1.3 Lending Service Provider (LSP) model

The Lending Service Provider (LSP) model is the cleanest way to run a lending business without holding an NBFC licence yourself. Under the RBI Guidelines on Digital Lending (DOR.CRE.REC.66/21.07.001/2022-23, 2 September 2022), an LSP is “an agent of a Regulated Entity (RE) who carries out one or more of the lender’s functions or part thereof in customer acquisition, underwriting support, pricing support, servicing, monitoring, recovery of specific loan or loan portfolio on behalf of REs in conformity with extant outsourcing guidelines.”

In practice this means: you can do almost everything a lender does, but the loan is on the RE’s (NBFC’s or bank’s) books.

Money flow

1. LSP runs origination, KYC, application, underwriting support, sometimes credit decisioning support.
2. LSP submits the file to the partner RE (bank / NBFC).
3. RE makes the final credit decision and books the loan on its own balance sheet.
4. RE disburses to borrower (directly, or via a payout API the LSP triggers but the funds flow from RE’s account).
5. Borrower repays into an RE-owned collection account (or a designated escrow).
6. LSP services the loan (reminders, collections, customer support) and gets paid a fee from the RE.

The LSP never touches borrower money in its own name for the purpose of lending. Borrower funds flow only between borrower and RE — this is a hard rule under the Digital Lending Guidelines.

Risk owner

The RE owns all credit risk. The LSP can layer a Default Loss Guarantee (DLG) up to 5% of the portfolio under the DLG Guidelines (DOR.CRE.REC.21/21.07.001/2023-24, 8 June 2023) — making the LSP economically a partial risk taker even without holding a licence. DLG conversion of LSP economics is what makes the LSP model attractive to capital partners.

Borrower relationship

The borrower contracts with the RE. The KFS, loan agreement, and grievance disclosures must clearly name the RE as the lender. The LSP is named as the LSP. The borrower must have a clear grievance route to the RE.

The LSP may run the customer-facing app or website, but the LSP cannot represent itself as the lender.

Underwriting owner

The RE owns the final credit decision. The LSP can do:

• Data collection (KYC, bank statement, GST, bureau, AA)
• Scoring and recommendation
• Pre-screening / eligibility

…but the sanction itself must originate from a system / decision controlled by the RE. In practice, this is implemented either as:

• LSP runs RE’s policy as a service — the policy rules are owned by the RE and configured into the LSP’s rule engine. RE auditors verify the implementation.
• LSP recommends, RE approves — every file (or every batch) goes to a queue the RE’s credit team works.

Collections owner

LSP typically runs collections operationally, on behalf of the RE, under the RE’s recovery-agent rules and the RBI Fair Practices Code. Field agents, tele-callers, and recovery agents must be governed under the RE’s outsourcing framework, with call recording and compliance audits.

Loan booking and repayments

• Loan sits on RE’s books.
• Repayments flow to RE’s account, often via virtual accounts the LSP allocates per borrower.
• LSP gets a daily / weekly settlement file from RE for fee accounting.

Fees

• Origination fee from RE per disbursed file — 0.5% – 2.0% of sanction.
• Servicing fee from RE per annum on outstanding — 0.5% – 1.5%.
• Collection fee sometimes separately — ~5% – 10% of collections recovered from delinquent buckets.
• DLG premium — if LSP provides DLG, RE pays an explicit DLG fee on top, or it is netted into pricing.
• Tech / SaaS fee for the platform itself, if the LSP also exposes its origination stack to the RE — ₹X per disbursal or ₹Y per active loan per month.

