This article argues that India has achieved remarkable progress in expanding financial access, driven largely by digital public infrastructure such as the Jan Dhan–Aadhaar–Mobile (JAM) trinity and the Unified Payments Interface (UPI). As of 2024, 89% of Indian adults have a bank account, and UPI has over 260 million users. Yet this success in scale masks a deeper challenge: meaningful financial use remains limited. Roughly 14% of adults with accounts did not use them in 2023, indicating that accounts often function as passive repositories rather than tools for financial management. Much of this stems from India's bank-led model, where accounts are primarily used to receive government transfers. Aadhaar-linked Direct Benefit Transfers has inadvertently created a "lock-in" effect, reducing competition at the last-mile and limiting incentives for banks to improve service quality.
The article highlights structural frictions in credit markets, especially for low-income households and micro, small, and medium enterprises (MSMEs). Microfinance has expanded significantly, with a loan portfolio of ₹3.72 trillion serving 78 million borrowers. However, interest rates remain persistently high — 18–26% — despite decades of lending and strong repayment histories. This suggests limited progress in risk-based pricing and continued vulnerability to income shocks. MSMEs, which employ 90% of India's workforce, face a credit gap of ₹25–30 trillion. Information asymmetries, collateral-heavy lending, and weak risk-mitigation tools constrain their access to affordable finance.
The next phase of financial inclusion requires moving beyond payments to sophisticated risk underwriting. Indian households hold over 90% of their wealth in physical assets, and participation in pensions and insurance remains low. Without robust insurance and long-term savings products, risks get embedded into credit costs, raising borrowing rates and exposing lenders to correlated shocks.
The authors argue that India must shift from a top-down, bank-dominated system to a more competitive, consumer-centric financial ecosystem. This includes cash-flow-based lending, livelihood-specific underwriting, stronger insurance markets, and policy reforms that reduce frictions and empower households to manage risk and invest in their futures.
Read Digital Article : From scale to depth: Dismantling frictions within India’s financial inclusion juggernaut