RURAL BANKING IN INDIA 1 Rural Banking Introduction

RURAL BANKING IN INDIA 1

Rural Banking - Introduction • Rural banking in India started since the establishment of banking sector in India. • Rural Banks mainly focused upon the agro sector. • In rural banking in India, there are 14, 475 rural banks in the country of which 2126 (91%) are located in remote rural areas. • SBI – Largest bank catering to Rural banking. • Haryana State Co operative Apex bank limited, NABARD, Sindhanur Urban Souharda Co operative bank , United bank of India are some examples of other banks operating in rural markets.

Rural Banking - Current Status • Rural population of about 780 million with limited access to financial services. • A high proportion of rural lending is from informal sources. • About 500 600 million people in India still do not have bank accounts. • Rural economy (Agriculture + Non agriculture) constitutes about 50% of GDP. • Banks have woken up to the potential in the rural sector. • Current demand for credit in Rural India is around Rs. 1, 33, 000 Crs. • Commercial Bank branches cover only 7% of rural sector and large market is still untapped.

Banking Network in India Source : Seminar Rural Banking Through ICT

REGIONAL RURAL BANKS ACT 1976 • An Act to provide for the incorporation, regulation and winding up of Regional Rural Banks with a view to developing the rural economy by providing, for the purpose of development of agriculture, trade, commerce, industry and other productive activities in the rural areas, credit and other facilities, particularly to the small and marginal farmers, agricultural labourers, artisans and small entrepreneurs, and for matters connected therewith and incidental thereof.

Establishment and incorporation of Regional Rural Banks. • Establishment and incorporation of Regional Rural Banks. (1) The Central Government may, if requested so to do by a Sponsor Bank, by notification in the Official Gazette, establish in a State or Union territory, one or more Regional Rural Banks with such name as may be specified in the notification and may, by the said or subsequent notification, specify the local limits within which each Regional Rural Bank shall operate. (2) Every Regional Rural Bank shall be a body corporate with perpetual succession and a common seal with power, subject to the provisions of this Act, to acquire, hold and dispose of property and to contract and may sue and be sued in its name. • It shall be the duty of the Sponsor Bank to aid and assist the Regional Rural Bank, sponsored by it, by (a) subscribing to the share capital of such Regional Rural Bank; (b) training personnel of such Regional Rural Bank; and (c) providing such managerial and financial assistance to such Regional Rural Bank during the first five years of its functioning, as may be mutually agreed upon between the Sponsor Bank and the Regional Rural Bank: Provided that the Central Government may, either on its own motion or on the recommendation of the National Bank, extend the said period of five years by such further period, not exceeding five years at a time

• Authorised capital. The authorised capital of each Regional Rural Bank shall be five crores of rupees dividend into five lakhs] of fully paid up shares of one hundred rupees each: Provided that the Central Government may, after consultation with the [National Bank] and the Sponsor Bank, increase or reduce such authorised capital; so, however, that the authorised capital shall not be reduced below twenty five lakhs of rupees, and the shares shall be, in all cases, fully paid up shares of one hundred rupees each. • Issued capital. (1) The issued capital of each Regional Rural Bank shall, in the first instance , be such as may be fixed by the Central Government in this behalf, but it shall in no case be less than twenty five lakhs of rupees or exceed one crore of rupees. • Out of the capital issued by a Regional Rural Bank under sub section (1), fifty per cent. shall be subscribed by the Central Government; fifteen per cent. by the concerned State Government and thirty-five per cent. by the Sponsor Bank.

Organizational Structure The Organizational Structure for RRB's varies from branch to branch and depends upon the nature and size of business done by the branch. The Head Office of an RRB normally had three to seven departments. The following is the list of officers in decreasing order of their rank in the organization. • • • Chairman & Managing Director Executive Director General Manager Deputy General Manager Assistant General Manager Chief Manager Senior Manager Officer Assistants

Management • Management. (1) Subject to the provisions of this Act, the general superintendence, direction and management of the affairs and business of a Regional Rural Bank shall vest in a Board of directors who may exercise all the powers and discharge all the functions which may be exercised or discharged by the Regional Rural Bank. • (2) In discharging its functions, the Board shall act on business principles and shall have due regard to public interest.

