Let ‘digital collateral’ for loans drive credit inclusion

India's economy grew at a faster-than-expected 8.2% in the last quarter, driven by manufacturing and services as well as a recovery in private consumption.

- VIVAN SHARAN & SAMIRA ABRAHAM

The recent GST rationalization has helped boost consumption, but Index of Industrial Production data for the past six months points to weak rural consumer spending. Moreover, that growth was largely driven by capital-intensive and higher-skill sectors. As finance minister Nirmala Sitharaman prepares the next Union budget, her mandate is clear: the government must continue to stimulate demand without fiscal consolidation going awry.

Liquidity in the hands of people and enterprises that need it most is the missing piece that could help sustain our growth momentum. Technology has a prominent role to play here, not just in data analytics for credit assessments, but also in nudging loan repayments.

India's credit gap in the micro, small and medium enterprise (MSME) sector remains vast, estimated at ₹25 trillion, as does the challenge of providing affordable credit to households at the bottom of the income pyramid. Bank credit growth has been slowing: it fell to around 11% in 2024-25 over the previous year, compared with over 20% in 2023-24; this slowdown was compounded by reported challenges in the recovery of unsecured loans.

The next budget should thus focus on building momentum in the small-ticket loan segment. Large companies will invest when business sentiment turns positive. But small-value loans fuel everyday consumption, allow MSMEs to invest in productive assets and keep the economic engine warm. Microfinance can help at the margins, but not at the scale needed to stimulate demand.