Managing Non-Performing Assets (NPAs) has historically been a reactive process in the Indian banking and lending sector. However, with smart lending architecture, the process becomes a strategic, proactive, and data-driven journey.
NPAs have plagued the Indian banking and lending sector for decades. NPAs simply mean that lenders have loans which are no longer performing and generating income because the borrowers have defaulted on their loan obligations. Elevated non-performing assets can lead to financial instability for institutions, which can deter foreign investors and reduce investment, ultimately hindering economic growth.
Nevertheless, the increasing pace of technological advancement and innovative financial solutions like Smart Lending, has made the dream of zero NPAs in India's lending ecosystem look more achievable.
Understanding Non-Performing Assets: The Fundamental Problem
Before discussing Smart infrastructure, it's essential to fully comprehend what NPAs are and their relevance. An NPA (Non-Performing Asset) refers to a loan or advance where the principal or interest payment has been overdue for 90 days or more. High NPA ratios are a signal of stressed or defaulted lending portfolios, indicating a failure of the credit appraisal process, poor monitoring, and systemic fraud.
Common causes of Non-Performing Assets include:
- Poor credit assessment/risk profiling
- Willful defaults/fraud from the borrower
- External economic shocks (i.e. COVID-19, global recession)
- Political interference in credit disbursal
- Lack of borrower education/financial literacy
- Manual or outdated underwriting processes
According to the Reserve Bank of India, as of FY2023, the gross NPA ratio for the Indian banking system was 3.9%, which is relatively low historically; however, we have an ongoing issue that can be managed through intelligence and improved recovery systems.
What is Smart Lending Infrastructure?
Smart lending infrastructure is the combined suite of digital tools, platforms, processes, and regulatory structures that allows lending decisions to be intelligent, data-based, and automated. Smart lending utilizes technologies- such as AI and dynamic insight via data analytics that enhance credit assessment, provide indicators of potential default, and streamline loan origination timelines and accuracy.
A smart lending infrastructure may include:
- Digital loan origination platforms
- credit scoring model based on AI
- E-KYC and video verification
- Integrated credit bureaus and their alternate data sources
- Automated underwriting
- Blockchain and digital loan contracts
- Early Warning Systems (EWS) for defaults
These elements work together to help lenders make accurate assessments of borrower credibility, reduce turnaround times, and manage risks; all aimed at decreasing non-performing assets (NPAs). Smart lending enables banks to extend credit confidently while actively mitigating credit risk through continuous monitoring and reduction of NPAs.
Importance of Ecosystem Players in Smart Lending
The success of smart lending is directly tied to a collaborative ecosystem, fueled by FinTechs, regulators, banks, non-banking financial companies (NBFCs), credit bureaus, and the government. FinTechs are at the forefront of innovation, utilising technology and innovative approaches, such as alternative credit scoring and digital underwriting, to increase access to credit, particularly for underbanked customers. Regulators, such as the Reserve Bank of India (RBI), play a vital role in ensuring that technology is secure and compliant by implementing e-KYC, supporting the Account Aggregator framework, and facilitating open banking.
Banks and NBFCs are actively reshaping their operations through partnership models with finTechs for co-lending, API integration and sheer investment in digital transformation. Credit bureaus are also supporting the ecosystem with dynamic scoring models and analytics capability, while Account Aggregators execute secure data sharing through the digital empowerment of citizens and consumers in accordance with the consent-based frameworks. Together, these developments will enable lenders to make better, more informed, real-time lending assessments before making lending decisions.
Government initiatives such as the Digital India (DI) Stack, consisting of Aadhaar, e-KYC, UPI, Digi Locker, OCEN, in addition to support from SIDBI, Mudra, and legal frameworks such as the Insolvency and Bankruptcy Code (IBC) and SARFAESI Act (SARFAESI), are important foundations of the ecosystem.
It is noteworthy to mention that the regulator has also encouraged collaborative regulation between friendly departments, such as MeitY, DFS, and the RBI, to forecast an eventual, responsible growth pathway, free from systemic risk.
These ecosystem players have together contributed to the establishment of a scalable, inclusive and tech-driven lending ecosystem in India.
How Smart Lending Infrastructure Reduces Non-Performing Assets?
1. AI-Driven Credit Risk Assessment
Conventional credit scoring systems were generally built on static, historical measures, such as income statements, bank balances, and repayment histories. We have now, however, seen artificial intelligence (AI) changes the credit risk landscape by utilising alternative and dynamic data sources such as utility bill payments, e-commerce behaviour, GST filings, and psychometric data. Together, these factors act as stars on a 360-degree map, allowing lenders to gain a much better assessment of borrower's risk.
It also makes it easy to limit false positives, reducing the chance of lending to a high-risk or ineligible borrower, and better identifying conditions of financial distress through behavioural indicators. Consequently, the amount of outreach in lending can be magnified without an increase in risk exposure. With the growth of FinTech platforms that can analyze over 1000+ data points in real time using AI, lenders can lend more intelligently and safely to MSMEs.
2. Digital KYC and Fraud Prevention
It includes Aadhaar-based verification (a digital identity system) and video onboarding, which has steadily reduced identity fraud, a significant cause of willful loan default. Lenders can verify borrower identity with a high degree of certainty when they rely on national identity systems and can be confident that the borrower has no duplicate applications or is not otherwise committing fraud. Concepts, such as biometrics, real-time validation, and time-lapse information from another Know Your Customer (KYC) step, enhance lending integrity. Furthermore, machine learning algorithms can detect historical patterns to identify potentially fraudulent behaviour, allowing lenders to identify risky borrowers better.
