Just 33% of the Indians that are eligible for a loan have access to a bank account

• A report by TransUnion CIBIL found that out of 220 million people in India that are eligible for loans, only 72 million have active bank accounts.
  
• This is a significant opportunity for banks to expand their retail lending.

India has been lauded for its progress on financial inclusion in recent years. The World Bank found that India’s flagship government schemes such as the Jan Dhan Yojana, under which nearly 315 million accounts have been opened, increased formal financial coverage from 53% of the population in 2014 to 80% in 2017.

Even CRISIL, a homegrown analytics firm, said that India’s overall score on its district-wise financial inclusion index has increased as a result of government efforts.

However, the surge in account openings is not translating into credit penetration. A report by TransUnion CIBIL, a credit information agency, highlights that a lot more work needs to be done in expanding access to formal credit.

The report found that out of 220 million people in India that are eligible for a loan -- based on the fact that they are between the age of 20 and 69 and earn at least ₹250,000 a year -- only 72 million, or 33%, had an active account at a bank or lending institution.

A market opportunity

Rather than bemoaning the lack of access to formal credit as a problem, however, TransUnion CIBIL says this represents a significant opportunity for banks to tap into. Following the massive pileup in non-performing loans, banks are becoming wary of lending to companies. They have relied on retail lending, that is loans given to individuals for housing, cars or investment purposes, to drive credit growth. Last month, Standard Chartered outlined plans to increase it share of retail loans in India to 40% from the current 29%.

This untapped market is expected to sustain a rise in credit growth for the next five years. And the population of credit-worthy borrowers is only set to grow bigger as incomes rise and young Indians come of age, reaching 295 million in another five years. The expansion in access to credit can be facilitated through the uptake of online banking, which will require credit cards, and peer-to-peer lending through smartphones.

What the government needs to do

Account openings aren’t the sole determinant of financial inclusion. Financial literacy programmes are vital in enabling account holders to make proper use of their banking facilities and overcome their resistance to using phones for banking purposes. The government also needs to encourage the establishment of credit bureaus to underwrite individual loans - something that can be achieved by the continued linking of bank transaction information with Aadhar details.

Additionally, it is precisely because of lack of access to formal credit that India’s household debt, as a proportion of GDP, is still very low compared to countries like China and the US. According to a working paper by the IMF, India’s household debt is a little less than 10% of the GDP compared to 150% in the US and 44% in China. As banks expand access to credit, the government will have to keep a watch on this statistic.