Regional Rural Banking in India - 230326 - 110221

INDEX
SR. CONTENTS
PAGE
NO. NO.
1 INTRODUCTION 3 TO 4
2 What Is Rural Banking 5 TO 6
ORIGIN OF REGIONAL RURAL
3 BANKING 7
4 Need of Rural Finance 8 TO 9
RRBs: Structure and Functions of the
5 Rural Banking 10
Structure and Organisation of the
6 RRB: 11
7 Functions of Rural Bank 12
8 Objectives of Rural Banks 14
9 Objective & Role of RRB? 15
Regional rural banks in India
penetrated every corner of the
10 country 16 TO 19
Rural banking prove the next

11 development engine for Indian banks 21
India’s First Rural Bank to issue
12 ATM Card, Launched in Salem 22 TO 24
Role of Banks in Promoting
13 Financial Inclusion 25 TO 29
pg. 1
KEY DRIVERS OF FINANCIAL
EXCLUSION OF RURAL
14 BANKING 30 TO 32
REASONS FOR UNPROFITABLE
15 OF RURAL BANKING IN INDIA 33 TO 34
16 Issues and Challenges 35 TO 39
REGIONAL RURAL BANKING: A
17 THEORETICAL REVIEW 40 TO 54
DATA ANALYSIS &
18 INTERPRETATION 55 TO 66
19 QUESTOINAIRE ON BANK 67 TO 69
20 CONCLUSION 70
21 BIBLOGRAPHY 71
pg. 2
INTRODUCTION
The villages are the backbone of any country. As far as India is

concerned, it is populated highly with rural mass that undertakes the
agriculture and its allied activities at larger level. The income from these
activities occupies more in the Gross Domestic Product of India. It is well
known that the banking system is the heart of any Countries’ economy,
striving to achieve growth and that remain a permanent and dominating
factor in the global competitive business environment. They are having a
favourable growth, asset quality and profitability. To improve the rural
credit mechanism cooperative banking sector were also introduced earlier
and that was also not in a position to satisfy the rural needs in terms of
money. This inadequate situation led the Government of India to form a
committee to find feasible solution to enable easy rural credit satisfying
mechanism. The committee that headed by Shri. M. Narshimam in the
year 1975 came out with its recommendation to form Regional Rural
Banks. In particular, the regional rural bank of India mainly focuses on
supply of credit to the rural people. This paper attempts to study that the
Regional Rural Banks of India satisfies the rural people for their
agriculture and agro-based business financial needs and in turn they earn
profit for their activities through their banking activity. Rural
development occupies a significant place in the overall economic
development of the country. Ghandiji Said ―India lives in Villages He
stressed a rural character of economy and the need for re-generation of
rural life. Since independence, it has been constant endower of our policy
maker to give adequate trust to rural development as the sector is directly
related to agriculture. Rural banking in India started since the
pg. 3
establishment of banking sector in India. Rural Banks in those days
mainly focused upon the agro sector. Regional rural banks in India
penetrated every corner of the country and extended a helping hand in the
growth process of the country. SBI has 30 Regional Rural Banks in India
known as RRBs. The rural banks of SBI is spread in 13 states extending
from Kashmir to Karnataka and Himachal Pradesh to North East. The
total number of SBIs Regional Rural Banks in India branches is 2349
(16%). Till date in rural banking in India, there are 14,475 rural banks in
the country of which 2126 (91%) are located in remote rural areas.
Regional Rural Banks (RRB) were established under the provisions of an
ordinance promulgated on the 26th September 1975 and the RRB Act,
1976 with an objective to ensure sufficient institutional credit for
agriculture and other rural sectors. The RRBs mobilize financial
resources from rural / semi-urban areas and grant loans and advances
mostly to small and marginal farmers, agricultural laborers and rural
artisans. The area of operation of RRBs is limited to the area as notified
by Government of India (GoI) covering one or more districts in the State.
RRBs are jointly owned by GoI, the concerned State Government and
Sponsor Banks (27 scheduled commercial banks and one State
Cooperative Bank); the issued capital of a RRB is shared by the owners
in the proportion of 50%, 15% and 35%respectively.
pg. 4
What Is Rural Banking?
The term "rural banking" covers a lot of ground. In the United States,
rural banking is an informal description of the activities of community
banks in rural areas. Rural banking outside the United States refers to
banking services in communities that are beyond the reach of formal
banking systems. Internationally, rural banking is part of development
efforts that serve the poor. RRB (Regional Rural Bank) is also known
as ‘Gramin Bank’. It was established in 26th September 1975 with the
objective of the economic development of India. The ideology behind
RRB is to focus on the upliftment of the rural economy because it is
assumed that Real growth of Indian Economy lied in the freeing of rural
masses from unemployment, acute poverty and socio-economic
backwardness.
Regional Rural Banks are small, region based; rural development

oriented public sector commercial banks. They mainly lend to small and
marginal farmers, agricultural labourers, artisans, small traders and
entrepreneurs in the rural area to generate income, employment and
development. It is a part of the national rural financial infrastructure
created with an explicit intention of extending formal prudent banking
services to rural people at minimum cost. The sources of funds of RRBs
comprise of owned fund, deposits, borrowings from NABARD, sponsor
banks and other sources including SIDBI and National Housing Bank.
NABARD also gives refinance for short term loans for crop and other
farm related activities and also refinance to term loans for investment
purpose.
There were 196 RRBs sponsored by 27 scheduled commercial
pg. 5
banks and one state co-operative bank with a network of 14484 branches
spread over 523 districts operating in the country as on 31 March 2005.
Then, to make them financially viable, the process of sponsor bank-wise
amalgamation of RRBs was initiated by the GoI in a phased manner in
September, 2005. Consequent on amalgamation, the number of RRBs
declined from 196 in 2005 to 82 as on 31st March 2010, spreading across
26 States and in one Union Territory, covering 619 districts with a
network of 15475 branches.
pg. 6
ORIGIN OF REGIONAL RURAL
BANKING
As stated earlier in this chapter, in pre-independent India, despite its

being an agricultural country, there were few commercial bank branches
in the rural areas. The All India Rural Credit Survey Committee (1952)
observed that there were no formal sources of finance in the rural areas
apart from a few co-operatives banks located in the villages. Therefore
most of the financial needs of the rural folk were met from the informal
traditional sources such as relatives, traders, landlords and money lenders.
As the co-operative banks were offering only short term credit, the
committee recommended setting up Agricultural Refinances Corporation
to grant term loans to rural people, especially farmers. Further, in the
mid-sixties, with plan support to agriculture, the credit needs of the rural
farm sector exceeded the capacity of co operatives. To support the rural
economy, 14 major commercial banks were nationalized in 1969, and
they were called upon to open branches in the rural areas and directed to
extend agriculture credit on a priority basis. However, in 1972, despite
the massive branch expansion to rural areas, the Banking Commission
observed that a vast segment of the rural population comprising of
weaker sections and economically backward classes was deprived of
banking facilities as their requirements were insignificant in size to
entertain by commercial banks. To come out of the situation, the banking
commission indicated the formation of a specialized institution to cater to
the needs of rural population.
With the above objectives in view, Government of India
pg. 7
constituted a Working Group on Rural Banks in 1972, (popularly known
as Narasimham Committee) which submitted its report in 1975.
Need of Rural Finance
India‘s rural poor are overwhelmingly dependent on agriculture as their

primary source of income; the majority is marginal or small farmers, and
the poor holds are landless. The financial needs of India‘s rural poor
reflect the volatile, uncertain, and irregular income streams and
expenditure patterns of these households. The recently completed World
Bank-NCAER Rural Finance Access Survey of 2003 (henceforth referred
to as RFAS 2003) indicates that while rural families are predominantly
multiple-income households, their two main sources of income include
the sale of agricultural products and wage labor.
Irregular employment is the most important source of income from wage
labor
For households with more than one source of income, agricultural income
is the most important secondary source, with sales of farm produce and
dairy products being the most prominent. Clearly, rural households
depend on one or both of two types of income: seasonal (post-harvest
sale) or highly irregular, due to irregular or part time wage labor, with the
dependence on the latter being inversely proportional to the size of land
holdings. The typical expenditure profile of the households is also of
small, daily, or irregular expenses incurred throughout the month.
Moreover, the overwhelming majority of rural households report having
to deal with at least one unusual expense each year, which they are forced
to finance either from cash at home or through informal loans from
family, friends, or money lenders. Research shows that poor people value
financial services and want these to be reliable, convenient, continuous,
pg. 8
and flexible. They understand that financial services help them spend at
one time the income they have earned at other times. And because those
incomes tend to be small, irregular, and unreliable, they need the full
armory of intermediating modes—saving up for future spending, taking
advances against future savings, and building cash reserves that can be
called on at any time. The poor need a wide range of financial services—
from small advances to tide over consumption needs to loans for
investment purposes to long-term savings that help them manage life-
cycle needs.
pg. 9
RRBs: Structure and Functions of the
Rural Banking
Structure and Functions of the Rural Banks!
The Regional Rural Banks (RRBs) aimed at providing credit and other
facilities to the small and marginal farmers, agricultural labourers,
artisans and small entrepreneurs in rural areas.
The RRB Act, 1986, empowers the Central Government to establish in a
State or Union Territory one or more RRBs when any sponsor bank
makes such a request The sponsor bank assists the RRB in many ways by
subscribing to its share capital, by helping in its establishment, by
assisting in recruitment and training of its cadre, and in general providing
such managerial and financial assistance sought by the RRB.
The RRB functions within the local limits as specified by government
notification. It can have its branches at any place as notified by the
government.
pg. 10
Structure and Organisation of the RRB:
The authorised capital of an RRB is fixed at Rs. 1 crore and its issued
capital at Rs. 2 lakhs. Of the issued capital, 50 per cent is to be subscribed
by the Central Government, 15 per cent by the concerned State
Government and the rest 35 per cent by the sponsoring bank.
The working and affairs of the RRB are directed and managed by a Board
of Directors consists of a Chairman, three directors to be nominated by
the Central Government, and not more than two directors to be nominated
by the State Government concerned, and not more than 3 directors to be
nominated by the sponsoring bank. The chairman is appointed by the
Central Government and his term of office does not exceed five years.
pg. 11
Functions of Rural Bank
Rural banking in India came into existence since the establishment of