Board of directors. (1) The Board of directors shall consist of the Chairman appointed under sub section (1) of section 11, and the following other members, namely: • 1. a) two directors, who are not officers of the Central Government, State Government, Reserve Bank, National Bank, Sponsor Bank or any other bank, to be nominated by the Central Government; (b) one director, who is an officer of the Reserve Bank, to be nominated by that Bank; (c) one director, who is an officer of the National Bank, to be nominated by that Bank; (d) two directors, who are officers of the Sponsor Bank, to be nominated by that Bank; and (e) two directors, who are officers of the concerned State Government, to be nominated by that Government. • 2. The Central Government may increase the number of members of the Board; so, however, that the number of directors does not exceed fifteen in the aggregate and also prescribe the manner in which the additional number may be filled in. Term of office of director. A director (other than the Chairman) shall hold office for such period not exceeding two years, from the date when he assumes office, as the authority nominating him may specify at the time when the nomination is made, and may, on the expiry of the said period, continue to hold office until his successor has been nominated and shall also be eligible for re nomination

Objectives • • • The objectives of RRBs can be summarized as follows: (i) To provide cheap and liberal credit facilities to small and marginal farmers, agri culturelabourers, 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 dispar ity between regions.

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.

Major Problems of RRB The following were the main problems faced by the RRBs till recently. • (i) Running into losses: During 1997 98, out of 196 RRBs, 70 RRBs incurred losses amount ingto Rs. 230. 76 crore in total. The accumulated losses of all RRBs up to the end of March 1998 amount to Rs. 3116. 00 crore. This may be due to heavy overhead costs, reduction in lending rates, lower profit margins, heavy increase in salaries and allowances of staff, etc. During 2001 02, out of 196 RRBs, 167 made net profit of Rs. 699. 93 crore while 29 suffered losses amounting to Rs. 92. 05 crore. The accumulated losses of all RRBs declined to Rs. 2792. 59 crore as on March, 2001. • (ii) Slow progress: The progress of RRBs is not up to the expectation and is slow when comparing with other types of banks because of many restrictions on their operations. For example till 1996, RRBS were permitted to lend only under priority sector schemes. • (iii) Limited scope of investment: The basic objective of RRBs was to provide credit facilities to poor and weaker sections of society, i. e. , to small and marginal farmers and other weaker sections. They were originally having limited scope to invest their surplus funds freely. • (iv) Delay in decision making: The RRBs are controlled directly and indirectly by various agencies, i. e. , the sponsoring bank, NABARD, RBI, besides Central Government. Thus, it takes long time to take decisions on some important issues. This, in turn affects the progress of RRBs. However, since end 1997, the operational responsibility of RRBs has been passed on to sponsor bank.

• • • (v) Lack of co-ordination: Lack of co ordination between the RRBs and sports or banks regarding branch expansion, policy making, etc. , are also the important causes for the slow progress of RRBs. (vi) Difficulties in deposit mobilization: The RRBs are aiming at catering to the needs of poor and are not serving the needs of the rich. So, the RRBs are not able to attract the deposit from that potential sector. (vii) Lack of training facilities: Generally the staff of RRBs is urban oriented and they may not know the problems and conditions of rural areas. Lack of training facility concerning these areas also affects the growth of RRBs. (viii) Poor recovery rate: The recovery performance of the RRBs is not up to the mark. The /ate of recovery in respect of many RRBs is around 55 per cent only. (ix) Capital inadequacy: The capital adequacy is the very basis to financial soundness. There is capital inadequacy in RRBs as most of the RRBs have huge losses in their 3 alance Sheet eating away all the Capital of RRBs.

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