Increasing access to the formal financial sector for low-income households, especially in rural areas, has become a priority. This is not just for reasons of equity, but also for the very practical reason that this segment provides a relatively untapped and potentially large pool of deposits for banks and funds for capital markets. Moving the GDP growth trajectory up to 8-10% requires mobilization of significantly higher domestic savings. It is not that the household savings rate of 24.3% is particularly low; indeed, it is better than many other countries. The main challenge is to capture more of the existing savings into the formal financial system. Households put 54% of their savings in physical assets-houses, land, cattle and gold. These nonfinancial savings, to provide a perspective of opportunity, amounted to Rs. 358,805 cr in 2003-04.
India's banking penetration remains low, and worse and the geographic reach of banking is uneven. Census 2001 data indicate that only 68.2 million households (36%) were "availing banking services". Of these, 41.6 million (30%) were in rural areas. The "unbanked" population in rural areas is consequently about 440 million (i.e., 96.5 million households). Bank deposits are 62% of GDP, (compared to 190% in China). Although 68% of 70,324 bank offices in 2005, were in rural and semi-urban areas, their share of deposits and credit were 29.1% and 20.5%, respectively. As of March 2004, only 7% of banking deposits were owned by farmers. Credit delivery in rural areas is equally poor; the credit deposit ratio in 2003-04 was 43% (compared to 67% in urban areas). A large proportion (30%) of bank branches is those of RRBs, whose weak balance sheets constrain rapid credit expansion.
At the same time, it is not that rural India has no need for credit. The National Sample Survey (NSS) estimates that 49% of rural households are indebted. Of loans outstanding, 35.6% is from banks, 19.6% from coops, 2.5% from government and 31.2% from money lenders and traders. The Vyas Committee constituted by the RBI quoted a private survey showing that only 24% of the Andhra Pradesh and 19% of the Uttar Pradesh households had access to formal credit, while 56% and 51% of the households depended on private credit. A large share of loans has, nevertheless, been for "productive investments". Thirty one percent and 28% of these loans were for capital and current expenditures in farm business, 11% for marriage, 9% for consumption expenditure and 7% for non-farm business. There is ample anecdotal evidence of the high cost of this informal finance.
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