Rural Banking

Rural Banking

This article deals with ‘Rural Banking.’ This is part of our series on ‘Economics’ which is important pillar of GS-3 syllabus . For more articles , you can click here .

Steps taken to promote Rural Banking

Various steps have been taken to penetrate Banking into Rural Areas

1 . Before Independence

  • During British Raj & initial years of independence , Banks (& insurance companies) operated in Urban Areas only .
  • Result :  villagers used to rely on money lenders , who lend money at exorbitant rates & they remained in debt & poverty .

2. After Independence

1950s Cooperative Banks/societies
1955 Birth of SBI & ICICI
1960s Bank Nationalisation (1960 & 1969)
1969 Lead Bank Scheme
1975 Regional Rural Banks (RRB) setup
1980s NABARD setup + Bank Nationalisation(2nd Round)
Early 90s Self Help Group & Bank linking
Late 90s Kisan Credit Card
Mid 2000s No Frills Account Banking Business Correspondent Interest Subvention Schemes on crop loans
Present RRB Amendment + Payment Banks

Lead Bank Scheme

  • 1960s :  Narsimham Committee recommended that responsibility of development should be given to banks & there should be integrated approach  . Hence, this  scheme was launched .
  • 1969 : State Bank of India + its subsidiaries + 14 national banks + 3 Private banks selected under this . Every district was given to specific bank making it responsible for development of Banking in that district called Lead Bank .
  • 1975: these banks were asked to setup subsidiary banks in their districts which are known as Regional Rural Banks .

Rural Infrastructure Development Fund (RIDF)

  • Started in mid 90s .
  • NABARD operates RIDF.
  • This fund provides cheap loans to state & state owned corporations so that they can complete projects related to
Medium & minor irrigation Community Irrigation Wells
Soil conservation Village Knowledge centres
Watershed Management Desalination plants in coastal areas
Flood Protection Building schools & Anganwadi centres
Forest development Building toilet blocks
Cold storage Rural roads & bridges
  • Banks who don’t meet their Priority sector lending requirements provide money to RIDF .

Regional Rural Banks

Cooperative Banks

  • Dealt below

Priority Sector Lending

Cooperative Banks

Cooperative Banks
  • Co-operative bank is a financial entity which belongs to its members, who are at the same time the owners and the customers of their bank.
  • These Banks on the principle of NO PROFIT & NO LOSS + ONE MEMBER ONE VOTE .
  • They are subjected to CRR & SLR requirements , however the requirements are less than commercial banks.
  • PSL requirements are not applicable on them.
  • They can be Scheduled or Non Scheduled.
  • Western Concept & came into being in beginning of 1900s.
  • Regulators : RBI, NABARD & State Registrar of Cooperative Society .
  • They were  instrumental in dismantling hegemony of money lenders in rural finance .
  • Before nationalisation drive took place in 1960s , Cooperative banks constituted 80% of institutional credit . But after nationalisation of banks, due to  stiff competition from commercial Banks , their share decreased significantly .
  • Due to One Member One Vote , they suffer from Caste Politics .
  • These banks don’t have all India presence & are present in selected regions like Gujarat, Maharashtra, Andhra Pradesh and  Tamil Nadu where cooperative movement was strong.
  • 2018 Update : RBI allowed Urban Cooperatives to voluntarily transform into Small Finance Banks, with conditions .


Type Commercial Cooperative
Banking Regulation Act Yes Yes (Since 1966)
CRR, SLR Yes Yes ( but lesser than Commercial Banks)
Who can borrow Anyone Only Members
Vote Power Proportionate to Shareholding One Member One Vote
Profit Motive Yes No Profit No Loss
Presence All India Mainly concentrated in Gujarat, Maharashtra , Andhra & TN

Rural Co-Operative Banks

Structure and Funding  of Rural Co-operative banks is as follows

Rural Co-Operative Banks


  • Rural Cooperatives suffer from huge NPAs . NPA level in these banks was around 25% in 2015 (very high) .
  • Due to 1 person 1 vote , they suffer from Casteism during voting . After that, they serve people belonging to their caste only.
  • Although SARFAESI Act powers are given to these banks but due to political backing , these banks don’t take action on defaulters.
  • Deposits are very low because rates are not competitive against Scheduled Commercial Banks & Post Office Deposits. Hence, they have to depend on NABARD Funding .
  • Large scale manipulation goes on in District Central Cooperative Banks (DCCBs) and PACS as their operations are not digitalised and they aren’t connected to Core Banking Solution . During demonetisation, District Cooperative Banks were involved in changing black money in back-date.
  • They are under the dual supervision of   RBI and the Registrar of Co-operative Societies (RCS) of the respective states . This has led  to poor supervision and control .


  • Close down PACS & form LAMPS (LArge Sized Multipurpose Society) in their place. Their operations will not be restricted to giving loans  . Apart from banking, LAMPS   will also be involved in food processing , supplying fertilisers and seeds etc. . 
  • Budget 2017 : Core Banking Solution introduced in PACS & District Central Cooperative Banks to check manipulation of accounts.

Urban Cooperative Banks (UCBs)

  • Traditionally, the area of operation of the UCBs was confined to metropolitan, urban or semi urban centres and catered to the needs of small borrowers including MSMEs, retail traders, small entrepreneurs, professionals and the salaried class. However, there is no formal restriction as such and today UCBs can conduct business in the entire district in which they are registered, including rural areas.
  • UCBs too are suffering from losses.

Reasons for losses

  • UCBs are dominated by builders and manipulators. They indulge in Zombie-lending. Eg: Punjab and Maharashtra Cooperative Bank kept on doing zombie-lending to weak company called HDIL due to corrupt nexus between directors and HDIL owners. When HDIL failed, NPA of the bank increased exponentially and depositor’s money was stuck in the bank .
  • Although, they are given powers under SARFAESI Act but officials of the bank don’t use these powers because debtors are their friends and relatives .

Steps taken

  • RBI has offered all Urban Cooperative Banks to convert to Small Finance Banks so that RBI can have more regulation over these Banks. But most of UCBs are least interested to convert because of the benefits accruing from present loopholes.
  • RBI is forcing shutdowns (reduced from 1900 (2004) to 1500 (2018)) and mergers (Maharashtra = 72 mergers between 2004 to 2018) due to frauds and scams.
Urban Cooperative Banks