Credit divide: Gaps exist in rural finance access despite progress

The latest Rural Sentiment Survey (of September), of the National Bank for Agriculture and Rural Development, captures, among other things, both progress and persistent fault lines in rural finance. On the positive side, 54.5 per cent of the households surveyed now borrow exclusively from formal sources, the highest since the survey began last year. However, nearly 22 per cent of them remain dependent solely on informal credit. This segment continues to face high costs: Average interest rates are at 17-18 per cent, with one-third of the borrowers paying more than 20 per cent annually. About 24 per cent of the households depend on the combination of both formal and informal credit. Further, about 30 per cent of the households take loans from family and friends, paying no interest. Thus, even though banks have expanded their reach in rural areas, there is still a significant unmet demand for credit. 

According to the Reserve Bank of India’s Annual Report for 2024–25, there has been a significant increase in the number of banking outlets in rural areas over the past decade. Specifically, the number of branches in villages has risen from 33,378 in March 2010 to 56,579 by December last year. Yet, a proportion of households still depends on moneylenders — perhaps evidence that a physical presence alone may not be enough. Structural conditions also play a role. Many rural households face significant income volatility, seasonal risks, and declining government transfers, now just 9.27 per cent of monthly income, the lowest since the survey began. In such circumstances, the immediacy and flexibility of informal loans, despite punitive interest rates, serve as a survival strategy. 

Beyond physical access, social and demographic factors shape credit use. A NITI Aayog 2025 report shows women’s credit demand growing at a compound rate of 22 per cent since 2019, with 60 per cent of the borrowers from semiurban and rural areas. Yet, many remain credit-willing not credit-ready, limited by documentation gaps, guarantor needs, and collateral constraints. Addressing the rural credit divide requires more than branch expansion. The way forward is twofold. First, strengthen the priority-sector lending framework by ensuring not just targets but the quality of credit. Monitoring credit flows to vulnerable groups and tailoring products for small-ticket, short-tenure needs will reduce dependence on moneylenders. This calls for focused mechanisms for banks and cooperatives at the last mile. 

Second, technology can be leveraged to reduce costs and increase trust. Aadhaar-enabled microlending, interoperable digital wallets, and mobile-based grievance redress systems can bridge gaps. Business correspondents, supported with better incentives and digital tools, can act as the trust layer between rural households and institutions. Fintech firms complement this by using alternative credit-scoring data to build reliable credit profiles for “thin-file” borrowers. Finally, policy should not just focus on giving people access to banks, but also on making loans affordable and improving financial awareness. Basic financial education, linked with rural livelihood programmes, can help people reduce their dependence on moneylenders. Rural finance has made good progress, but the cost and dependence on informal loans show the job is not yet done. Bridging the credit gap in rural India will be a crucial step towards achieving inclusive growth.