A

Project File
On
Rural Banking

Submitted in partial fulfilment of B.Com LLB

Semester- V
Session- 2018-19

SUBJECT- ECONOMICS

SCHOOL OF LAW

GURU GHASIDAS

VISHWAVIDYALAYA

Submitted to : Submitted by :

Dr. S. Kispotta Tripti Rajput

(Assistant Professor) B.Com LLB (5th sem)
 DECLARATION

I, TRIPTI RAJPUT, ROLL. NO. 56, B.Com.LL.B 5THSemester, OF

GURU GHASI DAS UNIVERSITY does hereby declare that, this project is my
original work and I have not copied this project or any part there from any
sources without any acknowledgement. I am highly indebted to the author of the
book that I have preferred in my book as well as all the writers of the articles
and the owner of the information taken from website to it. It is only because of
their contribution and proper guidance of my faculty adviser DR. S.
KISPOTTA Sir, that I was able to gather light on the subject.

TRIPTI RAJPUT
ROLL.NO.-56
B.Com.LL.B (5TH SEMESTER).
 CERTIFICATE

I am too glad to submit this project report on “Rural Banking” as a part

of my academic assignment. This project is based on research methodology. It
further studies making sources and method of research methodology and further
discusses the interview method. I hope this would be significant for academic
purpose as well as prove information to all readers.
Here through I declare that this paper is an original piece of research and
all the borrowed text and ideas have been duly acknowledged.

SUBMITTED BY SIGNATURE OF FACULTY

TRIPTI RAJPUT
 ACKNOWLEDGEMENT

I would like to express my earnest and deepest gratitude to Dr. S.

Kispotta, faculty of ‘economics, for giving me opportunity to do a project on
such a important topic of ‘Rural Banking’. I am grateful for the assistance,
guidance and support that were extended during the course of excellent
research. I thank my parents and my friends for their moral support and love
throughout my research work and projects operation. Above all I thank the God
almighty for the blessing me with the health vitality to complete this projects.

TRIPTI RAJPUT

Introduction
Regional Rural Banks (RRBs) also known as Gramin banks, are Indian
scheduled banks (Government banks) operating at regional level in different
States of India. They have been created with a view of serving primarily the
rural areas of India with basic banking and financial services. However, RRBs
may have branches set up for urban operations and their area of operation may
include urban areas too.
Regional Rural Banks have been in existence for around 32 years in the Indian
financial scene. Inception of Regional Rural Banks may be seen as a unique
experiment as well as experience in improving the efficacy of rural credit
delivery mechanism in India. Keeping in view the local peculiarities, an effort
was made to integrate commercial banking within the broad policy framework
towards social banking through joint shareholding of Central Government, the
Concerned State Governments and the Sponsoring Bank. The genesis of the
Regional Rural Banks may be traced for the need for a stronger institutional
arrangement for providing rural credit. The institution of Regional Rural Banks
(RRBs) was created to meet the excess demand for institutional credit in the
rural areas, particularly among the economically and socially marginalized
sections. Although the cooperative banks and the commercial banks had
reasonable records in terms of geographical coverage and disbursement of
credit, in terms of population groups the cooperative banks were dominated by
the rural rich, while the commercial banks had a clear urban bias.
The difference in monetary activities of rural people relative to urban people led to
the realization of NABARD (National Bank For Agricultural And Rural
Development), in addition to the presence of RBI.
The post-independence period saw exploitation of rural poor in need of credit, by
the hands of moneylenders and traders. Loans were granted at very high-interest
rates which ultimately pulled defaulters into a debt trap, robbing them out of credit.
To stop this exploitation NABARD was established to provide rural areas with
easy credit. Although RBI is the national banking apex body, NABARD has been
given powers that establish it as the apex banking body in rural India which
regulates all the credit and banking activities of rural India.

Origin of Rural Bank

The Banking Commission (1972) recommended to establish an alternative
institution for rural credit and ultimately Government of India established
Regional Rural Banks – a separate institution basically for rural credit on the
basis of the recommendations of the Working Group under the Chairmanship of
Sh. M. Narashimham. In order to provide access to low-cost banking facilities
to the poor, the Narashimham Working Group (1975) proposed the
establishment of a new set of banks, as institutions which “combine the local
feel and the familiarity with rural problems which the cooperatives possess and
the degree of business organization, ability to mobilize deposits, access to
central money markets and modernized outlook which the commercial banks
have”. The Regional Rural Banks were setup on the basis of Narsimham
Committee report (1975), by the legislations of the Regional Rural Banks Act of
1976. Thereafter, the first Regional Rural Bank was setup in 1975 itself by the
name Prathama Grameen Bank.
Subsequently, the Regional Rural Banks were setup through the promulgation
of RRB Act of 1976. The RRBs Act, 1976 succinctly sums up this overall
vision to sub-serve both the developmental and the redistributive objectives.
The RRBs were established “with a view to developing the rural economy by
providing, for the purpose of development of agriculture, trade, commerce,
industry and other productive activities in the rural areas, credit and other
facilities, particularly to small and marginal farmers, agricultural laborers,
artisans and small entrepreneurs, and for matters connected therewith and
incidental thereto”.
 Ownership of RRBs:
The equity of RRBs is held by the stakeholders in fixed proportions of 50:15:35
distributed among the following –

 Central Government has 50% share.

