India’s instant loan boom spawns a new breed of micro-settlement platforms

Kundan Shahi first built LegalPay, a startup that finances litigation, in late 2019, before stumbling upon a different kind of distress: consumer debt. As unsecured personal loans and ‘buy now, pay later’ credit spread, he began noticing a new kind of client in 2021—borrowers with loans stacked across multiple lenders, slipping into delinquency after covid-era job losses. The borrowers found themselves buried in legal notices from lenders.

“India’s credit boom also began creating a repayment crisis, and that’s when I realized the potential to build a platform that is primarily designed to support borrowers,” Shahi said.

That early exposure prompted LegalPay to explore debt-settlement services for some clients and eventually led to a separate, borrower-focused fintech, Zavo, which launched in November 2024. The platform digitally connects delinquent borrowers and fintechs for settlement for a commission.

Zavo is one of the startups that saw an opportunity in debt management platforms. Fintech lenders’ active-loan portfolios rose 25.6% year-on-year to ₹2.1 trillion by June 2025, Mint reported in October. Deep stress worsened simultaneously: loans more than 180 days past due (DPD) rose to 8.6% of the portfolio from 7.1%, while early-stage delinquencies (31 and 90 days past due) remained elevated.

‘Pressure, stigma, harassment’

“The pressure, and the social stigma, and the harassment from collection agencies meant these delinquent borrowers had no avenues or platform to represent them,” said Ritesh Srivastava, who founded debt-relief startup Freed in 2020 after seeing a market opening up amid rising stress in unsecured credit.

Srivastava claimed Freed is “settling almost ₹30-40 crore a month” in debt across fintech lenders, non-banking financial companies (NBFCs), and public and private banks.

To be sure, the Reserve Bank of India’s (RBI’s) crackdown has forced lenders to tighten underwriting and rein in the aggressive use of first-loss default guarantees (FLDGs). Under these structures, fintechs agreed to absorb a slice of potential credit losses to help an NBFC scale up lending. The regulator capped the guarantee at 5% of the loan amount in 2023.

Yet, risk has remained stubborn in sub- ₹10,000 personal loans from fintechs as dues past 31–90 days stayed at 4.1%, those outstanding for 91–180 days were at 4.8% as of June 2025. These delinquency levels are higher for similar loans extended by other NBFCs at 1.7% (31–90 DPD) and 1.8% (91–180 DPD), respectively.

Debt repayment infrastructure is emerging for small-ticket borrowing because of the explosion of such loans. According to a Fintech Association for Consumer Empowerment (FACE) report, based on analysis of 71 fintech NBFCs (CRIF High Mark bureau data), personal credit through such lenders has grown from 0.44 crore loans in FY19 to 8.9 crore in FY24, and 8.3 crore in the April-December 2024 period of FY25.

Business model

Credit management platforms take a cut of the value they unlock, either as a percentage of the loan amount settled or a percentage of the interest saved.

At Freed’s typical settlement rate of about 45%, a borrower with ₹1 lakh outstanding would usually settle for roughly ₹45,000, saving about ₹55,000 versus the face value of dues, Srivastava said. He said lenders accept such haircuts because “collection efficiency on NPA loans is barely 15%” and pay collection agencies “10–15% of what they collect”, leaving them with about 10% net in many cases.

Freed, he said, does not take any money from lenders and instead charges borrowers a 12–15% success fee as each account gets resolved. At a 45% settlement rate, that works out to roughly ₹5,400– ₹6,750 per ₹1 lakh outstanding if the fee is applied on the settlement payout.

Zavo takes a small cut from lenders for every rupee recovered. Its pitch to lenders is that traditional collection agencies charge 10-15% of recoveries (with high failure rates), while the platform delivers faster cash through partial EMIs and bidding-based settlements at a lower fee.

Two groups of stressed borrowers

Zavo claims it has processed repayments of about ₹500 crore on its platform in the past 9–10 months and is building a settlement layer for 90+ DPD borrowers.

Srivastava said Freed currently works with around 250 lenders and is adding “5 to 10 lenders” every month on the settlement side, while the platform’s enrolled debt is expected to hit ₹2,200 crore in FY26 and increase to almost ₹,7,500 crores in FY27.

BillCut, which began as a refinancing and rate-optimization platform, said it has refinanced and helped settle roughly ₹1,000 crore in gross loans for consumers stuck in debt.

The debt-management platforms are effectively seeing two borrower cohorts: people who are still “current” but overleveraged, and those already sliding into (or past) delinquency.

The first bucket comprises borrowers who may still have decent bureau scores but are running on thin cash flow, often paying 50–60% (or more) of their take-home income towards equated monthly instalments (EMIs). Tanish Sharma, chief executive of BillCut, says a key filter it looks at is the fixed obligations-to-income ratio (FOIR).

“If your income is 1 lakh rupees and you’re paying 50,000, 60,000 in EMIs, I understand you’re stressed… If BillCut can make it 30,000 for you by reducing your rate of interest and increasing the tenure, then borrowers are quite happy,” said Sharma.

Freed’s Srivastava describes a similarly solvent but super overleveraged cohort of borrowers with debt-to-income ratios of 80 to 85, who are one bad news away from going into delinquency, and come in looking for consolidation that brings down EMIs by 30–40%.

The second bucket is closer to the edge. These are borrowers who have missed multiple dues, are facing collection pressure, and increasingly want an organized way to negotiate and close out multiple liabilities.

No human intervention

In practice, these settlements are not ad hoc compromises but structured negotiations with lenders, including banks, NBFCs, and fintech lenders. The platforms aggregate accounts, assess repayment capacity, and then follow a defined process to close liabilities.

Zavo’s Shahi, who is building a more marketplace-led approach, said the platform lets a delinquent borrower “directly negotiate with the lenders without any human intervention,” with lenders able to counter-offer digitally based on a “repayment intent score” that signals whether the borrower is likely to honour the proposed terms.

Freed’s core settlement user is already delinquent, and that typical outcome is a 55% haircut for the lender, implying an average settlement rate of about 45% versus the borrower’s enrolled outstanding, according to Srivastava.

Bhushan Patil, founder and partner at Multiply Ventures, which has invested in Freed, sees debt management as a significant opportunity.

“As India grows, leverage will grow, and with it the stress pool,” Patil said. “From our fund thesis’ perspective, it’s really a credit management story…if India has to go from about $4 trillion to $10 trillion, leverage will increase, and that increases the stress pool too.”

Patil, however, cautioned that the platforms must stay neutral and avoid encouraging more defaults. “Fintechs working on debt settlement and management must walk a tightrope between smart risk-taking and preventing a culture of easy defaults.”