banking sector in India. Rural Banks in those days mainly focused upon
the agro sector. Banking Regulation Act, 1949 brought cooperative Banks
and Regional Rural Banks under the Reserve Bank’s jurisdiction, while
amendments to the Reserve Bank of India Act, Regional Rural Banks
(RRB) are regulated by the Rural Planning and Credit Department
of Government of India and supervised byNABARD. Capital share being
50% by the Central Government, 15% by the state government and 35%
by the scheduled bank. Total authorized capital was fixed at Rs.1 Crore
which has since been raised to Rs 5 crore. RRBs started their
development process on 2nd October, 1975 with the formation of a single
bank (Prathama Grameen Bank)
Functions of RRBs are as follows
 RRBs grant loans and advances to small farmers and agricultural

laborers so that they can start their own farming activities including
purchase of land, seeds and manure.
 RRBs provides banking services at the doorsteps of the rural
people ,particularly in those area which are not served by any
commercial Bank
 The RRBs charges a lower rate of Interest and thus they reduce the
cost of credit in the rural areas.
 RRBs provide loan and other financial assistance to entrepreneurs
in villages, sub-urban areas and small towns .So that they become
able to enlarge their business.
 Loans to artisans to encourage them for the production of artistic
and related goods.
 Encourage the saving habit among the rural and semi-urban
population.
 Granting of loans and advances to small and marginal farmers and
agricultural labourers, whether individually or in groups, and to co-
operative societies, agricultural processing societies, co-operative
farming societies, primarily for agricultural purposes or for
agricultural operations and other related purposes;
pg. 12
 Granting of loans and advances to artisans, small entrepreneurs
and persons of small means engaged in trade, commerce and
industry or other productive activities within its area of co-
operation; and
 Accepting deposits.
pg. 13
Objectives of Rural Banks
The RBBs Act has made various provisions regarding the incorporation,
regulation and working of RRBs. According to this Act, the RRBs are to
be set-up mainly with a view to develop rural economy by providing
credit facilities for the purpose of development of agriculture, trade,
commerce, industry and other productive activities in the rural areas.
Such facility is provided particularly to the small and marginal farmers,

agricultural labourers, artisans, and small entrepreneurs and for other
related matters.
The objectives of RRBs can be summarized as follows:
(i) To provide cheap and liberal credit facilities to small and marginal
farmers, agriculture labourers, artisans, small entrepreneurs and other
weaker sections.
(ii) To save the rural poor from the moneylenders.

(iii) To act as a catalyst element and thereby accelerate the economic
growth in the particular region.
(iv) To cultivate the banking habits among the rural people and mobilize
savings for the economic development of rural areas.
(v) To increase employment opportunities by encouraging trade and

commerce in rural areas.
(vi) To encourage entrepreneurship in rural areas.

(vii) To cater to the needs of the backward areas which are not covered by
the other efforts of the Government?
(viii) To develop underdeveloped regions and thereby strive to remove

economic disparity between regions.
pg. 14
Objective & Role of RRB?
RRB (Regional Rural Bank) is also known as ‘Gramin Bank’. It was
established in 26th September 1975 with the objective of the economic
development of India. The ideology behind RRB is to focus on the
upliftment of the rural economy because it is assumed that Real growth of
Indian Economy lied in the freeing of rural masses from unemployment,
acute poverty and socio-economic backwardness.
RRBs works for fulfilling the needs of rural population comprised of: -
- Agricultural labourers
- Artisans
- Small entrepreneurs
- Small and marginal farmers
- Mobilize deposits from rural households
Role for RRB: - RRB has following major role in implementation of

central and state government sponsored various programme of poverty
alleviation as-
 Swarnajayanti Gram Swarozgar Yojana(SGSRY)
 Prime minister Rozgar guarantee Yojana
 Antyabasai
 Old Age pension
 Midday Meal
 Indira Awas Yojana
 Payment to Aganbadi
 Scholarship to Students
 Labor payment for NAREGA laborers
pg. 15
Regional rural banks in India penetrated every
corner of the country
Rural banking in India started since the establishment of banking sector

in India. Rural Banks in those days mainly focussed upon the agro sector.
Regional rural banks in India penetrated every corner of the country and
extended a helping hand in the growth process of the country.
SBI has 30 Regional Rural Banks in India known as RRBs. The rural
banks of SBI is spread in 13 states extending from Kashmir to Karnataka
and Himachal Pradesh to North East. The total number of SBIs Regional
Rural Banks in India branches is 2349 (16%). Till date inrural banking in
India, there are 14,475 rural banks in the country of which 2126 (91%)
are located in remote rural areas.
Apart from SBI, there are many other banks which function for the
development of the rural areas in India. These banks are listed below:
pg. 16
Andhra Pradesh
Bihar
* Andhra Pradesh Grameena Vikas Bank

* Andhra Pragathi Grameena Bank
* Deccan Grameena Bank
* Chaitanya Godavari Grameena Bank
* Saptagiri Grameena Bank
Chhattisgarh
* Chhattisgarh Gramin Bank

* Surguja Kshetriya Gramin Bank
* Durg-Rajnandgaon Gramin Bank
Haryana
* Harayana Gramin Bank

* Gurgaon Gramin Bank
Jammu & Kashmir
* Jammu Rural Bank

* Ellaquai Dehati Bank
* Kamraz Rural Bank
Assam
* Assam Gramin Vikash Bank

* Langpi Dehangi Rural Bank
pg. 17
Jharkhand
* Jharkhand Gramin Bank

* Vananchal Gramin Bank
Gujarat
* Dena Gujarat Gramin Bank

* Baroda Gujarat Gramin Bank
* Saurashtra Gramin Bank
Himachal Pradesh
* Himachal Gramin Bank

* Parvatiya Gramin Bank
Punjab
* Punjab Gramin Bank

* Faridkot-Bhatinda Kshetriya Gramin Bank
* Malwa Gramin Bank
Kerala
* Narmada Malwa Gramin Bank

* North Malabar Gramin Bank
Tamil Nadu
* Pandyan Grama Bank

* Pallavan Grama Bank
pg. 18
Maharashtra
* Marathwada Gramin Bank

* Aurangabad -Jalna Gramin Bank
* Wainganga Kshetriya Gramin Bank
* Vidharbha Kshetriya Gramin Bank
* Solapur Gramin Bank
* Thane Gramin Bank
* Ratnagiri-Sindhudurg Gramin Bank
Karnataka
* Karnataka Vikas Grameena Bank

* Pragathi Gramin Bank
* Cauvery Kalpatharu Grameena Bank
* Krishna Grameena Bank
* Chikmagalur-Kodagu Grameena Bank
* Visveshvaraya Gramin Bank
Rajasthan
* Baroda Rajasthan Gramin Bank

* Marwar Ganganagar Bikaner Gramin Bank
* Rajasthan Gramin Bank
* Jaipur Thar Gramin Bank
* Hodoti Kshetriya Gramin Bank
* Mewar Anchalik Gramin Bank
Orissa
* Kalinga Gramya Bank