 State Government has 15% share.
 The Sponsor Bank has 35% share.

Features of Rural Banks

. The salient features of regional rural banks are as follows:
1. The regional rural banks combine the local feel and familiarity with rural
problems which the co-operatives possess and the degree of organisation
ability to mobilise deposits, access to central money market and
modernised out look which the commercial banks have.
2. Every rural banks will operate in a limited area or region comprising of
one or more districts in a State. Each of its branches will serve a compact
group of villages having a population of 5000 to 20,000. The area should
be comparatively backward or a tribal area or where coverage by
commercial banks and co-operatives is relatively poor. The area chosen
should have a real potential for development and should be poised for a
break-through once the flow of credit is assured.
3. The Regional Rural Banks will grant loans and advances mainly to small
and marginal farmers, agricultural labourers, small artisans and small
entrepreneurs engaged in productive activities in their area of operation.
The repaying capacity of the borrower over a reasonable period of time
would be the basis for sanctioning the loans.
4. These banks will adopt the pattern of operations to suit their
requirements. To start with a branch may be managed by a manager, an
Agriculture Officer, a clerk-cum-cashier and a peon.
5. The forms and procedures for the operations of rural banks will be very
simple. All the business would be conducted in the regional languages.
Forms would be filled up on behalf of the loanees by the employees of
the banks themselves so that brokers and intermediaries may not exploit
them.
6. The rates of interest charged by the Regional Rural Banks will be
comparable with those charged by the co-operatives.

Structure and functions of rural bank

  Capital structure of Regional Rural Banks

The authorised capital of a regional rural banks is Rs. 1 crore and paid up
capital Rs.25 lakhs contributed in the ratio of 50:15:35 by the NABARD, State
Government and the sponsoring commercial bank respectively.
Each Regional Bank will be managed by a Board of nine members consisting of
a Chairman appointed by the Central Government, three members nominated by
the NABARD, three by the sponsoring bank and two by the State Government
concerned. As stated earlier, the rates of interest charged by the Regional Rural
Banks will be comparable with those charged by the co-operatives. They are
allowed to pay 1/2% higher rate of interest on deposits than that paid by the
commercial banks.

The regional rural banks are included in the second schedule to the RBI Act and
therefore, they enjoy the same privileges and facilities as are given to the
scheduled banks, including access to the Reserve Bank for financial
accommodation. They can avail advances from the Reserve Bank provided the
sponsoring banks undertake the guarantee. It should also be noted that the
deposits with the Regional Rural Banks are insured by the Deposit Insurance
and Credit Guarantee Corporation.

 Organisational Structure of Regional Rural Banks

Each Regional Rural Bank is sponsored by a public sector bank which provides
assistance in several ways, viz. subscription to its share capital, provision of
such managerial and financial assistance as may be mutually agreed upon and
help in the recruitment and training of personnel during the initial period of its
functioning. In addition to this, Central Government may also provide necessary
directions for the formulation and implementation of policies in respect of these
banks.
Organisation
Although Regional Rural Banks to a large extent, have to depend upon the
sponsoring banks and also upon Central Government for designing its
organisation structure of a sound character, these banks have to provide a frame
work for managing the affairs. A bird-eye-visualisation of the facts pertaining to
organisation of these banks clearly reveal the following segments of
organisation : -
(A) Chairman
(B) Committees of Board
(C) Operating Personnel
(D) Branch Organisation

