I don't know what goes on in the minds of interviewers, but if I had to guess, they use recursion to test the interviewee's ability to reason inductively --- which, of course, is necessary for writing even simple loops. Maybe a question about loop invariants might be a good replacement.

Regardless, yes, I doubt many people write a lot of recursive functions, since the data structures people use tend to either be flat, based on arrays, or neatly hidden away in libraries.