Retail lending has grown more in the rural areas relative to the urban areas across lenders, as creditors started tapping the underserved market segment, with the rural-urban differential growth highest for NBFC (non-banking finance company) and Fintech NBFC lenders, per a report by CAFRAL.

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The year-on-year (y-o-y) growth in loans sanctioned for rural and urban areas was about 70 per cent and 65 per cent, respectively, for NBFCs in 2022, according to the charts in the India Finance Report 2023, which has been put together by the Centre for Advanced Financial Research and Learning. CAFRAL is an independent body of the Reserve Bank of India.

The y-o-y growth in loans sanctioned for rural and urban areas was about 200 per cent and 140 per cent, respectively, for Fintech NBFCs in 2022.

CAFRAL’s researchers, however, noted that despite the recent growth spurt in credit to rural areas, total retail credit to rural areas was merely 18.8 per cent ( ₹66.52 lakh crore) of the total credit in 2021.

Of the 57.58 lakh crore sanctioned by NBFCs in 2021, the share of rural credit accounted for only 20.8 per cent ( ₹11.99 lakh crore), clearly highlighting the urban-rural divide in access to credit, opined the researchers.

They observed that fostering NBFC growth can potentially help narrow the rural-urban credit gap, as NBFCs reach out to rural borrowers through their deep penetration in rural areas.

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The researchers observed that RBI has previously used branch expansion policy as a tool to improve financial access in rural areas. For example, the most recent data from RBI shows that about 30 per cent of all bank branches are in rural areas where over 60 per cent of the population lives.

“This lack of access to formal financial institutions amongst rural households also implies constrained access to credit.”

“A credit supply shock leads to large consumption responses in rural compared to urban households. Rural consumption response estimate for NBFC loans is nearly double that in the urban areas,” they said.

The report said that data-driven underwriting processes and new financial products and credit delivery methods are reaching credit-constrained borrowers.

Though rural retail lending has seen strong growth, especially for NBFCs, credit access is still concentrated in urban areas, and much of the population remains underserved.