Functions :-
The Important Functions of Regional Rural Bank
In view of the role, challenge and responsibility assigned to Regional Rural
Banks, it is not possible to make an exhaustive list of the functions and services
likely to be rendered by Regional Rural Bank. however, we may highlight upon
their most fundamental functions, which may be divided into two categories :-
1. Accepting Deposits
2. Granting Loans And Advances
Accepting Deposits
In common parlance to ordinary commercial banking business, the most
important function of the Regional Rural Bank is the mobilisation of savings of
the public by accepting them in the form of deposits. For this purpose, the
Regional Rural Banks, like other bank, maintain various accounts, such as fixed
deposit accounts, current accounts and saving bank accounts. The savings
mobilised through all these accounts may partake the character of time deposits
and/or demand deposits.
Granting Loans And Advances
By their very nature, organisation and objective Regional Rural Banks have
become a major segment in the rural credit market. These institutions also make
loans and advances to farmers, artisans, consumers and agricultural labourers
etc. against securities. It may, however, be pointed out that Regional Rural
Banks do not usually lend hard cash. Instead, the customers are extended loans
and advances in the form of rights to draw cheques. Again, like commercial
Banks, Regional Rural Bank does also not lend its own money, they behave
like Recardo’s saying, “A man becomes a banker only when be begins to lend
other people’s money”.
As mentioned earlier, these banks are supposed to lend only to weaker sections
of rural areas and that too in such a way as to ensure better resource utilisation
and rapid economic development of rural areas.
Particularly, such loans and advances are expected to meet the following
requirements of the said area:-
(i) Bridging the credit gaps in the rural areas.
(ii) Productive credit for rural community.
(iii) Assisting implementation of large agricultural development projects.
(iv) To create climate for repayment of loans.
(v) Incentive for mobilising local resources.
(vi) Overall economic uplift of the weaker sections.
(vii) Financing small and marginal farmers, agricultural labourers, small
manufactures and petty traders, artisans and adivasis.

Objectives of rural banking

The objectives of RRBs can be summarized as follows:

1. To provide cheap and liberal credit facilities to small and marginal

farmers, agriculture labourers, artisans, small entrepreneurs and
other weaker sections. 
2. To save the rural poor from the moneylenders.
3. To act as a catalyst element and thereby accelerate the economic
growth in the particular region.
4. To cultivate the banking habits among the rural people and mobilize
savings for the economic development of rural areas.
5. To increase employment opportunities by encouraging trade and
commerce in rural areas.
6. To encourage entrepreneurship in rural areas. 
7. To cater to the needs of the backward areas which are not covered by
the other efforts of the Government.
8. To develop underdeveloped regions and thereby strive to remove
economic disparity between regions.

Importance of Rural Banking

The importance of the rural banking in the economic development of a
country cannot be overlooked. As Gandhi said “real India lies in village”
and village economy is the backbone of Indian economy. Without the
development of the rural economy, the objective of economic planning
cannot be achieved. Hence, banks and other financial institutions are
considered to be a vital role for the development of the rural economy in
India.

RRBs occupy an important position in the rural credit market. Loans

provided to the needy people have been categorized into two. One is
priority sector and the other one is non-priority sector. Priority sector bank
lending is an active instrument of Indian financial policy with an aim to
restore sectoral balance within credit disbursement and to channel credit to
the weaker sections of the society. Priority Sector is a sector which is
given priority in offering financial services by the banks.

Gradually, the list of segments under priority sector increased. At present

it consists of agriculture, small scale industry, small transport operators,
exports, small business housing, self employed persons, professionals,
education etc. Recently the micro finance through Self-Help Groups
(SHG) is also included in priority sector. Loans given to priority sectors by
RRBs consists of short-term loans, term loans, loans to rural artisans,
small scale industries, retail trade, and self-help groups’ etc.

The real growth of Indian economy lies on the emancipation of rural

masses from poverty, unemployment and other socio-economic
backwardness. Keeping this end in view, Regional Rural Banks were
established by the Government of India to develop the rural economy.
With the passage of three decades, the RRBs are now looked upon with
hope for rejuvenating the rural India. In the present study, the role of
RRBs in the rural credits structure has been deeply analyzed. The rural
credit structure consists of priority sector and the non-priority sector.
There has been tremendous achievement in disbursing loans to both the
sectors

CONCLUSION
RRBs' performance in respect of some important indicators was certainly better
than that of commercial banks or even cooperatives. RRBs have also performed
better in terms of providing loans to small and retail traders and petty non-farm
rural activities. In recent years, they have taken a leading role in financing Self-
Help Groups (SHGs) and other micro-credit institutions and linking such groups
with the formal credit sector.

RRBs should really be strengthened and provided with more resources with
which they can undertake more of these important activities. And most certainly
they should be kept apart from a profit-oriented corporate motivation that would
reduce their capacity to provide much needed financial services to the rural
areas, including to agriculture. Ideally, the best use of the resources raised by
RRBs through deposits would be through extensive cross-subsidisation. This, in
turn, really requires an apex body that would cover and oversee all the RRBs,
something like a National Rural Bank of India (NRBI).

The number of rural branches should be increased rather than reduced; they
should be encouraged to develop more sophisticated methods of credit delivery
to meet the changing needs of farming; and most of all, there should be greater
coordination between district planning authorities, panchayati raj institutions
and the banks operating in rural areas. Only then will the RRBs fulfill the
promise that is so essential for rural development.

Bibliography
1. Desai S S M (1990) : Agriculture And Rural Banking In India,
Published By Himalaya Publishing House, Delhi. Page : 326.

2. www.gr8ambitionz.com

3. www.yourarticlelibrary.com

4. NCERT Class 11