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.

Non-bank financial companies (NBFCs), including housing and fintech lenders, are the backbone of the small-value segment. According to the Reserve Bank of India's (RBI) 2025 Financial Stability Report, they account for more than 84% of personal loans below ₹50,000. RBI deputy governor M. Rajeshwar Rao recently acknowledged their crucial role in furthering financial inclusion, even though the central bank is worried about unsecured loans and delinquencies.

Throttling credit is not a way to resolve the tension between risk mitigation and financial inclusion; instead, let's encourage the use of technology to secure small-value loans.

Much has already been written about technology's role in transforming credit underwriting. With richer data-sets such as GST filings and alternative indicators derived from smartphone usage, AI tools can meaningfully assess borrowers once dismissed as unworthy. Young workers, gig economy participants, migrants and informal-sector entrepreneurs all benefit from this shift.

So far, India's regulatory stance on AI in fintech has been pragmatic. India has not mimicked Europe's restrictive attitude; RBI's committee on responsible and ethical enablement of AI suggests market-friendly approaches.

But a potent technological intervention lies waiting, one that can help us re-imagine collateral for a software-defined world. We could promote 'digitally secured' loans to improve credit outcomes; certain functionalities of a digital device or asset could be temporarily barred in the event of non-repayment. The logic is not novel: borrowers have a strong incentive to repay loans when their access to an asset they value depends on it. But 'digital collateral' updates this rationale to today's times.

Smartphones, now essential for work and education, best demonstrate the potential of digital collateral. NBFCs can work with smartphone brands to temporarily limit non-essential features through remote locking or feature denial if borrowers miss payments repeatedly. Such systems already operate in countries like South Africa and Brazil, and this was also the case in India post-covid until RBI clamped down on the practice.

Digital collateral sharpens incentives for repayment and screens out high-risk borrowers who are less willing to accept such credit conditionalities. Field experiments in Uganda demonstrate possible gains: digitally secured loans showed repayment rates roughly 11 percentage points higher than comparable unsecured loans.

Critics may argue that such mechanisms weaponize access to technology by tying essential services to repayment behaviour. Such concerns are neither new nor insurmountable.

The promotion of any financial inclusion technology should follow a pragmatic and gradual approach. Basics like informed consumer consent, ample notice periods for access bars, the preservation of essential functions and quick reversals once dues are cleared or restructured are non-negotiable.

The principle has been used in other sectors. Essential services such as electricity supply are routinely suspended for non-payment, often more abruptly and with worse effects than anything envisioned under a digital collateral framework. A thoughtfully designed system could improve India's loan-recovery standards across the economy.

As more consumer assets, from cars and two-wheelers to refrigerators and IoT-enabled home appliances, come to depend on software to keep running, the number of use cases for digital collateral should expand beyond the small-value segment.

India needs policies that enable credit expansion through various tried and tested tools. The adoption of digital collateral in a tech-driven world is a no-brainer.

The author are public policy experts at Koan Advisory Group, New Delhi.