Tokenising India’s Credit System

India’s Digital Public Infrastructure (DPI) improved financial inclusion, but credit depth remains weak; the next reform push is financial asset tokenisation to digitise rights.

Financial Asset Tokenisation is the digital representation of ownership rights and financial claims (such as bonds, fund units, and receivables) on a programmable ledger.
It makes financial assets transferable, pledgeable and enforceable with embedded rules.

About Credit System

The credit system refers to the institutional and non-institutional arrangements through which credit (loans) is supplied to different sectors of the economy.
It plays a crucial role in capital formation, economic growth, financial inclusion, and poverty reduction.

To mobilise savings and channel them into productive investments.
To provide timely and affordable credit to agriculture, industry, MSMEs, and households.
To reduce dependence on informal moneylenders.
To promote inclusive and balanced regional development.

Low Credit Depth: Domestic bank credit to the private sector remains around ~50% of GDP, far below countries with deep credit markets highlights a structural mismatch.
MSME Shortfall: Only ~19% of MSME credit demand (FY21) is met through formal channels, leaving an estimated ~₹80 lakh crore credit gap despite priority sector lending and credit guarantee schemes.
Friction Bottlenecks: Credit is constrained by slow settlement cycles, fragmented asset registries and weak enforceability, not by lack of payment rails.
Data Without Collateral: DPI (Aadhaar e-KYC, UPI, Account Aggregator) digitised cash-flow visibility, but it still cannot convert verified cash flows into enforceable collateral, limiting credit depth.
Static Asset Processing: Digital assets remain as static records, not programmable financial claims. Hence, collateralisation & settlement stay slow and dispute-prone.

Programmable Claims: Tokenisation embeds ownership directly into the asset, converting instruments from passive records into programmable financial claims, which improves lender confidence.
Faster Settlement: Settlement and servicing become built-in attributes of the token, reducing back-office delays and reconciliation frictions, improving liquidity and lowering transaction costs.
Working Data Rails: India already has strong DPI foundations, enabling scalable verification. This lowers information asymmetry and improves underwriting quality across lenders.
Bridging Missing Layer: Tokenisation adds the next layer by converting verified financial information into pledgeable, transferable digital assets, enabling continuous asset-based monitoring.
Ecosystem Linkages: When linked with platforms like ONDC enterprise data, tokenised claims can reflect real-time business cashflows, which can improve MSME credit access.

B2B Sequencing: Start with B2B tokenisation (receivables, bonds) before retail scaling to prove reliability.
Joint Sandbox: Launch a SEBI–IFSCA sandbox to test tokenised bonds with controlled exposure; E.g., phased pilots with audited MRV-like compliance.
Custody Guardrails: Mandate licensed custodians & recovery protocols for insolvency and fraud.
Tax Differentiation: Separate taxation of asset-backed tokens from speculative crypto-assets to channel capital productively; E.g., neutral tax for tokenised securities.

1. What is the credit system in India?

The credit system refers to the institutional and non-institutional mechanisms through which credit (loans) is provided to different sectors of the economy to support capital formation, production, and investment.

2. What are the primary objectives of the credit system?

To mobilise savings and convert them into productive investment.
To provide timely and affordable credit to agriculture, industry, MSMEs, and households.
To reduce dependence on informal lenders.
To promote balanced economic growth across regions.

3. What are the main issues facing India’s credit system?

Low credit depth: Formal credit to the private sector is significantly lower compared to global benchmarks.
MSME credit gap: A large proportion of MSME credit demand remains unmet.
Friction and settlement inefficiencies in collateral and asset registries.
Difficulty converting verified financial data into pledgeable collateral, limiting access to credit.

4. How does tokenisation aim to fix the credit system?

Tokenisation of financial assets embeds ownership and claims on a programmable ledger, making them pledgeable and enforceable digitally.
It reduces back-office delays and settlement friction, helps with liquidity, and improves credit access, especially for MSMEs.
It leverages India’s strong Digital Public Infrastructure (DPI) like Aadhaar, UPI, and account aggregators.

5. What is Digital Public Infrastructure (DPI), and how does it relate to credit?

DPI includes digital identity (Aadhaar), payment systems (UPI), and data aggregators.
While DPI has improved visibility of financial flows, it has not fully addressed the lack of enforceable collateral, which tokenisation seeks to resolve.

6. Why is formal credit access critical for MSMEs and agriculture?

Formal credit ensures lower interest rates, standardized terms, legal protection, and better financing for inputs and expansion.
Agriculture and MSMEs often face informal lending at high interest rates, leading to financial stress.

7. What role does the Reserve Bank of India (RBI) play in the credit system?

RBI regulates the credit and currency system of the country, formulates policies for credit delivery, and supervises banks and financial institutions to maintain credit flow and financial stability.

8. What are informal sources of credit in India?

Non-institutional lenders such as moneylenders, traders, landlords, friends, and relatives provide credit, often at higher interest rates with less legal protection.