Digital overdue loans fall to 1.4% even as riskier borrowers dominate penalties

Digital personal lenders are showing better repayment trends, but the improvement comes with a portfolio that is still skewed towards riskier borrowers, according to a report by the Fintech Association for Consumer Empowerment (FACE) analyzing digital personal loans.

According to FACE, the share of digital personal loans more than 90 days past due decreased to 1.4% from 3.3% in March 2023. However, almost 60% of the value sanctioned in FY26 was for medium, high or very risky borrowers. The mix of borrowers continued to challenge the industry’s underwriting capacity, although headline asset quality data showed improvement. Digital non-bank financial companies approved personal loans worth 13.2 million crowns ₹2.15 trillion in FY26. Outstanding book grew 29% YoY to ₹1.43 trillion by March 2026.

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Digital personal loans refer to unsecured personal loans originated by digital non-banking financial companies (NBFCs) through their own loan applications or through partnerships with other loan service providers or applications.

Growth is driven by digital NBFCs, with the FACE report tracking over 110 members in this segment; FACE says it is an RBI-recognized fintech self-regulatory organization (SRO) with over 385 members, including digital lenders such as Setu, Kissht, PaySense, Navi and KreditBee.

Key things

Digital loan defaults fell to 1.4%, the best level in three years.
Almost 60% of loans are still directed to medium and high risk borrowers.
Digital lenders dominate loan volume, but banks hold most of the value.
The authority’s weekly updates since July aim to limit multiple simultaneous borrowing.
Broader fintech stress is rising, even as initial headline numbers look better.

The growth of this segment depends more on speed and access than on loan size. Digital lenders accounted for 77% of all approved personal loans by volume in FY26, but only 19% by value. In contrast, banks accounted for only 8% of volume and 61% of value. The average loan size increased slightly to ₹16,238 from ₹12,945 in FY23. More than half of the sanctioned value now comes from borrowers with loans of ₹50,000, credit history for five years and medium to low risk profiles. This suggests that this segment is slowly moving beyond very small-ticket first-time borrowers.

A rule change that could change the way lenders assess risk

The next challenge comes in July, when lenders must update credit bureau records every week. The goal of this change is to prevent compounding, where borrowers take out several small loans before any single loan is recorded on their credit file. The adjustment comes as the larger fintech lending market continues to face pressure. June 2025 CRIF High Mark data showed loans 180 days overdue rose to 8.6% from 7.1% a year earlier, even as the active fintech loan book grew 25.6% to ₹2.1 trillion.

Joydip Gupta, head of Apac at Scienaptic AI, said the 77% volume and 19% value split shows the segment is still built around small-ticket lending, even as it grows.

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Scienaptic AI is an AI-based credit decision platform used by lenders to improve underwriting.

“This is a model that does its job, not stops. It formalizes the everyday credit needs of borrowers that the system has historically missed,” he added.

As for the risk mix, where digital lenders appear to be selling more loans to riskier borrowers, he said that’s nothing to be alarmed about.

“This mix is acceptable if it results from sharper underwriting rather than looser standards,” he added.

Ticket sizes were larger for women than men, higher in urban and metro areas than in rural and semi-urban markets, and increased steadily with age and length of credit history. Simply put, older borrowers and those with longer repayment periods receive larger loans than younger and newer borrowers.

Digital lenders are also expanding access to formal credit for younger and underserved borrowers, particularly through low-value loans delivered quickly through digital channels.

In FY 2025-26, more than 58% of the sanction value went to borrowers below the age of 35, 82% to males and about 39% to customers in Tier III cities and beyond.

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A rule change that could change the way lenders assess risk

Joydip Gupta, head of Apac at Scienaptic AI, said the 77% volume and 19% value split shows the segment is still built around small-ticket lending, even as it grows.

Scienaptic AI is an AI-based credit decision platform used by lenders to improve underwriting.

“This is a model that does its job, not stops. It formalizes the everyday credit needs of borrowers that the system has historically missed,” he added.

As for the risk mix, where digital lenders appear to be selling more loans to riskier borrowers, he said that’s nothing to be alarmed about.

“This mix is acceptable if it results from tighter underwriting rather than looser standards,” he added.

Digital lenders are also expanding access to formal credit for younger and underserved borrowers, particularly through low-value loans delivered quickly through digital channels.

In FY 2025-26, more than 58% of the sanction value went to borrowers below the age of 35, 82% to males and about 39% to customers in Tier III cities and beyond.

The report also claimed that personal loans are often used to manage cash flow, cover urgent expenses and deal with unexpected events, making timely access to credit an important part of household finances. This helps explain why digital lenders continue to gain scale, even though their average loan size remains much smaller than other lenders.

At the same time, the mix of borrowers remains inclined towards riskier segments. In fiscal year 2025-2026, 26% of the penalty value went to medium-risk borrowers, 21% to high-risk borrowers, and 13% to very-risk borrowers, while 19% went to low-risk borrowers, 18% to very low-risk borrowers, and 3% to non-scoring customers.

Key things

Digital loan defaults fell to 1.4%, the best level in three years.
Almost 60% of loans are still directed to medium and high risk borrowers.
Digital lenders dominate loan volume, but banks hold most of the value.
The authority’s weekly updates since July are aimed at limiting multiple simultaneous borrowing.
Broader fintech stress is rising, even as initial headline numbers look better.