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 &
2. After Independence
SBI & ICICI
Nationalisation (1960 & 1969)
Lead Bank Scheme
Rural Banks (RRB) setup
setup + Bank Nationalisation(2nd Round)
Help Group & Bank linking
No Frills Account
Interest Subvention Schemes
on crop loans
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 .
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
& minor irrigation
plants in coastal areas
schools & Anganwadi centres
roads & bridges
Banks who don’t meet their Priority sector
lending requirements provide money to RIDF .
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 .
Banking Regulation Act
but lesser than Commercial Banks)
Who can borrow
Member One Vote
Profit No Loss
concentrated in Gujarat, Maharashtra , Andhra & TN
Rural Co-Operative Banks
Structure and Funding of Rural Co-operative banks is as follows
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
during voting . After that, they serve people belonging to their caste
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
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
UCBs too are suffering from
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 .
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.