* Utkal Gramya Bank
* Baitarani Gramya Bank
* Neelachal Gramya Bank
* Rushikulya Gramya Bank
pg. 19
Villagers can now deposit as well as withdraw cash
upto Rs 10000 per day using 'branch less banking
under rural banking scheme
Financial inclusion plans of banks seems to be taking new leaps across

the country. The rural banking drive in Goa has brought with it the
facility of branchless banking to villagers in remote areas which have not
been touched by banking. Villagers can now deposit as well as withdraw
cash upto Rs 10000 per day using 'branch less banking underrural
banking scheme.'A survey conducted has resulted in shortlisting of 41
villages which will receive the platform of mobile banking through
customer service points (CSPs).According to SBI district manager, S
Shahane, the CSPs will have 'zero' application software. The villagers
will be provided biometric smart cards to carry out transactions."For
every transaction, the customer will be issued a receipt from the
machine," RSETI (rural self-employment training institute) director
Suhas Dhamankar said.Of the 41 unbanked villages, 18 will be run by
State Bank of India (SBI), and the others by Union Bank, Bank of India,
Syndicate Bank, Canara Bank, Bank of Baroda and Indian Bank. The
CSPs will be linked with a mobile service and will function in a PCO
model whose accounts will be maintained by nationalized banks.
pg. 20
Rural banking prove the next development engine
for Indian banks
The growth of the domestic economy, the banking sector in India has
truly come of age. But with the current slowdown and fears of a global
recession, the Indian economy and the banking sector have been looking
for new avenues of growth. In the face of these circumstances, it is ironic
that rural banking which has hitherto been a slow growth sector could
prove the next development engine for Indian banks. With affordable and
relevant technology driving penetration as well as providing an improved
service experience, rural banking could bring in financial inclusion and
help banks grow their business radically.
Indian banks have awakened to the vast potential of the rural sector.
Specialized and innovative schemes to improve rural penetration have
become the popular mantra. No-frills credit cards, franchisee networks,
supply chain financing for agriculture, investments in rural infrastructure
and cross-selling of products are only some of the programs directed at
the rural sector. Needless to say, at the core of these initiatives lies
sophisticated yet reasonably priced technology - playing a significant role
both in effective operations and delivery
pg. 21
India’s First Rural Bank to issue ATM Card,
Launched in Salem
Customer-friendly: Collector J. Chandrakumar (extreme left) launching

the ATM cards of Pallavan Grama Bank to D. Bhuthalingam (GM, Indian
Bank, Coimbatore), in Salem on Monday.Pallavan Grama Bank has
become the first Regional Rural Bank in the country to launch the Indian
Bank co-branded ATM cards for its customers.
Launching the same here on Monday, Collector J. Chandrakumar lauded

the efforts of the Pallavan Bank, which he said had been doing good
services to the rural populace.He further added that the bank with its
innovative schemes had been performing well.He also released a booklet
on ‘Guidelines for Recognition and Settlement of Claims relating to
Deceased Depositors’ account and on policies’.General Manager, Indian
Bank Circle Head Office, Coimbatore, D. Bhuthalingam received it.
pg. 22
Named as Pallavan Bank ATM crads, its customers could withdraw
money from any of 1,092 Indian Bank ATMs established in the country
with a maximum of Rs. 25,000 as withdrawal amount per day. Its
Chairman G. Rangarajan spoke in detail on various schemes of the bank
and its future development. It also was determined to take the advanced
banking to rural areas, he said.
The bank had touched Rs. 1,300 crores of business and second to none in
automation of banking with ATM facility.
The modern banking system has failed to deliver inexpensive credit to India’s
600,000 villages
ECONOMICALLY empowering, i.e. access to inexpensive credit and

other micro-finance services, including savings and insurance, India’s
rural population will have a significant impact on India’s economic
growth. Economic empowerment is defined here as. The modern banking
system has failed to deliver inexpensive credit to India’s 600,000 villages
– despite several expensive attempts to do so. Do we need to rethink the
appropriate institutional structure for rural bankingin India? The problems
of widespread poverty, growing inequality, rapid population growth and
rising unemployment all find their origins in the stagnation of economic
life in rural areas.
Since the days of the Rural Credit Survey Committee (1954), India has
come a long way in its search for an appropriate rural banking set-up.
Though there has been some improvement, the problem remains. There
has been tremendous progress in quantitative terms but quality has
suffered, progress has been slow and halting and significant regional
disparities persist. Stagnation in rural banking is noticed in the north and
northeastern regions. The focus should be on assisting and guiding small
farmers. It is in this context that the role of rural banking institutions has
to be reconsidered.
pg. 23
The development strategy adopted and the increasing diversification and
commercialisation of agriculture underline the need for the rapid
development of rural infrastructure and a larger flow of credit. Activities
allied to agriculture – livestock breeding, dairy farming, sericulture etc
are being taken up on commercial lines. Further, hi-tech agriculture with
an export orientation has brought about higher productivity in cotton,
oilseeds, etc.
Progressive and not-so-small farmers have no difficulty in obtaining

credit from the commercial banks. Credit for the poorer households is the
real problem.
The Narasimham Committee observed that the manning of rural branches

“has posed problems for banks owing to the reluctance of urban-oriented
staff to work in the rural branches and the lack of motivation to do so.
More local recruitment and improved working conditions in rural areas
should help to meet this problem.”
pg. 24
Role of Banks in Promoting Financial Inclusion
The Indian economy is growing strongly which ensures better recovery

and asset valuation. Progressive bank reforms and low interest rates will
increase borrowing activity to meet their financial targets. Banking
industry is making rapid strides with Information technology driven
initiatives and has led to expansion of products (i.e.) expansion of
financial services giving birth to the concept of Financial Inclusion.
Financial inclusion is the availability of banking services at an affordable

cost to the disadvantaged and low incomegroups. In India, the basic
concept of financial inclusion is having a saving or current account at any
bank. In reality, it includes loans, insurance services and much more, for
all members of an economy. An inclusive financial system has several
merits. It facilitates efficient allocation of productive resources and thus
can potentially reduce the cost of capital. In addition, access to
appropriate financial services can significantly improve the day to day
management of finances.
An inclusive financial system can help in reducing the growth of informal

sources of credit such as money lenders, which are often found to be
exploitative. Thus, an all inclusive financial system enhances efficiency
and welfare by providing avenues for secured and safe saving practices
and by facilitating a whole range of efficient financial services.
In India, the Reserve Bank of India has initiated several measures to

achieve greater financial inclusion, such as facilitating “no frill” accounts
and “General Credit Cards” for low deposits and credits. The German
Bankers’ Association introduced a voluntary Code in 1996 providing for
an “everyman” banking transactions. In South Africa, a low cost bank
account called “Mzansi” was launched for financially excluded people in
2004 by the South African Banking Association. Alternative financial
institutions such as micro finance institutions and Self Help Groups have
also been promoted in some countries in order to reach financial services
to be excluded.
pg. 25
Rural Finance Service Providers
India has a range of rural financial service providers, including formal
sector financial institutions at one end of the spectrum, informal
providers (mostly moneylenders) at the other end, and between these two
extremes a number of semi-formal/microfinance providers.
Formal Providers.
In terms of their sheer size and spread of operations, formal-sector
financial institutions dominate the rural finance landscape: Commercial
banks, mostly public sector banks (but also some private- sector banks)
and regional rural banks (RRBs) together have more than 32,000 rural
branches India also has a vast network of rural cooperative banks, with a
three tiered structure at the state, district, and village levels. There are
some 14,000 branches of rural cooperative banks and more that 98,000
grassroots retail outlets of Primary Agricultural Credit Societies (PACS),
which are used by the cooperative system as channels for fund flows. The
post office system adds to the physical service point network of the
country with more than 154,000 post office branches handling more than
110 million money orders and administering 114 million savings
accounts Formal financial institutions are regulated by the Reserve Bank
of India (RBI), although it has delegated the task of supervising rural
cooperative banks and RRBs to the National Bank for Agriculture and
Rural Development (NABARD). 14Development banks such as
NABARD and the Small Industries Development Bank of India (SIDBI)
provide support to both formal and semi-formal segments through
funding refinancing arrangements. NABARD provides refinancing to
banks‘ lending in rural areas and SIDBI funds and supports MFIs.
pg. 26
The semi-formal/microfinance sector
While India is home to many microfinance innovations, in terms of

people reached and the scale of financing, microfinance in India is still a
drop in the ocean. It reaches between 5 and 6 percent of the country‘s
poor rural households, or about 30 percent of the rural poor, either
directly or indirectly. Dominant among the microfinance models is Self-
Help Group (SHG) – Bank linkage, whereby women‘s SHGs are linked
to the rural branches of commercial banks, RRBs, or cooperative banks,
which often benefit from refinancing by NABARD. SHG-Bank linkage
has reached out to around 12 million family‘s interns of savings accounts.
Credit outstanding remains low; disbursements in FY 2002–03
accounted.
for only 2 percent of the formal-sector credit outstanding in rural areas.

