India’s large rural and semi-urban population is still out of banking fold, according to the latest report released by McKinsey & Company, a global management consulting firm.

“Despite, the presence of nearly 90 scheduled commercial banks, the extent of access is still low, with around 35 percent of India’s population financially excluded, and only 28 percent total bank retail credit being channeled to rural and semi-urban areas, which constitute 87 percent of the population,” says the report titled “Reimagining Banking in India: Gearing up to meet the new environment.”

The report recommends that banks should focus on using digital channels to increase penetration of banking and digitally enable current propositions or create new propositions. It says that cost efficiencies achieved by going digital will benefit both the banking players and end customers.

Saying that there is lack of innovation, the report also mentions that banks need to do innovation in their distribution channels to cater to changing customer preferences, as well as improve productivity and cost-efficiency.

It further says that the decline of real GDP growth from average of 8.1 percent (2004-2011) to less than 5 percent in Q4 of 2013 has resulted into declining savings rate, the shift from financial to physical savings, declining investment rates (as percentage of GDP) and impact of global capital flows driving volatility.

Public and private investment rates (as percent of GDP) have declined from 26.2 percent in 2008 to 18.5 percent in 2012. Infrastructure projects worth Rs. 11,400 billion (around 8 percent of GDP were stalled as of March 2012, the report mentions.

“While lot of asset quality problems in the banking industry today are a reflection of  the macroeconomic situation, too much emphasis on just big ticket lending to build balance sheets will lead to concentration  of lending to fewer companies and continued exclusion of small business, specialised and mass lending’” adds the report.