What are the prime causes of limited formal credit penetration among the rural and unbanked populations in India? Comment on the effectiveness of Small Finance Banks in addressing this gap and advancing inclusive financial growth. (Answer 250 words in English)

TD SBD RBI Report: Formal credit in India is 74% and informal credit-SHG accounts for 26% of total credit Highlight need for further reform in credit access and penetration. Primary cause of limited formal credit among rural and unbanked population: 1) Lack of security: Rural population lack documents such as land deeds to access bank credit. 2) Poor credit culture: Loan universal hinders regular repayment culture leading to poor credit disbursement. 3) Lack of banking locality in rural and intruption areas hinder access to formal credit. 4) Lack of awareness among rural and unbanked population. 5) Bank hesitancy: Banks hesitant in offering loans in rural areas because of high NPA's and credit culture. 6) Lack of productive use and repayment capacity. Majority farmers earn less than 3000 lack repayment capacity.

Effectiveness of Small Finance bank in inclusive financial growth: 1) Focused banking: Small finance bank focus small farmers and MSME. 2) Priority sector lending: Higher target ensure focus on sectors such as agriculture. 3) Convergence on District and ward level: ensures availability of loans for rural and unbanked population. 4) Penetration in rural area: Small finance bank establish Micro ATM and branches in rural areas to ease expand. → D limited capacity to lend → D2) High NPA in small finance bank → D3) Banking frauds such PMC bank impact customer trust → D4) Limited profitability for small finance banks. Issues D1: Digitalization to reduce cost Use of connections Fintech digital channels to promote better banking infrastructure. To ensure coverage of rural and unbanked sector there is need to focus on awareness and better banker culture to ensure new and enjoyment of credit.

Issues pertaining to limited capacity to lend → D2) High NPA in small finance bank → D3) Banking frauds such PMC bank impact customer trust → D4) Limited profitability for small finance banks.

— Jayant Garg · AIR 64