reforms such as secured-transaction laws or digital-ID rollout often progress slower than market needs.
Factfin’s approach helps bridge this gap. We prototype new models that can operate responsibly within today’s constraints but are designed to plug into tomorrow’s systems—be that open APIs, e-invoicing, or collateral registries as they evolve.
Looking Ahead
India’s model proves that when infrastructure, policy, and innovation align, MSME credit access can grow exponentially. But no market starts fully built. The path forward for others lies in structured experimentation, data sharing, and public-private coordination.
Factfin’s mission is to help lenders and policymakers get there faster—innovating with control, and scaling with confidence.