The other model is specialized Microfinance institutions (MFIs), which
reach around 1 million clients. The total branches of MFIs are estimated
to be in the range of a few thousand, compared to the vast numbers of
bank branches. Recent developments have led to other inter linkages
between the formal both public- and private sector banks and semi-formal
sector initiatives, particularly in the context of SHG–Bank linkage, as
well as through lending by SIDBI and commercial banks to MFIs.
Moreover, a few private-sector commercial banks, such as ICICI Bank,
have tried innovative ways of incorporating lessons from microfinance
into their operations, and have made inroads in using micro finance
methodologies to deliver rural financial services. Informal providers,
Informal financiers include a range of actors-landlords, local
shopkeepers, traders, professional moneylenders, etc. While there are no
definite estimates of the number of informal-sector providers, these are
spread very widely across the country. Survey data indicate that poor
rural households rely heavily on informal finance to meet a range of
pg. 27
financing needs: from consumption and emergency financing to
investment loans.
Review of literature:
RRBs though operate with a rural focus are primarily scheduled

commercial banks with a commercial orientation. Beginning with the
seminal contribution of Haslem (1968), the literature probing into factors
influencing performance of banks recognizes two broad sets of factors,
i.e., internal factors and factors external to the bank.
The internal determinants originate from the balance sheets and/or profit
and loss accounts of the bank concerned and are often termed as micro or
bank -specific determinants of profitability. The external determinants are
systemic forces that reflect the economic environment which conditions
the operation and performance of financial institutions. A number of
explanatory variables have been suggested in the literature for both the
internal and external determinants. The typical internal determinants
employed are variables, such as, size and capital [Akhavein et al. (1997)]
The literature on RRBs recognizes a host of reasons responsible for their
poor financial health. According to the Narasimham Committee, RRBs
have low earning capacity. They have not been able to earn much profit
in view of their policy of restricting their operations to
target groups. The recovery position of RRBs is not satisfactory. There
are a large number of defaulters. Their cost of operation has been high on
account of the increase in the salary scales of the employees in line with
the salary structure of the employees of commercial banks. In most cases,
these banks followed the same methods of operation and procedures as
followed by commercial banks. Therefore, these procedures have not
found favor with the rural masses. In many cases, banks have not been
located at the right place. For instance, the sponsoring banks are also
pg. 28
running their branches in the same areas where RRBs are operating. The
issue whether location matters for the performance has been addressed in
some detail by Malhotra (2002). Considering 22 different parameters that
impact on the functioning of RRBs for the year 2000, Malhotra asserts
that geographical location of RRBs is not the limiting factor for their
performance. He further finds that ‗it is the specific nourishment which
each RRB receives from its sponsor bank, is cardinal to its performance‘.
In other words, the umbilical cord had its effect on the performance of
RRBs.
Need for the study:
The rural banking system in India has an essential role in the rural
development of the country. Beginning with co-operative credit structure
followed by rural branches of commercial banks and then RRB‘s the
institution structure has grown and expanded during the last 64 years
since independence. In spite of these expansion programmers, a large
segment of rural economy is still beyond the reach. The success of any
bank depends on the facility what they provides to their customers.
Objective of the study
To analyze the usage of bank facility by the rural customer
To trace out the genesis and concepts of rural banking.
To know the reasons for unprofitable of rural banking in India.
To identify the cost per transaction of Indian Banks and purpose of
borrowings.
Scope of the study
The study mainly deals with the elements issues and challenges of rural
bank. The study is limited to the study of rural banks and to some
extent of financial data. This information helps to understand the
performance of the rural banks in India. Study is limited to Rural
Banking sector in India.
pg. 29
KEY DRIVERS OF FINANCIAL EXCLUSION OF
RURAL BANKING
Approximately 245 million adults in rural India do not have a bank

account today. As depicted in Following Table, this reflects 24% of the
total population. While 60 million out of 245 million may not need
banking services because they are below the poverty line, Diamond
believes that approximately 185 million ―potentially bankable‖ people
do not use formal banking services because of reasons like poor access
or usage.
Unbank Poten
Non Urban Rural e Financial tial
Total Adult Banked
Adult Populat Adult Adult Populat d ly ly
Populati Populat i Populat Populat i Populat Bank
i i i i Constrai abl
on on on
on on On on nts e
100 47 53 16 37 13 24 6 18
Source: Census India; BSR 2008-Reserve Bank of India; World Bank &
NCAER (2008)
pg. 30
Access Issues for Rural Customers
Access is explained in terms of
Infrastru Limite Delive The

cture Physical d ry Regulatory economics of
capabil
distance ities constraints rural banking.
The banking infrastructure in rural India is not encouraging, with just

7% of villages housing a bank branch. What‘s more, the poor physical
and social infrastructure also impacts the access to financial services,
with 23% of villages going without electricity, 67% without a Post
Office, and an average rural literacy rate of 59% and secondary school
penetration of 12%. This lack of physical and social infrastructure in rural
India is a key issue impacting access to formal financial services. The
average distance to a branch in India is approximately 3.8 Kms. While
this compares favorably to the average distance to a branch in a
developed market like the U.S. (which is 6 Kms6), there are significant
additional challenges in India in the form of unpaved roads and limited
pg. 31
access to modern transportation.
Most rural customers are likely to sacrifice an entire day‘s wage to travel
to a bank branch which is open between 10:00am and 5:00pm. While
some banking transactions could be done over phone, this is rarely an
option in a country with such low rural television-density. Limited
delivery capability is a significant challenge. Much of rural India is
serviced through branches because ATM penetration is low and other
channels such as Phone and Internet Banking are non-existent.
Intermediaries like Non-Governmental Organizations (NGOs), Self-Help
Groups, and Micro Finance Institutions (MFIs) are being used by banks
to improve access to credit and savings. However, these channels, in their
current form, offer limited services. There are some regulatory
constraints imposed by the Reserve Bank of India (RBI) which may
inadvertently contribute further to the lack of formal banking services in
rural areas. For example, the RBI does not allow banks to post any person
other than a security guard at ATMs. Hence, banks cannot deploy many
ATMs in rural areas as many rural customers require in-person support. A
second regulatory inhibitor is that new banks planning to establish a
branch in a rural area have to receive approval from the Lead Bank and
District Collector of that district. Hence, banks choose not to open new
branches in certain areas even when it is profitable to do so because there
is no certainty of getting approvals. Many banks view the rural market as
a regulatory requirement rather than an economic opportunity. Banks
have from time to time borne the social cost of lending to the rural
economy at rates below their costs. They have also faced capital erosion
because of the write-off of loans, particularly agriculture loans. Banks are
required via regulatory requirements to open branches in rural areas to
provide loans to agriculture and other priority sectors.
pg. 32
REASONS FOR UNPROFITABLE OF RURAL
BANKING IN INDIA
High Non-Performing Loans (NPL)Banks have higher non-
performing loans in rural areas because rural households have
irregular income and expenditure patterns. The issue is compounded
by the dependence of the rural economy on monsoons, and loan
waivers driven by political agendas. NPLs from the agriculture sector
are 7.7%, compared to 3.5% across non-agriculture sectors. In order
for banks to view rural India as a growth opportunity, rather than a
regulatory requirement, a combination of these issues must be
addressed. Increasing financial access to rural areas is contingent
upon basic conditions such as proper infrastructure and an enabling
regulatory framework, as well as innovative thinking on the part of
commercial banks. Access issues, however, explain only one part of
the problem. Usage is an equally important issue for rural customers.
Low Ticket Size: The average ticket size of both a deposit
transaction and a credit transaction in rural areas is small. This means
that banks need more customers per branch or channel to break even.
Considering the small catchments area of a branch in rural areas,
generating a customer base with critical mass is challenging.
High cost to serve: Branches are the most used channel in rural
areas. This is because many rural people are not literate and are not
comfortable using technology-driven channels such as ATMs, phone
banking or internet banking. On the other hand, a branch is an
expensive channel for banks (Following Table). In addition, rural
people, whenever they have access to banks, have frequent low ticket
and cash-based transactions, which increase the overall transaction
cost for their bank.
pg. 33
Cost Per Transaction in Indian Banks
Phone (Call
Branch Centre) ATM Phone (IVR) Interne
48 25 18 8 4
Source: Reserve Bank of India; CGAP, World Bank.
Higher risk of credit: Rural households may have highly irregular and
volatile income streams. Irregular wage labor and the sale of agricultural
products are the two main sources of income for rural households. The
poor rural households (landless and marginal farmers) are particularly
dependent on irregular wage employment. Rural households also have
irregular expenditure patterns. The typical expenditure profile of rural
households is small, with daily or irregular expenses incurred through the
month. Furthermore, a majority of households incur at least one
unscheduled expenditure per year, with the most frequent reasons being
medical or social emergency. In short, the rural customer is generally
considered to be a risky one.
Information Asymmetry: Since many rural people do not have bank
accounts, there is a lack of information on customer behavior in rural
pg. 34
India. Absence of a Credit Information Bureau also complicates the
problem as banks have to rely on informal sources to learn the credit
history of rural customers. A lack of reliable information can result in
either missed opportunities in not approving otherwise eligible loan
candidates, or nonperforming loans.
Issues and Challenges