Regulatory risks

• Digital Lending Guidelines apply in full to the LSP — KFS, APR disclosure, cooling-off period, no automatic credit limit increase without consent, borrower consent for data, grievance, etc.
• Outsourcing rules apply to the RE — RE must perform due diligence on the LSP, write a comprehensive outsourcing agreement, have right to audit, board-approved outsourcing policy. RBI Master Direction on Outsourcing of IT Services, 10 April 2023, and Outsourcing of Financial Services (earlier circular set).
• First-loss obligations cap — DLG is capped at 5% per portfolio, structured as a contractual guarantee, with specific format and disclosure obligations per the DLG Guidelines.
• LSP can’t lend in its own name — any direct flow of funds borrower-to-LSP-to-borrower (other than collections pass-through under explicit agreement) is a Digital Lending Guidelines breach.
• Misclassification risk — if the LSP is “the real lender” in economic substance (takes all risk, controls all decisions), the RBI can re-characterise the arrangement and the RE+LSP both face action.

Technology modules needed

The LSP usually builds everything except the loan ledger and disbursement-rail ownership. Specifically:

• Modules A, B, C, D, E, F, H, K (origination, KYC, application, ingestion, underwriting, manual UW, docs, collections).
• Module I (disbursement) is integration with RE’s payout rather than owning the rail.
• Module J (LMS) is sometimes built by the LSP and exposed back to the RE (then the LSP is also a SaaS LMS provider — see Whitelabel and SaaS).
• Module N (reporting) — LSP produces reporting feeds for the RE’s compliance and CKYC / bureau / RBI uploads.

Integrations needed

Same as own-book NBFC, plus specifically:

• API / SFTP exchange with RE for daily loan transmission, daily collection MIS, daily settlement file.
• RE’s payout API or a payment gateway / payout rail mapped to RE’s bank account.
• Shared / RE-owned escrow account for borrower collections.

Unit economics

Take-rate model. Per disbursed ₹1 lakh of book at 90 days:

Line	Per loan
Origination fee from RE	₹1,000 – ₹2,000
Servicing fee (annualised over 90 days)	₹125 – ₹375
Tech/SaaS fee per disbursal	₹100 – ₹500
DLG premium (if applicable)	₹200 – ₹800
Gross revenue per loan	₹1,400 – ₹3,700
Bureau / API cost	₹250 – ₹500
eSign / eStamp	₹50 – ₹150
Field / collection cost (if delinquent)	variable
Net per loan in steady state	₹600 – ₹2,000

LSP economics are fee-margin, not yield-margin. They scale with volume rather than book. To make ₹10 Cr of net revenue per year, an LSP needs ~50,000 – 150,000 disbursals per year, which is ~₹500 Cr – ₹1,500 Cr of disbursements (depending on ticket size).

Pros

• No NBFC licence required — far simpler regulatory perimeter, less capital, faster launch.
• Capital-light scaling — revenue grows with volume, not with own balance sheet.
• Multi-RE optionality — can plug into multiple partner REs over time.
• Strong SaaS optionality — same stack can be productised for other LSPs / smaller NBFCs.

Cons

• Bound to RE’s policy and pace — slow partners block growth.
• No interest spread — fees only, so unit economics per loan are lower than balance-sheet lending.
• Compliance burden almost equal to RE’s — Digital Lending Guidelines treat LSP as a near-equal compliance bearer.
• DLG is the only risk lever, and is capped at 5%.
• Switching costs — losing the partner RE means losing the book.

Scalability

High in disbursal volume; bounded by how many REs you can integrate and how aggressive their growth plans are.

Fit for SME working-capital ₹20–50 lakh, 60–180 days, repeat borrowers

Good fit, especially as a complement to own-book. The recommended approach: hold an NBFC licence (or apply for one), run own-book + co-lending as the core, and layer an LSP arrangement with one or two additional banks where they want to use your origination stack but not your balance sheet. This gives you three revenue lines (interest on own book, co-lending fees, LSP fees) on the same operating cost base.

Sources

• RBI Guidelines on Digital Lending, DOR.CRE.REC.66/21.07.001/2022-23, 2 September 2022.
• RBI Guidelines on Default Loss Guarantee in Digital Lending, DOR.CRE.REC.21/21.07.001/2023-24, 8 June 2023.
• RBI Master Direction on Outsourcing of Information Technology Services, 10 April 2023.
• RBI Digital Lending FAQs (updated periodically on rbi.org.in).