Venture funding for digital lending startups has fallen by more than half year-on-year in the first eight months of 2025 as rising defaults and regulatory crackdowns on short-duration consumer credit weigh on the sector.
Funding into digital lending startups slumped to $462 million between January and August 2025 from $1.1 billion a year earlier, according to data from market intelligence platform Tracxn.
Only around 50 of the 154 fintech deals reported this year involved digital lenders, the data showed.
The digital lending sector comprises consumer lending startups like Fibe, Kissht and Kreditbee, credit marketplaces like BankBazaar, and business lending companies like Flexiloans and Indifi.
Navin Honagudi, founder and managing partner of Elev8 Venture Partners, which has backed buy now pay later (BNPL)-focused fintech startup Snapmint, said the slowdown stems from multiple factors including “the RBI tightening the norms around unsecured and digital lending.”
Also, most large startups in the space are becoming profitable. “So, the internal accruals are good enough to shore up their net worth and hence they don't need to raise additional equity money,” he noted.
Honagudi said there are “no new startups coming in this space.”
In 2023, the RBI had increased risk weightage on unsecured consumer lending and credit cards to 125%, which resulted in banks cutting back their exposure to fintech lenders.
Earlier, digital lending startups were valued like tech startups based on growth potential, user base, and revenue multiples, often giving them high valuations despite not being profitable. Now, investors are treating them more like traditional NBFCs, which means valuations are being calculated on conventional financial metrics such as net worth, Honagudi said.
Founder of a business lending startup said, “Most of the major deals in lending fintechs in recent times have been done by private equity funds. The focus has shifted towards profitability and asset quality rather than growth, hence the large-ticket sized fundraises are not reported these days.”
Public market forays
This shift is pushing fintechs like Kissht and Moneyview to explore the public market for better valuations. Kissht has filed its draft IPO papers with Sebi, while Aye Finance has received the stock market regulator’s nod for its proposed public listing in April 2025.
The sector has also seen consolidation. Consumer lending startup Axio was acquired by ecommerce major Amazon, while Temasek-owned Fullerton took full control of Lendingkart and changed the management as well.
“This (funding trend) needs to be seen over a one- to two-year cycle and not on a quarterly basis, because funding trends follow credit cycles,” said Anish Patil, vice president at venture capital firm Z47 (previously Matrix Partners India).
In FY24, digital lenders, buoyed by a surge in unsecured loans, reported strong profits and revenues. But rising defaults on collateral-free loans coupled with slowdown in new loans, resulted in most major fintechs posting muted performance.
Banks and large NBFCs – the traditional lending partners for digital lenders – also slowed down their exposure to the sector, making the space less attractive from a venture capital standpoint.
“VCs today are becoming more discerning in how they value fintechs, which is a healthy sign for the ecosystem. The sharper focus on unit economics, sustainability, customer quality, and cost discipline ensures that businesses built now will be stronger and more resilient,” said Manish Lunia, cofounder of Mumbai-based MSME-focused digital lending firm Flexiloans.
“In lending especially, credit quality and sound unit economics are at the core, and the fact that investors are spending more time on due diligence ultimately benefits both entrepreneurs and the market in the long run,” he added.
Flexiloans is one of the few fintech lenders that managed to raise around $79 million over two rounds between August 2024 and June 2025.
New avenues
Investors are shying away from “generic lending” firms and backing more specialised areas such as insurtech, fintech infrastructure, and regulatory technology.
“Specialised areas are where we are keen on investing, but not generic lending,” said Bhaskar Majumdar, founder and managing partner of Unicorn India Ventures.
Patil of Z47 said, “VCs are always looking for new categories. Right now, innovation is happening in verticals like voice bots, AI-enabled collections, and AI-software for regulatory compliance.”
The trend mirrors global patterns. In the past three years, investors have put $22 billion into lending fintechs in series A-D rounds, compared with $30 billion into financial infrastructure fintechs, according to a 2025 report by Boston Consulting Group.
Still, some investors remain optimistic that the current funding slowdown is only temporary. “Over the next 6-12 months, we will see a correction in the cycle, followed by acceleration and an increase in disbursals. I am optimistic about the outlook,” Patil said.