Even if access to formal banking is provided to rural customers, there is
no guarantee that these services will be used. According to a study
conducted by the World Bank, many households, even in developed
countries, choose not to have a bank account as they do not engage in
many financial transactions they collect wages in cash, spend in cash and
do not wish to be burdened by a bank account. To compound the situation
many customers in rural India, who have access to and would otherwise
choose to use formal financial services, do
not do so because the product and service mixes do not meet their needs.
The financial service needs of rural customers are not confined to just
savings and credit, as is usually assumed. Their financial needs are
linked to their life cycle needs, ranging from savings to credit to
insurance to remittances. In fact, even the savings and credit products
currently offered to rural customers do not entirely meet their needs.
Access to savings and investment facilities is critical for the poor. The
two critical needs for the rural poor are micro-savings and frequent
withdrawals. These needs facilitate a customer in building capital over
the long term, as well as coping with income shocks in the near term.
However, banks do not offer adequate services to address these needs.
The lack of services, therefore, leaves the rural poor with little option
than to transact with the informal banking market. A study conducted by
pg. 35
Micro Save also concludes that the poor transact with the informal sector
because it will accept small amounts, provide doorstep service, and
ensure ease of enrolment. Rural customers need loans not only for
productive purposes but also for consumption needs (Following Table).
A part from agricultural support, rural customers need micro credit for
consumption, education and emergencies. Though banks offer purpose
free loans (personal loans and credit cards) in urban areas quite liberally,
in rural areas sanction of such loans is significantly restricted. Therefore,
the poor raise these loans through the informal financial system (it is
worth noting that these loans taken from the informal system are almost
always repaid or renewed12). In addition, larger households need
occasional high value micro-enterprise loans for small capital
investment. Though banks offer these loans, they require excessive
documentation and time-consuming processes which discourage
customer applications.
Purpose of borrowing
1. Rural Household Borrowing
2. Bank Lending to Rural Households
Rural Household Borrowing

Other business
Agriculture Expenditure Household Expenditure Expenditure
38% 48% 14%
pg. 36
Bank Lending to Rural Households
Other Business Loan Personal Loans Agriculture Loan

52% 12% 36%
Source: AIDIS-2008, National Sample Survey Organization (NSSO);

Diamond analysis.
Insurance reduces the vulnerability of poor households by replacing

the uncertain prospect of large losses with the certainty of payout
against small, regular premium payments. It is integral to a
comprehensive risk management strategy for poor households. This
includes life, health, accident and asset (dwelling, crop, and livestock)
insurance. Banks and insurance firms do not offer these services in
many rural areas, leading the poor to rely on the informal financial
system.
pg. 37
There are many rural households which depend on weekly or monthly
remittances from their family members who have moved to urban areas.
At present, they depend on informal channels to remit the money and
consequently either risk the loss of money or pay high transaction fees.
Banks do not offer seamless remittance facilities between urban and rural
branches as many of the rural branches are not computerized and
connected to the main bank‘s computer systems. This often results in the
beneficiary receiving the amount two weeks after it has being transferred.
This represents yet another key service which is not provided.
The transaction cost for a rural customer to receive credit primarily
constitutes four attributes: the interest rate, loan amount received as a
percentage of amount applied, bribes paid, and the lead time to process
the loan. Though the formal banking system offers loans at interest rates
lower than informal banking systems, the time taken for a loan to be
sanctioned is high which increases uncertainty and opportunity cost. In
addition, the customer needs to pay almost 10% of the loan amount in
bribes and eventually receives an amount that is less than what was
applied for. Therefore, while the interest rates are usurious in the informal
financing system, rural customers still resort to this channel because the
waiting time to receive the loan is negligible and there are no indirect
costs or commission. Banks also insist on collateral security which many
rural poor cannot afford.
As far as savings are concerned, though the formal banking system
provides financial security, the cost of opening and operating an account
is high. The overall cost of transacting with the formal financial system
increases for a rural person because of additional costs such as expenses
incurred to reach a branch and the opportunity cost of lost wages. Since
rural banks are generally not within an accessible area and do not operate
at convenient times, the rural customer must forgo a day‘s wage to reach
a branch. Informal systems, on the other hand, involve a lower transaction
pg. 38
cost, but they are risky and in some cases result in the loss of one‘s entire
capital. In short, this leaves the rural customer to choose between two
unfavorable options.
Limitations:
1. The study proposed to collect the data from a defined sector i.e.
Banking sector.
2. The study is limited to the extent of issues and challenges in rural
banking sector, but not with other cost and other sector.
However effort would be made to minimize the impact of all these
limitations by
incorporating appropriate measures.
pg. 39
REGIONAL RURAL BANKING: A THEORETICAL
REVIEW
Rural populace around the world is almost always in the clutches

of poverty, and is invariably deprived of all the amenities enjoyed by the
urban inhabitant. Rural populace around the world is not famous for their
prolonged poverty. It is estimated that not less than 70 per cent of the
world’s poor are living in the rural areas and in the developing world,
around 55 per cent of their total population are in the rural area (IFAD,
2010). Poor education, health and sanitation, lack of social assets, limited
economic opportunities and social inequalities are the causes and
manifestations of poverty. Despite intensive poverty eradication measures
among countries, the menace is actively present among many Asian and
Sub-Saharan countries.
Lack of infrastructure and utilities such as road, electricity,

drinking water, schools, hospitals, communication systems etc. in rural
areas lead most of the heavy industries and non-farm job avenues to
urban areas, and this has forced the majority of countrymen to depend
mainly on agriculture for their livelihood.
Seasonal rainfall, obsolete technology, inadequate support such as

transport, storage, processing and marketing; and lack of market
information lead to underemployment in agriculture. Added to this, the
exploitation of money lenders due to the absence of formal financial
institutions and also the reluctance of these financial institutions to lend
money to the rural farmers aggravated the situation further. Thus, these
severe problems lead the rural inhabitants to their migration which
ultimately ends up in city slums and adds to urban poverty. To improve
the economic and social conditions of the rural mass, there have been
pg. 40
many policy and administrative initiatives called “rural development
programme” in both developed and developing countries. Recently, there
has been a shift of focus in rural development programmes from
providing direct employment to empowering people by providing with
low cost credit in order to assist them in creating employment and wealth.
In fact rural people are not less intelligent, less hard working or less
ambitious, but lack of capital resources and information in rural areas
lead to low productivity, low income, low savings, and resultant poverty.
To help people to come out of this vicious circle, the need of capital
infusion and availability of information and market intelligence to
ambitious rural individuals and groups cannot be over emphasized.
Today banks can act as a vehicle to carry, distribute and administer this
most essential ingredient of rural development.
Even though banking as an industry has grown to sky heights in

the world, in no country their doors are open impartially to all. Due to
economic, social and geographical reasons, vast majority of the rural
poor have not received much attention and care of the formal banking
sector until recently. Now even in developed countries there is a greater
awareness as to the role which financial institutions can play in
empowering the low income groups. With this end in view, United
Kingdom has constituted a Financial Inclusion Fund in 2004 and banks
and credit unions have been given responsibilities of specific areas.
Similarly United States of America has Community Reinvestment Act
(CRA) and Home Mortgage Disclosure Act (HMDA). Though both these
Acts are comparatively older, a recent amendment to these Acts made
them some more strong. As per the provisions of these Acts, banks are
prohibited from discriminating against low and moderate income
communities and further the banks are obliged to disclose the details as to
pg. 41
whom the services are offered. Now Philippines, Brazil, Indonesia,
China, Thailand, Nigeria, Bangladesh, Pakistan, Ghana apart from India
are some of the other countries focusing on rural banking in this manner.
Concept of Rural Banks

Banking in its most simple form is as old as authentic history of human
being. As early as in 2000 BC, Babylonians had a system of banking
which was the oldest trace of banking. It was done by private individuals
in the early years; later on they established public banks to facilitate
commercial activities and to serve the governments. The Bank of Venice
(1157) is considered to be the first ancient bank followed by Bank of
Barcelona (1401) and Bank of Genoa (1407) (Vaish, 2002). In the initial
period, the activities of these banks were confined to satisfying of the
individual needs of a few influential people; but later on, through various
stages, it developed in to the present state. Presently, banking industry
hand in hand with Information and Communication Technology (ICT)
has grown to the length and breadth of the world.
Banks worldwide are broadly classified as Central banks,

Commercial banks, Development banks, Co-operative banks and
Specialized banks. With regard to the importance, the share of
Commercial banks is so large that the term bank itself is to mean a
commercial bank unless otherwise specifically stated. Despite the
physical presence of banks of varied nature in the rural, semi urban and
urban areas; their urban origin, commercial orientation, pro-rich policies
and profit motivation have marginalized a greater portion of the
population, i.e., the rural poor, from accessing the banking services.
Though the reasons like economic, financial, geographical conditions and
lack of awareness can also be pointed out, the lukewarm attitude of the
pg. 42
banks mainly force the marginalized people to source their credit needs
from informal, indigenous, exploitative sources which made them more
and more marginalized.
To address the pressing need of providing formal credit to rural

people, another form of banking “Rural Banking” came into being across
the world (Shekhar and Shekhar, 1998). These were public or private,
commercial or co operative banks, regionally based, and rural oriented
with specially designed service schemes to suit the needs of agriculture,
micro and small industries, petty and small traders, artisans, and even
landless labourers in the rural areas.
At the beginning, these banks were organized in co-operative sector and

