As India's economy charts a robust growth path, a critical challenge persists: ensuring liquidity reaches the hands of people and enterprises that need it the most to sustain momentum. With bank credit growth slowing and a vast credit gap in the MSME sector, experts are proposing a novel, technology-driven solution: using 'digital collateral' to secure small-ticket loans and improve repayment rates.
The Credit Conundrum: Growth Amidst Gaps
India's economy surprised many by growing at 8.2% in the last quarter, fueled by manufacturing, services, and a revival in private consumption. However, this growth has not been evenly distributed. Data from the Index of Industrial Production points to weak rural consumer spending, and the expansion has been largely driven by capital-intensive, high-skill sectors.
The finance ministry, preparing for the next Union budget, faces the dual mandate of stimulating demand while maintaining fiscal discipline. A key piece of this puzzle is addressing the massive credit gap in the MSME sector, estimated at a staggering ₹25 trillion. Compounding this issue is the slowdown in bank credit growth, which fell to around 11% in 2024-25 from over 20% the previous year, partly due to challenges in recovering unsecured loans.
NBFCs, Technology, and the Small-Ticket Loan Backbone
Non-banking financial companies (NBFCs), including fintech lenders, have emerged as the backbone for small-value personal loans. According to the RBI's 2025 Financial Stability Report, they account for more than 84% of personal loans below ₹50,000. These loans are vital as they fuel everyday consumption and enable MSMEs to invest in productive assets.
While technology, especially AI, has already revolutionized credit underwriting by using alternative data from GST filings and smartphone usage, a more potent intervention is now on the table. Instead of throttling credit to mitigate risk, policy experts Vivan Sharan and Samira Abraham suggest promoting 'digitally secured' loans to improve outcomes.
How Digital Collateral Works: The Phone-Locking Model
The concept is straightforward yet powerful. For loans where a smartphone is integral to the borrower's livelihood or daily life, lenders could partner with device makers to temporarily limit access to non-essential features if payments are missed repeatedly. This remote locking mechanism turns the device into 'digital collateral.'
The logic is not new—borrowers repay when something they value is at stake—but it's updated for a software-defined world. Smartphones, now essential for work and education, are perfect candidates. Similar systems have operated in countries like South Africa and Brazil, and were briefly seen in India post-COVID until the RBI intervened.
Field experiments in Uganda showed promising results: digitally secured loans had repayment rates roughly 11 percentage points higher than comparable unsecured loans. This approach not only sharpens repayment incentives but also helps screen out borrowers unwilling to accept such terms, potentially lowering overall risk.
Navigating Concerns and Designing a Pragmatic Framework
Critics argue that such mechanisms could weaponize access to essential technology. However, proponents state these concerns are surmountable with a thoughtful, regulated framework. Key safeguards must be non-negotiable:
- Informed consumer consent before loan approval.
- Ample notice periods before any access restriction.
- Preservation of essential functions (e.g., emergency calls).
- Quick reversal of locks once dues are cleared or restructured.
The principle is already accepted in other essential services; electricity disconnections for non-payment are common. A digital collateral system could be designed to be far less abrupt and more transparent.
As more assets—from cars and refrigerators to IoT appliances—become software-dependent, the use cases for digital collateral will expand. For a tech-driven India looking to bridge its vast credit gap, enabling such innovative, tested tools could be a strategic step towards inclusive financial growth.
