2 days ago6 min read

Digital Public Infrastructure: Potential to enable Last Mile financing for economic growth

If you are interested in applying to GGI's Impact Fellowship program, you can access our application link here.

In India, less than 10% of the population has access to formal credit, and the disparity in

financial inclusion is stark. For many, credit is a lifeline to upward mobility, whether through credit cards, personal loans, or home loans. However, for most Indians, access to organized credit remains distant. This lack of access hinders personal and family growth and economic expansion, as small businesses remain perpetually small due to the absence of scalable financing options. This paper explores the challenges in last-mile financial inclusion in India potential solutions to bridge the gap, examining how unlocking credit access can drive socio-economic development, reduce income inequality, and fuel national growth.

2.Context: The Credit Gap

For the 90 % of India’s population, the ability to access organized credit is not only limited but nearly non-existent. Banks and financial institutions, which provide easy access to loans and credit to the corporate and urban segments, shy away from smaller, more fragmented borrowers due to perceived risks. The challenge is not just about high default risk; it is the inability of the bank to understand the risk of lending to people without a transactional history. Without data on formal income, daily wage earners and small business owners are left out of traditional credit evaluations.

This creates a vicious cycle: without access to formal credit, these individuals are forced to

access capital loans at rates as high as five percent per month from local lenders in cash and

continue to transact in cash, which in turn perpetuates the lack of credit history, making them ineligible for future bank loans. The consequence of this exclusion is not limited to individuals. The broader economy suffers from lost opportunities in terms of productivity, tax revenues, and GDP contribution. Furthermore, small businesses, unable to access affordable credit, are forced to borrow at exorbitant rates, significantly eroding their competitiveness in the free market and prospects for future growth.

3.The Role of Gold Loans: An Interim Solution

For those seeking formal credit, a gold loan is a viable option because it can be given as

collateral in smaller chunks based on the need. However, even with these secured loans,

interest rates range from 12% to 24% annually. This discrepancy in interest rates is alarming: while corporates and corporate employees can access unsecured loans at rates as low as 12% to 14%, small businesses are burdened with rates that can double that figure, even for secured loans. This disparity perpetuates a system in which small businesses and the unorganized sectors are financially handicapped, preventing them from scaling up and integrating into the formal economy. The ability to reduce these high interest rates is not only a matter of economic justice but also a critical lever for fostering broader business growth and financial stability among India and its underserved populations.

4.Key Advances in Financial Inclusion

Over the past decade, significant strides have been made in promoting financial inclusion. The introduction of Digital Public Infrastructure (DPI), particularly the Unified Payments Interface (UPI), has revolutionized digital transactions in India. With over seven years of adoption, UPI has fundamentally altered consumer behavior and brought millions of merchants onto digital platforms. This success is a powerful demonstration of how digital infrastructure can catalyze financial inclusion at scale.

At present 35 Crore UPI users are in India which is higher than the population of the USA. The value transacted has grown from 5,00,000 crore to 20,00,000 crore. In 3 years, the value of the UPI transaction has quadrupled. Users benefit from zero transaction costs and user-friendliness of the UPI. It is the banks who have benefited even more from UPI than the users, they now have access to capital at zero cost. The burden of taking cash to ATM’s has drastically reduced. UPI has benefited all the stakeholders and changed behavior for good.

The next frontier in this digital revolution is the Open Credit Enablement Network (OCEN) for MSME and the Unified Lending Interface (ULI) for micro-lending. ULI will be a plug-and-play infrastructure where lenders can access the data of the user's properties using an application programming interface(API). It was announced within the past three years, aiming to provide accessible, small-ticket credit to a vast population that remains outside the reach of traditional banking systems. Despite their potential, adoption has been slow, largely due to the complexities involved in evaluating new types of borrowers and the ambiguities around credit collection processes.

5.The Promise of Unified Lending Interface (ULI)

ULI presents a transformative opportunity for India's financial system, especially for micro-

entrepreneurs and daily wage earners. By leveraging vast datasets generated through digital

platforms like UPI, ULI enables credit evaluation at a fraction of the cost of traditional methods. This infrastructure allows banks to offer loans as small as INR 100 for durations as short as one day—a critical innovation for street vendors and micro-enterprises.

Consider a street vendor who requires INR 100,000 in working capital for a small business. With ULI, the cost of borrowing could be reduced to as little as 1% per month—an enormous saving compared to the 5% or more that such businesses currently face. This reduced cost of credit can empower small businesses to reinvest in their operations, expand, and ultimately integrate into the formal economy. Over time, this would not only boost the competitiveness of small enterprises but also contribute to broader economic growth and formalization.

However, the current credit evaluation frameworks are not designed for individuals with

fluctuating daily incomes or irregular wage patterns. To fully realize ULI’s potential, banks and non-banking financial companies (NBFCs) need to adapt their technology stacks to

accommodate these new borrowers and create a more flexible credit scoring system that

reflects the realities of daily-wage earners.

Like in UPI Banks can benefit as much as the users themselves. The smaller credits in their loan book can reduce the defaulting risk if done right. All of these businesses are dependent on India, so makes them shockproof against global economic slowdowns . Govt gets higher tax rates and GDP growth and all the other benefits of the formal growing economy.

6.Harnessing Digital Public Infrastructure for Economic Growth

The impact of DPI on the Indian economy is already evident. According to the World Economic Forum, Since Inception UPI has saved India an estimated INR 5.5 lakh crore—an amount greater than the combined budgets for health, education, and railways for FY 2024-25. If a single digital initiative can generate such efficiencies, scaling ULI could unlock even greater potential.

Every year of delay in implementing ULI at scale costs the Indian economy billions of rupees, not to mention the lost opportunities for millions of potential borrowers who remain trapped in informal financial systems. By accelerating the adoption of ULI and making formal credit more accessible, India has the chance to significantly boost its GDP, reduce income inequality, and bring more of its population into the formal economy.

7.Conclusion: Financing India’s Future

Financial inclusion is not merely a goal; it is a necessity for ensuring India’s economic future. The key to unlocking this future lies in scaling digital public infrastructure like ULI and making formal credit accessible to all. With the right regulatory frameworks and technological innovations, India can transform its financial landscape and provide millions of underserved citizens with the opportunities they need to thrive. By financing small businesses, enabling affordable education loans, and integrating women into the workforce through consumer credit, India can lay the groundwork for inclusive growth and a more equitable society.

DPI, at scale, is not just an option—it is the most feasible means of financing the country's

future.

Meet The Thought Leader

Laboni is a mentor at GGI and is currently working at The Bridgespan Group as a Senior Associate Consultant. She takes interest in socioeconomic development issues, public policy, and equity across

different vectors of gender, caste, class, and ability, which in turn fuelled her transition from working at a global bank to the social sector. She is an Urban Fellow from the Indian Institute for Human

Settlements, Bangalore and has a bachelor's degree in Economics from

St. Stephen's College, University of Delhi.

Meet The Authors (GGI Fellows)