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Funding into digital lending startups slumped to $462 million between January and August 2025 from $1.1 billion a year earlier, according to data from market intelligence platform Tracxn.
Only around 50 of the 154 fintech deals reported this year involved digital lenders, the data showed.
The digital lending sector comprises consumer lending startups like Fibe, Kissht and Kreditbee, credit marketplaces like BankBazaar, and business lending companies like Flexiloans and Indifi.
Navin Honagudi, founder and managing partner of Elev8 Venture Partners, which has backed buy now pay later (BNPL)-focused fintech startup Snapmint, said the slowdown stems from multiple factors including “the RBI tightening the norms around unsecured and digital lending.”
Also, most large startups in the space are becoming profitable. “So, the internal accruals are good enough to shore up their net worth and hence they don't need to raise additional equity money,” he noted.
Honagudi said there are “no new startups coming in this space.”
In 2023, the RBI had increased risk weightage on unsecured consumer lending and credit cards to 125%, which resulted in banks cutting back their exposure to fintech lenders.
Earlier, digital lending startups were valued like tech startups based on growth potential, user base, and revenue multiples, often giving them high valuations despite not being profitable. Now, investors are treating them more like traditional NBFCs, which means valuations are being calculated on conventional financial metrics such as net worth, Honagudi said.
Founder of a business lending startup said, “Most of the major deals in lending fintechs in recent times have been done by private equity funds. The focus has shifted towards profitability and asset quality rather than growth, hence the large-ticket sized fundraises are not reported these days.”
Public market forays
This shift is pushing fintechs like Kissht and Moneyview to explore the public market for better valuations. Kissht has filed its draft IPO papers with Sebi, while Aye Finance has received the stock market regulator’s nod for its proposed public listing in April 2025.
The sector has also seen consolidation. Consumer lending startup Axio was acquired by ecommerce major Amazon, while Temasek-owned Fullerton took full control of Lendingkart and changed the management as well.
“This (funding trend) needs to be seen over a one- to two-year cycle and not on a quarterly basis, because funding trends follow credit cycles,” said Anish Patil, vice president at venture capital firm Z47 (previously Matrix Partners India).
In FY24, digital lenders, buoyed by a surge in unsecured loans, reported strong profits and revenues. But rising defaults on collateral-free loans coupled with slowdown in new loans, resulted in most major fintechs posting muted performance.
Banks and large NBFCs – the traditional lending partners for digital lenders – also slowed down their exposure to the sector, making the space less attractive from a venture capital standpoint.
“VCs today are becoming more discerning in how they value fintechs, which is a healthy sign for the ecosystem. The sharper focus on unit economics, sustainability, customer quality, and cost discipline ensures that businesses built now will be stronger and more resilient,” said Manish Lunia, cofounder of Mumbai-based MSME-focused digital lending firm Flexiloans.
“In lending especially, credit quality and sound unit economics are at the core, and the fact that investors are spending more time on due diligence ultimately benefits both entrepreneurs and the market in the long run,” he added.
Flexiloans is one of the few fintech lenders that managed to raise around $79 million over two rounds between August 2024 and June 2025.
New avenues
Investors are shying away from “generic lending” firms and backing more specialised areas such as insurtech, fintech infrastructure, and regulatory technology.
“Specialised areas are where we are keen on investing, but not generic lending,” said Bhaskar Majumdar, founder and managing partner of Unicorn India Ventures.
Patil of Z47 said, “VCs are always looking for new categories. Right now, innovation is happening in verticals like voice bots, AI-enabled collections, and AI-software for regulatory compliance.”
The trend mirrors global patterns. In the past three years, investors have put $22 billion into lending fintechs in series A-D rounds, compared with $30 billion into financial infrastructure fintechs, according to a 2025 report by Boston Consulting Group.
Still, some investors remain optimistic that the current funding slowdown is only temporary. “Over the next 6-12 months, we will see a correction in the cycle, followed by acceleration and an increase in disbursals. I am optimistic about the outlook,” Patil said.
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