Rural Banking 4m3g1u

Rural Banking

Definition • a rural bank is a financial institution that helps rationalize the developing regions or developing country to finance their needs specially the projects regarding agricultural progress. • Provides banking services mainly lending to the rural areas mainly in agricultural sector • Provides strong and viable framework for ing the development and growth

Requirement/ Characteristics • Rural sector characterized by poverty and lack of access to sufficient funds. • Perpetuating poverty • Large proportions spent on food so difficult to meet any additional expenses • Natural calamities leading to gap between requirement and supply of funds • Inadequacy, unavailability and unsuitability of agricultural credit • Dependability on local money lenders

Forms of Rural Financial Agencies • Non-regulated and informal e.g. money lenders, saving groups etc • Semi-formal institutions – not regulated by banking sector but licensed and supervised by other govt. agencies like SHG’s, NGO, PACS’c (primary agricultural credit societies) • Financial institutions subjected to banking regulations and supervisions eg MFI’s Banks

Constraints to rural Finance • Products and services are not flexible to match the requirements and consumption pattern of rural borrowers • • • •

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Volatile and improper consumption pattern No collateral other than land (many don’t have land either) High risk and high cost proposition Absence of credit information adding to default risk

High transaction cost due to small size Illiterate and heterogeneous borrowers Cumbersome process of lending Competition from RRB’s and cooperative banks Institutional sources of credit have failed to meet credit needs thereby forcing people to go to money lenders causing exploitation

Regional Rural Banks (RRB’s) • Established under RRB act 1976 • Basically are scheduled commercial banks having • Limited area of operation • Focuses basically on weaker sections of the rural areas

• Formed to bridge the gap between demand and supply of credit to rural poor • Objective is to develop rural economy by providing credit and other facilities for the purpose of development of agriculture, trade, commerce, industry and other productive agencies specially to small and marginal farmers, laborers, artisans • Setup as per the recommendation of Narsimham committee with the goal of doorstep banking to rural masses (where the banking facilities are unavailable). • Objective is to mobilize rural savings to productive activities by ensuring credit availability • To bring down the cost of credit and also to generate employment opportunities • To check the outflow of rural credit to urban areas • Provide credit at lower rates than any other financial institutions in that area – for this various

Regional Rural Banks (RRB’s) • To be promoted by GOI, State Govt, a scheduled commercial bank in the proportion of 50:15:25. The balance 10% may be led by local institutions/individuals • 9 Board of directors are comprised of • • • •

4 (including chairman) from GOI 2 by sponsor bank 1 by state govt 2 by GOI from remaining shareholders

• 60% of advances to be earmarked for small farmers, artisans, rural poor • Differential rate of interest (DRI) for weaker sections • Problems encountered • But the quality of lending was poor • proper procedure, follow-up and supervision were lacking • There were cases of misuse and diversion of loan amounts into unproductive activities, resulting into large-scale willful default • Frequent natural calamities like droughts and floods resulted in increasing over dues in several banks • increase in salary structure of RRBs also contributed to the higher establishment costs

Service Area Approach - SAA • • • • • • •

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Also called as ‘Command Area Approach’ The Service Area Approach (SAA) introduced in April 1989, and was extended to all Indian scheduled commercial banks including Regional Rural Banks (RRBs) to bring about an orderly and planned development of rural and semi- urban areas of the country It was to avoid duplication of efforts and scattered lending over wider areas. under this approach credit plans from village to district level are formulated and implemented throughout the country this approach emphasizes on micro level credit planning where in credit planning begins from village level and moves upward up to district level all rural and semi-urban branches of banks were allocated specific villages, generally in geographical contiguous areas, the overall development and the credit needs of which were to be taken care of by the respective branches. The Branch Managers/ village level workers of Developmental agencies have to conduct surveys in the entire village falling in their service area taking into consideration the infrastructure and market potential of the area. Annual credit plans are prepared, first at branch level, then block level and district level. Post approval of credit plan at district level , submitted to SLBC for approval and consolidation

Reasons for the SAA’s • Development of need based banking infrastructure with penetration of commercial banks in rural and semi-urban area • Increase in priority sector advance and agricultural advance

NABARD • National Bank for Agriculture and Rural Development (NABARD)NABARD was set up as an apex Development Bank with a mandate for facilitating credit flow for promotion and development of agriculture, small-scale industries, cottage and village industries, handicrafts and other rural crafts. It also has the mandate to all other allied economic activities in rural areas, promote integrated and sustainable rural development and secure prosperity of rural areas. • It is apex development bank in India. It has been accredited with "matters concerning policy, planning and operations in the field of credit for agriculture and other economic activities in rural areas in India

Functions •Credit dispensation •Providing refinance to lending institutions in rural areas •Prepares and help in finalization of credit plan, evolving and sticking to credit discipline •Monitors implementation of credit plan

•Developmental and promotional •Nurturing and strengthening RFI’s •Growth of SHG and bank linkage •Extending to NGO’s, development agencies and banks •Development initiatives in farm/non-farm sectors •Extending assistance for R&D •Helps the state governments in reaching their targets of providing assistance to eligible institutions in agriculture and rural development. •Act as a coordinator in the operations of rural credit institutions.

•Supervisory •Extends assistance to the government, the Reserve Bank of India and other organizations in matters relating to rural development. •Evaluating, monitoring and inspecting the client banks •act as regulator for cooperative banks and RRBs •Removal of regional/sectoral imbalances •Strengthening Rural Financial Institutions (RFIs) •Encouraging prudential financial standards in RFIs

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