As reported in The Indian Express on Thursday, of the 60 million people that were registered with the credit bureau agency CIBIL, only 35% or just 21 million people were active in accessing credit through financial institutions. It?s a strong indictment of the allegedly pro-aam aadmi bank nationalisation of 1970s that only 40% of the country?s population is covered under the banking system and over 90% of rural population still have to depend on moneylenders for credit. Aggressive efforts must be made to expand the reach of credit facilities to a larger section of the population, especially in the rural areas and banks must expand their networks. To be fair, the flow of credit to the agricultural sector has expanded over the years but it is equally important that people in the hinterland get credit facilities for their other needs. In fact, commercial banks collected 9.3% of their total deposits in rural areas in 2009 but only 7.3% of the total credit was disbursed to rural people. In contrast, while banks mobilised 56.3% of the total deposits from metros, they disbursed 67.2% of the total credit. This difference in both mobilisation and distribution needs to narrow down if we are to achieve inclusive growth. Banks must develop their credit plans based on easy instalment facilities, fair rates of interest and lesser documentation, all of which would suit the requirements of the vast section of the country?s population. For rural areas, banks will have to take steps towards convenient rural financing plans and schemes, as the bottom of the pyramid has a large amount of untapped credit capacity?tapped though by microfinance institutions?and default rates are negligible.
Of course, traditionally, Indian households have always preferred low leverage, something that becomes evident from analysing credit card usage. Indians spend just about 1% of their total annual purchases through credit cards, while the world average is around 12%. Large transactions on cards have enabled banks in the developed countries to reduce their interest rate on cards. Moreover, Indians, on an average, use just one or two credit facilities at a time?a home loan and a credit card loan or a home loan and an auto loan. Again, this is an indicator of untapped potential as incomes rise and the middle class grows more prosperous. The only feasible way to force banks to reach out is through more competition. RBI must seriously consider giving out more licences and liberalising norms for bank branches and mobile banking.
