It is interesting to understand the structural gap underlying the Indian banking industry. Economist studies the state of the Indian banking industry:

Some of India’s banks recently made returns on equity of up to 16%, but not by lending. Up to 40% of some Indian banks’ assets are invested in government bonds and other state-guaranteed instruments, way beyond the statutory liquidity requirement of 25%.

According to a World Bank study, 79% of India’s rural households do not have access to formal lending. Of the households surveyed, 44% said they had used informal lending channels over the past year. That can include loans from family and friends, but well over half this finance comes from unregulated moneylenders who charge an average annual interest rate of 48%. There is clearly huge scope for cheaper, more formal lending. One reason banks are not pursuing this market is that the RBI and local authorities discourage them from charging interest of more than 14%. Some rural banks get round this by demanding bribes. Micro-lending, by micro-finance institutions or by self-help groups (in which borrowers club together to provide collateral), is increasing. But it reaches only around 5% of India’s poor, against 60% in Bangladesh.

What may be even more important for the economy is to provide access for the 92% of Indian businesses that do not use bank finance. That represents an enormous potential market for both local and foreign banks, but the present structure of the banking system is not suitable for reaching these businesses. Securitising micro-loans?bundling many loans together and selling the resulting cashflow as a security?may be a way of achieving economies of scale. One private bank, ICICI, securitised $4.3m of micro-loans last year. But most Indian banks are more interested in competing for affluent customers.