later on spread to the public sector also. As regards the functions, these
banks were expected to cover not only agricultural needs, but all aspects
of rural life such as trade, small manufacturing, retailing, and other self
employment initiatives. Apart from providing credit and collecting
savings, these were also envisaged to take up the task of implementing
poverty alleviation programmes of the governments, ancillary banking
services such as supplying inputs and providing assistance in marketing
and thus generally helping the overall development of the area of
operation. The idea of rural banks was found appealing to the
governments as well as the rural people despite many practical difficulties
in the beginning, and eventually it helped rural banking to get wider
acceptance across the length and breadth of the globe (Shekhar and
Shekhar, 1998).
pg. 43
Rural Banking in India
Despite a long tradition of banking there is no satisfactory history
that goes back beyond the Mughal period and covers all of India (India
Infrastructure Data Base, 2005). The evidences that are available suggest
that there were money lending operations in India during Vedic period
(2000-1400 BC) and the importance of interest rate was recognized by all
Hindu law givers such as Manu, Vasishta, Yajnavalkya, Gautama etc.
(Indian Central Banking Enquiry Committee, 1931 and Reddy, 1999).
The developments during the early 18th Century laid the foundations for
the Indian Banking System (RBI, 2006), and the western type joint stock
banking was brought to India by English Agency Houses of Calcutta and
Bombay (Mumbai). Further The Bank of Bombay (1720) was the first
joint stock bank in India, established in Mumbai (Bombay). Besides,
during the early nineteenth Century, East India Company’s trade was
concentrated in Calcutta, and there was a growing need for uniform
currency to finance foreign trade and remittances by British Army and
civil servants. This led to the establishment of the first Presidency Bank,
The Bank of Bengal in 1806. The Bank was given powers to issue notes
in 1823. Following this, the Bank of Bombay (1840) and the Bank of
Madras (1843) were also set up as Presidency Banks. They were known
as Presidency Banks as they were set up in the three Presidencies that
were the units of administrative jurisdiction in the country for the East
India Company and these banks were governed by the Royal Charters of
the British.
During the same period, the Swadeshi Movement (1906) in the

country gave a call for the Indian owned joint stock banks and also for
setting up of co-operative societies to cater to the needs of rural people. In
pg. 44
response to the call, many commercial banks of Indian ownership like
Punjab National Bank (1895), Bank of India (1906), Indian Bank Ltd
(1907), Bank of Baroda (1908), Central bank of India (1911), Canara
Bank etc. were set up in a row.
A major development in Indian banking that happened during the

period was the formation of the Imperial Bank of India in 1921 merging
the three Presidency Banks to act as banker’s bank, banker to the
Government and as a commercial bank. Simultaneously during the same
period, co-operative movements also began to grow, initially in the urban
areas and then in to rural areas as well. In 1913 the number of reporting
banks had raised to 56 (Report on Currency and Finance, RB, 2006) and
by 1915, there were 602 urban co operative credit societies and 13745
agricultural credit societies in India. The history of modern banking, from
a rural perspective can be summed into two broad time spans: Pre-
independence period and Post-independence period.
Pre-independence Phase
The pre-independence period was characterized by the existence of
large number of money lenders and small private banks, organized as
joint stock companies. They were largely localized and were maintaining
their own credit instruments (RBI, 2006). As there was no ceiling on
interest rates, usurious money lending practices were rampant. The
Central Banking Enquiry Committee Report (1929) and it’s associated
Provincial Reports like Madras Provincial Banking Enquiry Committee
Report (MPBEC, 1930), explain the then practices:
“Frequently the debt is not repaid in full and a part of the loan
persists and becomes a pro-note debt. In the course of time, it may with a
lucky year be paid off or it may become a mortgage debt. By the
pg. 45
existence of this heavy persisting debt the creditor takes the bulk of the
produce and leaves the debtor unable to repay short term loans. But
equally the short term loans have produced long term debts and there is a
vicious cycle. The farmers cannot clear his short term debt because of the
mortgage creditor and he cannot cultivate without borrowing because his
crops goes largely to the long term creditor. If he pays his long term
creditor his current debts swell and overwhelm him.”
The MPBEC found that repayment of prior debt was by far the
single most significant reason for borrowing in 1929. The mechanism of
mortgage was very beneficial to the landlords, by which they got control
over large tracts of land (MPBEC, 1930). Grain loan was another form of
loan which was commonly repayable in kind at harvest season. Rates of
interest on these were generally twice compared to cash loans. When cash
loans cost between 12 and 24 per cent, grain loans costs between 24 and
48 per cent and further there were no transparency in keeping the
accounts by the lenders. For tenant farmers, in addition to the loans and
interest, they had to pay the rent also on land. If the rents were not paid in
time the crops would be withheld in the field until the rent was cleared
and high rate of interest would be charged on the unpaid balance
(MPBEC, 1930).
Major Legislations on Rural Banking

The colonial government brought about much legislation to tackle the
serious situation prevailed among the rural agrarians. The enactment of
Deccan Agricultural Debt Relief Act (1879), and similar Acts in Punjab,
Berar (also known as Hyderabad Assigned Districts) and Central
Provinces empowered the courts to stop usurious interest and resultant
land grab by money lenders. Coming up of Land Mortgage Banks and
pg. 46
enactment of two legislations such as Land Improvement Loans Act
1883, (for long term loans), and Agriculturists Loans Act 1884, (for short
term loans) for providing low interest loans for agriculture were the
major interference by the legislature. But these laws did not help to
mitigate the situation (Chandavarkar, 1984).
The enactment of the Co-operative Societies Act 1904, and of
1912, enabled the entry and regulation of co-operative credit in India. By
1930, Provincial Co-operative Banks were set up in all provinces. But the
severe socio economic divisions that existed in the society disappointed
the visionaries. Most of the banks were run by the high caste landlords
and money lenders. Outcaste men found it impossible to get a loan from a
co-operative bank unless he promises his labour to the landlords at a low
wage (Royal Commission on Agriculture, 1929).
The introduction of Usurious Loans Act (1918) was indented to

apply the damdupat principle (interest never exceed principal) to debts.
Between 1933 and 1936 there were a number of Debt Conciliation Acts
in central provinces of Berar, Punjab, Assam, Bengal and Madras. These
Acts were to deal with the wave of legal suits against debtors for land
attachments following the situation emerged out of the Great Depression
of thirties. Debt Reconciliation Boards stemmed out of these laws, were
abolished after a few years finding that they lack any coercive powers
(Naidu, 1946).
To regulate the money lenders, The Punjab Regulation of Accounts

Act 1930, and Debtors Protection Act 1935 were passed which made
licensing, registration and proper accounting of transactions compulsory
to money lenders. But these laws were also ineffective due to the
reluctance of the debtors to sue the money lenders being their sole source
pg. 47
of funds in emergencies (Chandavarkar, 1984). But the Madras
Agriculturists Debt Relief Act 1938 attracted the hostility of creditors,
leading to many instances of litigation (Naidu, 1946).
Despite all these regulations, the money market continued to be deeply

imperfect. The fixing of interest rate, fixing of price for the produce,
fixing of time of its sale, were beyond the discretion of debtors, added
with this is the oppressive caste system, asymmetrical power balance
among different castes and occasional drought led to the pauperization of
peasantry in colonial India.
b) Reserve Bank of India

During the early twentieth Century, major socio economic events
like First World War (1914-1918) Great Depression (1930) and World
War II (1939-1945) etc. led to continuous bank failures in India (India
Infrastructure Database, 2005). The high mortality rate among Indian
banks and low support to agriculture and rural credit by them felt the
need for a central bank to the country. The Indian Central Banking
Enquiry Committee (ICBEC, 1929), appointed to study the problems in
the Indian banking sector recommended that a central bank be established
for the country and a special legislation be made to regulate banks by
amending the existing Companies Act (1913).
The Reserve Bank of India Act, 1934 brought the RBI in to

existence. The issue of bank failures and need to support to agriculture
were the two prime reasons for the emergence of RBI (RBI, 2006).
Almost the entire finance required by agriculture and rural sectors were
provided by the money lenders at that time, and also, the role of co-
operatives and other agencies were negligible. The legislation made
agriculture credit a special responsibility of RBI. During the period from
pg. 48
1935 to 1950, RBI continued to focus on agriculture and rural finance by
encouraging co-operative societies through the provision of financial
accommodation to them. Besides, RBI played a central role in building a
well differentiated structure of co-operative credit institutions for
catering, both short term and long term needs of agriculture and allied
activities (Mohan, 2004).
Post-independence Period
Independence brought big changes in many spheres of economic activity,
and banking was one of the crucial areas where a phenomenal
transformation took place. Following the partition and related turmoil,
bank failures became common and started to cause hardships to the
savers. Among many administrative and legislative measures to curb this,
the enactment of Banking Companies Act (1949), the first legislation on
banking in free India, and an amendment to it in 1961 were made to
check the troubles in the banking sector.
When the country attained independence, Indian banking industry was
entirely under private sector, which had neither penetrated in to rural and
semi urban areas and nor had any interest too. Further, most of the bank
credit went to industry and commerce and very little to agriculture,
regardless of its huge (55%) contribution to the nation’s GDP (RBI,
1952). Since the rural credit markets were isolated and rather
unregulated, the money lenders, who were also the buyers of agricultural
produce most often, acted as monopolists and charged exorbitantly high
rate of interest. To have a ground report of the rural credit situation, RBI
constituted a committee, The All India Rural Credit Survey Committee
(AIRCSC) in 1951, which rendered its report in 1954. As per its report,
the total debt of the farmers in India was estimated to be around Rs.750
crore during the period of study, out of which the commercial banks’
pg. 49
share was 0.9 per cent. While the share of the informal sources, such as
agricultural money lenders and professional money lenders were 24.9 and
44.8 percent respectively (AIRCSC, 1954 and RBI, 2006). In relation to
this, the committee also observed that, there were 551 commercial banks,
the bank office to population ratio was at a staggering one branch for
136000 persons and the savings rate of the country was at 10 per cent of
national income (RBI, 1998). Another observation was that the co-
operatives, though they lack facilities and guidance, are the best suited to
the rural needs. To this end, the amalgamation of imperial banks and
major state associated banks were thus recommended to have a
nationwide machinery to assist and control the co-operatives credit
institutions. Accordingly Imperial banks were amalgamated, nationalized
and converted in to State Bank of India in 1955 with an objective of
spreading banking facilities on a large scale to rural and semi urban areas.
With this a large number of branches were opened in hitherto unbanked
areas.
Despite an increase in the number of rural branches of commercial

