Funding halves for digital lending startups

Funding for lending startups has halved this year as investors pull back on valuations and become more selective on capital deployment, even as digital credit demand continues to grow sharply. Venture capitalists say the funding slowdown reflects a correction in pricing and structure rather than weakening fundamentals in the lending business.

Data from Venture Intelligence shows investments into lending startups fell to about $752 million so far this year from $1.53 billion in 2024. Deal volumes also declined to 53 from 69 in the previous year. Despite the drop, lending remained the largest contributor to fintech deal activity, accounting for 40% of the 134 fintech deals recorded this year.

Ironic timing of the funding cut

The moderation in funding comes at a time when loan growth remains robust. Data from the Fintech Association for Consumer Empowerment (FACE) shows digital lenders sanctioned 64 million personal loans worth Rs 97,381 crore in the first half of FY26. This marks a 10% rise in volumes and a 25% increase in value compared with the same period last year. The growth in value was driven by a 14% increase in average ticket sizes to Rs 15,177.

Portfolio quality has also improved alongside growth. Loans overdue by more than 90 days declined to 2.1% in the September quarter, from 3.3% in March 2023. This suggests improving underwriting and collections, even as lenders expand into younger borrowers and more underserved segments.

“Lending still attracts lots of deals because the problem is real and the business models are well understood, but investors are being far more selective about valuation, loss curves, and funding structure than they were a year ago,” Sandeep Patil, partner at QED Investors, told Fe.

What did Sandeep Patil say?

According to Patil, part of the apparent funding slowdown is also due to a shift in how stronger lenders are financing growth. He said several mature digital lenders are increasingly tapping structured debt and partnerships instead of raising large venture equity rounds. This reduces the headline venture funding numbers without reflecting the underlying growth in lending activity. “Hence, the slowdown is not a sign of fatigue but of disciplined repricing,” he said.

The pressure on funding is most visible at later stages, where valuations are being reassessed and exits remain limited. Early-stage lending startups, however, continue to attract capital from investors betting on the long-term expansion of the credit market.

While credit has become a widely available product, it continues to grow steadily, Sagar Agarwal, founder and managing partner at Beams Fintech Fund, said. “Over the last 20 years, total lending has grown about 13% every year. That means strong lenders can grow 18-20% annually, and the best ones can grow around 25%,” he said, adding that credit remains a long-term compounding business.

“Lending will consistently attract the most amount of capital, no matter what the cycle,” Agarwal said. Beams has invested in fintech companies such as InsuranceDekho, Credgenics, Niyo and Infinity Fincorp.

The sector is also in a holding pattern ahead of potential public market listings. Digital lenders such as Kisst and Aye Finance are preparing for initial public offerings, which could provide liquidity and reset valuation benchmarks. Agarwal said the current funding dip is cyclical, with capital rotating into other fintech segments such as payments and wealthtech, even as lending remains central to India’s fintech growth story.