The Future of Lending Is Contextual: Building Embedded Credit Journeys for India’s Merchants

Priya runs a small textile business in Surat, Gujarat. Her orders spike during wedding seasons, but traditional banks require weeks for loan approvals— time she simply doesn't have when customers demand immediate delivery. Like millions of Indian entrepreneurs, Priya's growth aspirations are perpetually caught between market opportunities and credit accessibility. Her story represents the question facing India's economy: how do we unlock capital for the 63 million MSMEs that drive innovation, employment, and economic growth?

The answer lies in reimagining credit itself— moving from static, standalone products to contextual, embedded financial solutions that understand and adapt to business realities. This transformation represents more than technological evolution; it's about creating an ecosystem where credit becomes as intuitive and immediate as making a digital payment.

For India's vast MSME ecosystem, which contributes 30% to the nation's GDP and employs over 110 million people, this shift promises to democratize access to growth capital in ways previously unimaginable. The fintech industry has begun to recognize that the future of merchant lending lies not in replicating traditional banking models, but in building intelligent systems that integrate seamlessly into the daily workflows of business owners.

The MSME credit gap

India's MSME sector faces a staggering credit gap estimated between ₹20-30 lakh crore, with credit penetration standing at merely 14%—significantly lower than China's 37% and the US's 50%. This disparity isn't just a statistic; it represents millions of entrepreneurs whose growth potential remains constrained by systemic barriers in traditional lending the formal credit ecosystem. These structural impediments have pushed MSMEs toward informal credit channels, where borrowing costs are high, significantly impacting business sustainability and growth prospects.

To unlock their true potential, MSMEs need access to credit that is timely, flexible and tailored to their operational realities. This is where embedded and contextual credit journeys become game-changers.

Context is the new credit bureau

One of the most powerful developments in the fintech ecosystem has been the rise of alternative data and real-time digital signals. Lenders can now assess MSMEs using platform behavior, payment patterns, GST filings, UPI transactions and trade receivables moving beyond traditional credit scores. This shift enables more inclusive credit assessments, especially for businesses with little to no formal borrowing history. 

The merchant’s contextual footprint: sales trends, seasonality, stock levels, customer inflows can all feed into dynamic underwriting models that assess not just ability to repay, but also intent and consistency.

From static applications to dynamic journeys

Credit is no longer something MSMEs must apply for separately. It is being built directly into the platforms they already use like payment gateways, POS systems, QR-code apps, e-commerce dashboards and supply chain tools. Whether it’s working capital, invoice financing or micro-loans, the lending journey is becoming an invisible layer within the digital tools merchants rely on every day.

For instance, a retail shop running low on inventory can receive a loan offer embedded directly within their supplier ordering platform. A seasonal business can access top-up financing triggered by a sales surge. These “in-the-moment” credit touchpoints significantly improve access and relevance.

Meeting merchants where they are

Embedded lending redefines convenience not just by offering capital quickly, but by doing so at the right time and in the right context. This includes integrating credit access into real-time workflows like billing, invoicing, vendor payments and collections. Importantly, it also means that the loan experience right from application, approval, disbursal, to repayment happens entirely within the familiar interfaces MSMEs already use.

This low-friction approach eliminates documentation-heavy onboarding and enables small businesses to focus on operations rather than financial paperwork.

Flexibility is the foundation

Traditional EMIs don’t work for many MSMEs, whose cashflows are inherently volatile. Embedded credit journeys are now being paired with innovative repayment constructs that mirror these cashflow realities. One standout model is Equated Daily Instalments (EDI), where repayments are collected in small daily amounts instead of bulky monthly payments.

This approach offers multiple benefits:

• Smoother cash flow management as merchants don’t need to set aside lump sums at month-end

• Lower interest burden due to faster and consistent repayments

• Reduced default risk for lenders, thanks to more predictable and frequent recovery cycles

Such micro-repayment models build financial discipline while minimizing borrower stress.

The embedded credit ecosystem is taking shape

India is witnessing the emergence of a collaborative credit ecosystem, where fintechs, NBFCs, QR platforms, e-commerce giants and regulatory enablers are working together to plug the MSME credit gap. Initiatives like Account Aggregators, TReDS, MUDRA and evolving Priority Sector Lending (PSL) norms are strengthening the infrastructure for inclusive lending.

Crucially, technology and partnerships are allowing credit to be distributed at scale, with precision and without compromising on risk management. The future lies in platforms that blend digital behavior, real-time analytics and intelligent integrations to build seamless, embedded financial journeys.

By Deepak Mendiratta - Chief Executive Officer, PayU Finance