banks, the quantum of rural credit was inadequate throughout the 1950s
and 1960s (Mohan, 2004). Further, the setting up of Agricultural
Refinance Corporation (1963), indented to provide funds by way of
agricultural refinance to commercial and co-operative banks also failed to
achieve the desired results (Mohan, 2004). The other important
movements in this direction include bank nationalization and the
adoption of a series of other social banking strategies.
pg. 50
I. Bank Nationalization
Despite the AIRCS Committee’s insistence, the commercial banks
role in rural credit remained minimal and indirect all through 1950’ and
60s. Even after the RBI directive to commercial banks to open one rural
branch for every branch in the banked urban and semi-urban area, the
number of rural branches remained very few in number (Meyer and
Nagarajan, 2000) and the situation did not improve even up to 1971,
when the percentage of rural credit to total bank credit stood at 2.4 per
cent, most of which were given to plantations. Further, to achieve rural
credit target, the main strategy of banks of those days was to finance
agro-processing firms and purchase of bonds floated by land development
banks.
Until the end of 1960s, the majority share in the total bank credit
was enjoyed by industries, especially large ones (62%) followed by trade
and commerce (26%), (Sen and Vaidya, 1997). It has also been alleged
that advances by private banks were diverted to sister companies of the
banks or to companies in which their directors had an interest
(Chandrasekhar and Ray, 2005).
Thus, twenty years after independence, the co-operatives functioning in

the rural regions were dominated by the rural elite and commercial banks
were under strong urban bias which drove 50 per cent of India’s town and
all of its villages without a bank branch (India Population Census, 1961).
Thus, in 1969, the National Credit Council was instituted to guide the
branch expansion programme of banks; meanwhile it also found that, not
even one percent of India’s villages served by bank branches. Further,
bank credit to agriculture, which contributes 50 per cent to GDP, was
pg. 51
negligible while industry which contributes only 15 per cent of GDP had
cornered 67 per cent of total bank credit. Consequently to acquire a more
direct and activist role to RBI in deciding banking policies, 14 largest
commercial banks were nationalized in 1969. The Banking Companies
(Acquisition and Transfer of Undertakings) Act, 1969 that empowered
the state to nationalize the banks, emphasized the need to preserve
national priorities and objectives such as rapid growth of agriculture,
small industries, and exports, rising of employment levels,
encouragement of new entrepreneurs and development of backward
areas. After nationalization the branch expansion was deliberately
focused on the previously unbanked rural and semi urban locations.
II. Social Banking Strategies

There were many efforts by the RBI and GoI., to widen and to
make effective the banking services in India. Important among them
having a bearing on the rural banking include Lead Bank Scheme, branch
licensing policy of RBI, formulation of priority sector, setting up of
National Bank for Agriculture and Rural Development (NABARD) and
adoption of Service Area Approach (SAA).
Adoption of Lead Bank Scheme (LBS) mooted by Gadgil Study Group,

in December, 1969 as part of “Area Approach” by RBI, enabled banks to
assume leadership of districts in bringing about banking developments
especially, branch expansion and credit planning in the respective
districts. The Lead bank has no monopoly of banking in the district but to
lead other banks in the district. The main theme of the scheme was to
familiarize the banks with the district economy so as to identify the
banking and credit gaps and to mobilize savings to bridge such gap.
pg. 52
The credit planning exercise under this scheme primarily aims at
the overall development of the districts by the coordinated efforts of the
banks acting in unison with the developmental organs of the state
government at the district level. To co-ordinate all banks and financial
institutions in the district and government departments, District
Consultative Committees (DCCs) have been formed. With the help of the
representatives of DCCs, commercial banks having wide network of
branches in the district, and of district planning officials of the
government, lead bank prepares the District Credit Plan (DCP). Further,
for effective implementation of DCP, Annual Action Plans are formulated
as a separate document since 1980. It is considered that the lead bank
scheme was successful in branch expansion and in providing access to
credit to farmers and small enterprises (Thingalaya, 2010), and need to be
continued for taking the challenges of financial inclusion (Usha Thorat,
2009).
The branch licensing policy of RBI adopted in 1970 was the first
major step towards social banking since nationalization. As per which, for
every new branch in an already banked area, the commercial banks would
have to open at least 3 branches in unbanked rural and semi urban areas.
Again, this ratio was further revised to 1:4 in 1976. Following this
movement, the bank branches in unbanked locations really exploded
especially between 1977 and 1990 when around 80 per cent of all new
bank branches were in rural unbanked areas (Burgess and Pandey, 2002).
Priority sector lending was another measure adopted to further the

banking services to the countrymen. A target of 33 per cent lending to the
priority sector was set in 1975, the target was then raised to 40 per cent in
1979 and again in 1980 sub targets for agriculture (16%), and weaker
pg. 53
sections (10%) were also set in. As a result, until 1990, there has been
manifold increase in the priority sector lending both in terms of amount
and the number of accounts (Chavan, 2005 and Narayana, 2000).
Setting up of National Bank for Agriculture and Rural

Development (NABARD) in 1982 by taking over the Agricultural Credit
Department (ACD) and Rural Planning and Credit Cell (RPCC) of RBI
and Agricultural Refinance and Development Corporation (ARDC) was
another important step to improve rural outreach of formal finance. It
aims to promote sustainable agriculture and rural prosperity through
effective credit support, institutional development, supervision, capacity
building and training of personnel. Within a short span of time,
NABARD occupied an indisputable position among the country’s
development finance providers. Now it is widely considered as the engine
puller of rural development.
Adoption of Service Area Approach (SAA) based on the

recommendation of Ojha Committee (1989) was to close the loopholes of
LBS. As per SAA, each bank branch was allocated 15 to 25 villages
around it. On the basis of an elaborate survey of the area, the bank will
prepare a credit plan and such plans were discussed at the Block Level
Bankers Committee (BLBC) before finalization. The annual credit plans
prepared by all branches in the block are then consolidated to form the
block credit plan. The various credit plans from the district are then
consolidated to form the Annual Credit Plan of the District. Again, the
district credit plans will be aggregated in to state credit plans. In the light
of the above information the branch will prepare separate credit plans for
each village allotted to it and then combine all those plans to prepare .
pg. 54
DATA ANALYSIS & INTERPRETATION
1. Do you have any Bank account?
(a) Yes (b) No.
BANK ACCOUNTS
10%
YES
NO
90%
BASE 100 RESPONDENTS
2. Which Bank Do you have a Bank account?

(a) Private sector Bank (b) Public sector Bank (c) Other
BANKING SECTOR
10%
40%
PRIVATE SECTOR
PUBLIC SECTOR
50%
OTHER
pg. 55
3. Do you think that your bank cares all your banking needs?
(a) Yes (b) No
BANKING NEEDS
40%
YES
60%
NO
4. Are you greeted by the bank personnel when you visit your bank
branch?
(a) Yes (b) No
GREETNESS BY BANK
40%
YES
60%
NO
pg. 56
5. Does your bank conduct any recreation facilities for the customers?
(a) Yes (b) No
RECREATION FACILITIES
40%
YES
60%
NO
6. Does your bank have listed its share in stock exchange

(a) Yes (b) No (c) Not Aware
BANK SHARE LISTED IN STOCK EXCHANGE
20%
10%
YES
NO
70%
NOT AWARE
pg. 57
7. Does your bank have core banking facility for the customers?
(a) Yes (b) No
CORE BANKING FACILITY
30%
YES
70% NO
8. Are you able to access to your banking accounts online?

(a) Yes (b) No
ONLINE BANKING
10%
YES
NO
90%
pg. 58
9. Are you able to use various banking facilities?
(a) Yes (b) No
Sales
30%
YES
70% NO
10. Are you aware of any new products/services/technological

advancements that your bank has recently started providing?
(a) Yes (b) No
RECENT CHANGES
30%
YES
70% NO
pg. 59
11. Do they charge unnecessarily for not maintain minimum balance in
your account
(a) Yes (b) No
UNNECESSARY CHARGES FOR MINIMUM

BALANCE
20%
YES
80% NO
12. Does your bank offers competitive service charges?

