Self help groups and cooperative societies are the fourth and fifth preferred choices for sourcing loans and have a share of 9 per cent and 6 per cent respectively. Says ICRIER director and chief executive officer (CEO) Rajiv Kumar: “It is to ensure ease of transactions that the common man avoids banks. The processes of banks for loans are hide-bound, full of bureaucracy, and require a lot of collateral... these cumbersome processes take the common man away from banks.”

The banking system in our country has not been able to cater to the needs of rural India because of its lack of penetration. According to ICICI Bank head of retail assets Rajeev Sabharwal: “It’s more like being in a development stage as till now the penetration of financing has been more focussed on the urban side. What banks need to do and which they are doing is to spread the distribution network in the rural market and look for low cost solutions by way of technology that will help reduce transactions and cash management costs.”

The Invest India study also provides insights on the requirements of rural India that force them to go for these loans. Financial emergencies come out as the prime reason for taking a loan — accounting for 35 per cent.

The next in importance are medical emergencies and farm/ crop loans, which account for 20 per cent and 18 per cent respectively of loan takens. These three requirements account for 73 per cent of the loan requirements of rural earners.

At the next level come the need for homes/ land, business requirements and social obligation, which account for 12 per cent each. Says Sabharwal: “The requirements for emergencies are there but there is enough demand to finance pre-harvest agricultural implements and the post-harvest needs that come to banks.”

When it comes to taking small loans, banks’ share stands at 26 per cent and trails the loans taken from relatives, which stands at 42 per cent of the total sourced. Money lenders closely follow banks with 21 per cent.

Adds Kumar, “banks will have to come up with some innovative ways to give consumption loans so as to create productive assets.” Banks are organised lending institutions and their retreat raises concern.

According to Sabharwal, “The banks share will increase with the increasing distribution network, which all banks are working towards. Banks’ transparency is high and the interest rates charged by them are lower compared to money lenders.”