Unsecured lending has always remained a double-edged sword for lenders as well as borrowers. Though it gives access to funds in a hurry without pledging any collateral, it involves massive risks for repayment defaults, frauds, and disputes. In India, where digital lending and fintech have been witnessing explosive growth over the past few years, these risks are compounded by the fast pace of innovation and absence of holistic regulatory controls in some sectors. But as the ecosystem evolves, financial institutions and alternative lenders alike are increasingly looking at escrow services as a strategic weapon to mitigate risk and establish trust. In 2025, escrow is no longer a support service; it is becoming a building block in revolutionizing the way unsecured loans are written, disbursed, and collected in India.

The Rise of Unsecured Lending in India

The Indian unsecured lending industry has seen exponential growth, especially in the personal loan, SME loan, and BNPL (Buy Now Pay Later) sectors. Unsecured loans experienced a CAGR of more than 25% from 2018 to 2023, as per a CRIF High Mark report. This growth has been contributed by digitization, simplified access to credit through apps and platforms, and the emergence of alternate models of lending.

Although this expansion has provided access to financial services for millions of Indians, it has also led to increased cases of fraud, data theft, and NPAs (non-performing assets). Numerous borrowers have defaulted as a result of economic duress, financial illiteracy, or loan proceeds abuse. Conventional techniques such as credit scoring and post-disbursal tracking have been found inadequate in resolving these issues.

Why the Traditional Lending Model Is Failing

In conventional unsecured lending, lenders advance money directly to the borrower or to their connected vendors. This straight-through flow provides an opening for the diversion and abuse of funds. Without collateral, the lender has few options if the borrower defaults. Judicial recovery mechanisms are typically protracted and costly.

In addition, most of the fintech lenders have thin margins and are not in a position to sustain high delinquency. The credit risk models that rely on past data and user profiling are not able to detect real-time risk factors. There is an urgent need for a stronger mechanism that protects the purpose for which funds are being utilized, minimizes default risks, and enhances transparency for all concerned parties.

Enter Escrow: The Game-Changer

Escrow is a money arrangement wherein a third-party person (the escrow agent) holds money and pays it out based on terms set out in advance by the parties to a transaction. In unsecured lending, escrow acts as a layer of trust that protects money from being spent on anything other than what it was intended for and under specified conditions.

Here is how it operates: Upon approval of an unsecured loan by a lender, the approved loan amount is initially deposited in an escrow account instead of being credited directly to the borrower. The borrower can disburse the money only after fulfilling certain conditions like providing authentic documents, attaining a milestone (for example, procurement of inventory or machinery), or furnishing vendor invoices. This stepped disbursal prevents misuse of funds and promotes accountability.

Major Advantages of Escrow in Unsecured Lending

• Regulated Disbursement: By sequencing the disbursement of funds against milestones or conditions, escrow makes sure that funds are utilized for the purpose they were intended for. This reduces fund diversion risk to the minimum.

• Prevention of Fraud: Escrow lessens the possibility of identity fraud, misrepresentation, and shell vendor transactions. Funds are disbursed only after confirmation.

• Greater Transparency: Both the lender and borrower can monitor disbursal status, promoting greater transparency and trust in the association.

• Dispute Settlement: In the event of a dispute over disbursal or fund use, the escrow agreement offers a well-defined resolution process.

• Better Credit Discipline: Borrowers will be more likely to respect repayment conditions when disbursement is made conditional, developing a culture of financial discipline.

Regulatory Alignment and Market Adoption

As the Reserve Bank of India (RBI) streamlines norms for digital lending and focuses on accountability and transparency, escrow well slots into the changing regulatory landscape. RBI's guidelines on digital lending, launched in 2022, lay emphasis on direct fund flow, documentation, and protecting borrower interest.

Large NBFCs, fintech lenders, and P2P lending platforms are increasingly adopting escrow within disbursal architecture. This trend can be seen distinctly in the SME lending sector where suppliers, manufacturers, and vendors need payment guarantee before they provide service or goods.

Also, government schemes such as Stand-Up India and Mudra Yojana stand to gain a lot by adopting escrow to guarantee that loans and subsidies reach the intended end-use.

Castler: Empowering the Future of Lending

Being India's top escrow infrastructure provider, Castler provides a safe, customizable, and RBI-compliant platform that helps lenders easily add escrow arrangements to their operations.

Castler's escrow-as-a-service solution facilitates integration with lending platforms via APIs, allowing real-time tracking of funds, automated disbursement, and KYC/AML verification. Their collaborations with top banks and financial institutions provide legal enforceability as well as strong governance.

The most important characteristics making Castler perfect for unsecured lending are:

• RBI-compliant digital escrow accounts.

• Real-time tracking of fund disbursement.

• Milestone-based fund release through automation.

• Smart contract integration for scalability.

• End-to-end audit trails to maintain regulatory transparency.

With the use of Castler's escrow solutions, lenders can not only secure their funds but also make borrowers more engaged, decrease NPAs, and scale their business with confidence.

Real-World Use Cases

• SME Lending: A fintech lending platform advances a small producer an INR 10 lakh working capital loan. Rather than transferring the money outright, the money flows through an escrow. The borrower posts vendor invoices, and Castler's system checks the details and makes payments directly to suppliers.

• Education Loans: An edtech company providing unsecured student loans employs escrow to directly pay tuition fees to the educational institution to avoid fund misuse by students.

• Personal Loans for Medical Use: A healthtech lender that provides medical loans establishes an escrow to directly pay the hospital upon confirmation of the surgery, avoiding unethical use of funds.

Conclusion

In a world where unsecured lending is expanding at a scorching rate, the danger can't be overlooked. Escrow services provide a contemporary, scalable answer that addresses the inherent weaknesses of the unsecured lending scheme. Through guaranteeing that cash would only be released on validated terms, escrow improves transparency, fosters trust, and fits exactly with regulatory desires.

Castler is at the leading edge of this shift, allowing lenders to transition from reactive risk management to proactive risk mitigation. For fintechs, NBFCs, and even traditional banks, escrow is not an option—it's a necessary layer of trust and security in 2025 and beyond.