(a) Yes (b) No
OFFERS COMPETITIVE SERVICE CHARGES
20%
YES
NO
80%
pg. 60
13. Do you think your bank offers competitive interest rate
(a) Yes (b) No
Offers Competitive Interest Rate
10%
YES
NO
90%
14. Do you use the service of alternative bank

(a) Yes (b) No
SERVICE OF ALTERNATIVE BANK
20%
YES
NO
80%
pg. 61
15. Have you ever switched bank account provider?
(a) Yes (b) No
SWITCHED BANK ACCOUNT PROVIDER
10%
YES
NO
90%
16. Would you recommend this bank to your friends, relatives,

associates
(a) Yes (b) No
RECOMMEND THIS BANK TO OTHER
10%
YES
NO
90%
pg. 62
17. Are the calls answered promptly by the call centre agent?
(a) Yes (b) No
CALL CENTERS PROMPTNESS
20%
YES
NO
80%
18. Are the call center staff knowledgeable and have a friendly and
professional attitude?
(a) Yes (b) No
CALL CENTER STAFF IS FRIENDLY
20%
YES
NO
80%
pg. 63
19. The agent is genuinely interested in assisting me and resolving my
complaint
(a) Yes (b) No
CALL CENTER AGENT INTEREST FOR

SOLVING COMPLAINT
30%
YES
70% NO
20. Would you rate ease of access and the usefulness of our online
banking/channels?
(a) Yes (b) No
EASE OF ONLINE ACESS
40%
YES
60%
NO
pg. 64
21. Are you satisfied with the number of services offered on our online
banking platforms
(a) Yes (b) No
SATISFACTION - ONINE BANKING
20%
YES
NO
80%
22. What kind of account do you maintain in this bank?

(a)Current (b)Savings (c)Loan a/c (d)Demat (e)Credit card
KIND OF ACCOUNT
10% 10%
10%
CURRENT
SAVING
20%
LOAN
50%
DEMAT
CREDIT CARD
pg. 65
23. Which of the following facilities is given more importance in your
bank?
(a)Loan facilities (b) O/D facilities (c) ATM facilities
IMPORTANCE OF FACILITIES
30%
LOAN FACILITIES
60% O/D FACILITIES
10%
ATM FACILITIES
24. What do you feel about overall service quality of your

bank.
(a)Excellent (b) very good (c)good (d)average (e)poor
BANKS SERVICE QUALITY
10% 20%
EXCELLENT
20%
VERY GOOD
GOOD
10%
40% AVERAGE
POOR
pg. 66
QUESTOINAIRE ON BANK
1. Do you have any Bank account?

(a) Yes (b) No.
2. Which Bank Do you have an a Bank account?

(a) Private sector Bank (b) Public sector Bank (c) Other
3. Do you think that your bank cares all your banking needs?
(a) Yes (b) No
4. Are you greeted by the bank personnel when you visit your bank
branch?
(a) Yes (b) No

5. Does your bank conduct any recreation facilities for the customers
(a) Yes (b) No
6. Does your bank have listed its share in stock exchange

(a) Yes (b) No (c) Not Aware
7. Does your bank have core banking facility for the customers
(a) Yes (b) No
8. Are you able to access to your banking accounts online?

(a) Yes (b) No
9. Are you able to use various banking facilities?
(a) Yes (b) No
10. Are you aware of any new products/services/technological

advancements that your bank has recently started providing?
(a) Yes (b) No
11. Do they charge unnecessarily for not maintain minimum balance in

your account
(a) Yes (b) No
pg. 67
12. Does your bank offers competitive service charges
(a) Yes (b) No
13. Do you think your bank offers competitive interest rate

(a) Yes (b) No
14. Do you use the service of alternative bank

(a) Yes (b) No
15. Have you ever switched bank account provider?
(a) Yes (b) No
16. Would you recommend this bank to your friends, relatives,

associates
(a) Yes (b) No
17. Are the calls answered promptly by the call centre agent?
(a) Yes (b) No
18. Are the call center staff knowledgeable and have a friendly and
professional attitude?
(a) Yes (b) No
19. The agent is genuinely interested in assisting me and resolving my

complaint
(a) Yes (b) No
20.How would you rate ease of access and the usefulness of our online
banking/channels?
(a) Yes (b) No
21. Are you satisfied with the number of services offered on our online
banking platforms
(a) Yes (b) No
pg. 68
22. What kind of account do you maintain in this bank?
(a)Current (b)Savings (c)Loan a/c (d)Demat (e)Credit card
23. Which of the following facilities is given more importance in your

bank
(a)Loan facilities (b)O/D facilities (c)ATM facilities
24. What do you feel about overall service quality of your

bank.
(a)Excellent (b) very good (c) good (d)average (e)poor
pg. 69
Conclusion
There are 185 million bankable adults in rural India who are unbanked
because of access and usage issues. This presents a significant
opportunity for commercial banks. However, to reach this market and
subsequently build an inclusive financial system, there must be a
coordinated and concerted effort by the three key stakeholders: the
Government of India, the Reserve Bank of India and the commercial
banks. In addition, a partnership between banks and business
correspondents, and collaboration amongst banks is critical. Furthermore,
banks should tailor their product and service mix to meet rural.
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
pg. 70
institutions and the banks operating in rural areas. Only then will the
RRBs fulfill the promise that is so essential for rural development
pg. 71
BIBLOGRAPHY
Economic & Political Weekly July,2007

Regional Rural Bank In India – Biswa Swarup
Regional Rural Bank Liberalized Environment – A.P PATIL(Mittal
Publication)
Www.Wikipedia.Com
Www.Rural-Banking.Com
Www.Bankingsector/Rural.Com
Www.Financebank.Com
Www.Google.Com
Magazines:
Business Today
Business Week
Business World
Newspaper
Economic Times
The Hindu
Times Of India
pg. 72

Regional Rural Banking in India - 230326 - 110221

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Regional Rural Banking in India - 230326 - 110221

Uploaded by

Copyright:

Available Formats

INDEX

Rural banking prove the next

The villages are the backbone of any country. As far as India is

Regional Rural Banks are small, region based; rural development

There were 196 RRBs sponsored by 27 scheduled commercial

As stated earlier in this chapter, in pre-independent India, despite its

With the above objectives in view, Government of India

Need of Rural Finance

India‘s rural poor are overwhelmingly dependent on agriculture as their

Structure and Functions of the Rural Banks!

facilities to the small and marginal farmers, agricultural labourers,

artisans and small entrepreneurs in rural areas.

The RRB Act, 1986, empowers the Central Government to establish in a

subscribing to its share capital, by helping in its establishment, by

assisting in recruitment and training of its cadre, and in general providing

such managerial and financial assistance sought by the RRB.

The RRB functions within the local limits as specified by government

notification. It can have its branches at any place as notified by the

capital at Rs. 2 lakhs. Of the issued capital, 50 per cent is to be subscribed

by the Central Government, 15 per cent by the concerned State

Government and the rest 35 per cent by the sponsoring bank.

of Directors consists of a Chairman, three directors to be nominated by

by the State Government concerned, and not more than 3 directors to be

nominated by the sponsoring bank. The chairman is appointed by the

Rural banking in India came into existence since the establishment of

Functions of RRBs are as follows

 RRBs grant loans and advances to small farmers and agricultural

Such facility is provided particularly to the small and marginal farmers,

The objectives of RRBs can be summarized as follows:

(ii) To save the rural poor from the moneylenders.

(v) To increase employment opportunities by encouraging trade and

(vi) To encourage entrepreneurship in rural areas.

(viii) To develop underdeveloped regions and thereby strive to remove

- Small and marginal farmers

- Mobilize deposits from rural households

Role for RRB: - RRB has following major role in implementation of

Rural banking in India started since the establishment of banking sector

* Andhra Pradesh Grameena Vikas Bank

* Chhattisgarh Gramin Bank

* Harayana Gramin Bank

Jammu & Kashmir

* Jammu Rural Bank

* Assam Gramin Vikash Bank

* Jharkhand Gramin Bank

* Dena Gujarat Gramin Bank

* Himachal Gramin Bank

* Punjab Gramin Bank

* Narmada Malwa Gramin Bank

* Pandyan Grama Bank

* Marathwada Gramin Bank

* Karnataka Vikas Grameena Bank

* Baroda Rajasthan Gramin Bank

* Kalinga Gramya Bank

Financial inclusion plans of banks seems to be taking new leaps across

Customer-friendly: Collector J. Chandrakumar (extreme left) launching

Launching the same here on Monday, Collector J. Chandrakumar lauded

ECONOMICALLY empowering, i.e. access to inexpensive credit and

Progressive and not-so-small farmers have no difficulty in obtaining

The Narasimham Committee observed that the manning of rural branches

The Indian economy is growing strongly which ensures better recovery

Financial inclusion is the availability of banking services at an affordable

An inclusive financial system can help in reducing the growth of informal