3. Automated Underwriting and Loan Processing
Subjectivity, inconsistency, and inefficiency are often the inherent defects of manual underwriting processes. Automated Decision Engines (ADEs) provide standardised, data-driven lending decisions that improve accuracy and vastly accelerate turnaround times. Additionally, these systems are equipped with automated document verification, digital signatures, contract generation, and eligibility checks that utilise business rules. The outcome is stricter loan approval, which reduces human error and minimises opportunities for fraud. Quicker disbursal also tightens control over credit exposure, giving lenders a competitive advantage when managing risk.
4. Real-Time Monitoring and Early Warning Systems
Following disbursement, the use of dashboards and real-time analytics enables the lender to monitor loan performance and manage the loan portfolio automatically. The use of Early Warning Systems (EWS) is especially beneficial, as they help lenders continuously monitor indicators (such as missed EMI payments, changes in GST filing, reduced cash flow, and deviations in business plan metrics) for unusually long periods.
EWS generally warns lenders before a loan becomes a non-performing asset (NPA), allowing lenders sufficient time to take remedial measures, such as initiating recuperation, loan restructuring, or recommending credit counselling. PwC India reported that lenders using AI-powered EWS experienced 30% less NPA slippage compared to lenders relying on manual monitoring.
5. Open Credit Enablement Network (OCEN) and Account Aggregators (AA)
The fintech infrastructure in India is transforming credit delivery with frameworks like OCEN and Account Aggregators .OCEN is an enabling open protocol that allows lenders to deliver small amounts of capital to small targeted, needy borrowers through third-party platforms. Account Aggregators enable borrowers to digitally and securely share their financial data (such as bank statements and tax returns) with lenders.
A potential impact on non-performing asset (NPA) reduction is as follows. First, borrowers can be better identified, enabling financial inclusion for micro, small, and medium-sized enterprises (MSMEs) or informal segments. Also, underwriting can be done in a timely manner using verified, consent-driven data. Finally, the ultimate goal is to provide borrowers with an accurate risk profile that reduces the likelihood of default.
6. Blockchain for Secure, Tamper-Proof Lending Records
New lending platforms are exploring the use of blockchain technology to enhance the transparency, traceability, and auditability of loan contracts. There are many potential benefits, including smart contracts enabling automated repayments and compliance. In addition, there will be no document alteration, and forged collateral will be minimised. Additionally, it will reduce legal disputes and enhance the recovery process.
Although these are still in the early stages, blockchain-based lending will lead to a significant change in how we prevent non-performing assets (NPAs), especially for higher-value loans and association lending.
7. Data-Driven Collection Strategies
Following the disbursement of loan proceeds, technology is revolutionizing the collection phase to make repayments more manageable and efficient. By employing AI, automated collection strategies now incorporate reminders via SMS, WhatsApp, and email, enhancing the overall efficiency of the process. Borrowers can also utilise chatbots to help them schedule repayments and complete payments.
Lenders are increasingly employing dynamic risk-based prioritisation to manage their collection portfolios, targeting the most at-risk accounts for collections. Integrated digital payments also make EMIs quick and seamless. Technology-based, tailored collection strategies are increasing recovery rates and enhancing the borrower experience, both of which are crucial for sustaining performing loan books.
Key Recommendations in RBI Digital Lending Directions 2025:
The RBI’s Digital Lending Directions 2025 introduce comprehensive reforms to ensure responsible lending, reduce non-performing assets (NPAs), and enhance borrower protection. A notable highlight of the new measures is the introduction of a cooling-off period for borrowers, accompanied by penalties for uncommitted withdrawals from loans, which should help control impulsive borrowing.
Further, all multi-lender sites will now be required to clearly present all options transparently and honestly combined for lenders, which should enhance borrower's agency.
The new regulations will establish commensurate definitions and due diligence requirements for Lending Service Providers (LSPs), ensuring that regulated entities remain responsible for their LSPs through audits and functional delineation. New DLA registration for the RBI and the use of CIMS increase regulatory confidence, event-based penalty charge disclosure, and a ban on automatic increases of credit limits reduces unlimited liability and the opportunity for borrowers to incur a surprise expense.
The data localisation standards and ethical cash recovery practices ensure borrower privacy and fair treatment practices for borrowers' suits. The regulatory oversight on grievances and increased accountability further builds trust. Ultimately, all these steps should collectively cultivate a more transparent, borrower-first, and risk-mitigated digital lending ecosystem.
Conclusion
Reducing non-performing assets (NPAs) is a challenge with many variables to consider, but smart lending infrastructure provides a proactive, scalable, and sustainable solution. With the right technology, data, and intelligent workflows in place, financial institutions can underwrite more effectively, monitor more efficiently, and recover more quickly.
As banks and lenders adopt innovations, the outlook for emerging economies like India is encouraging, not just in terms of growth but also resiliency. By enhancing financial inclusion, elevating borrower responsibility, and introducing defined lender monitoring conditions, the strategy mitigates NPAs and promotes economically sustainable growth and resilience in the financial system through technology.