RURAL BANKING

Vaishali Sethi

We are all aware that the occupations in the rural backdrop are highly seasonal in nature. With these seasonal occupations, a major concern is that the income also becomes largely seasonal. For meeting the monetary requirements and for all the essential undertakings in life, like food, clothing, education of children, and functions like marriages, deaths and so on, the rural folks need easy and frequent access to credit facilities and loans. Traditionally, this credit requirement has been fulfilled by borrowings from moneylenders and extended family members. Since the supply of formal credit to the countryside has been chiefly inadequate, the informal sector including these moneylenders and all have played a major role and are also infamous for large scale exploitation of the borrowers by way of exorbitantly high interest rates and the applicable terms and conditions in case of inability in paying back the amount.

Thus one of the main focuses of the government post-independence was, in the words of former Governor of Reserve Bank of India, “to ensure that sufficient and timely credit, at reasonable rates of interest, is made available to as large a segment of the rural population as possible”. Therefor the highlight of the required strategy was the expansion of the formal sector to an extent that it benefits the target segment, so that cheap or subsidized credit is directly available to the poor and the needy

With this issue ailing the rural India, concerning a very big proportion of the Indian population, the Government came up with two major reforms.


1. Nationalization of banks in 1969 

  This was the phase of early ‘green revolution’ and as many as 14 banks were nationalized, basically with the aim to provide banking services to previously unbanked or under-banked areas, provide substantial credit at reasonable rates to agricultural and cottage industries and to provide easy credit to the specific destitute groups. This way the main role of the commercial banks took a slight turn. As per the directives of the apex bank, the Reserve Bank of India, these banks had to necessarily advance about 40% of their total lending amount to the so called ‘priority sector’ consisting of these rural seasonal occupations. This approach was not without success but these banks still remained highly commercial in nature.

   2. Formation of Regional Rural Banks

   In 1975, the Narasimhan committee proposed the formation of Regional Rural Banks (RRBs) saying that they were much better suited as a credit establishment in the rural backdrop than the commercial banks and other co-operative agencies. The fundamental objectives of these RRBs were to bridge the credit gap prevailing in the countryside, to keep the outflow of rural deposits to urban areas and to keep a tab on the inter-region disparities. These RRBs were supposed to focus on the area they functioned in and also take the onus of the development of the region by providing exceedingly easy loans and advances to the small farmers, artisans, small time entrepreneurs, traders, other co-operative societies and so on. Some of these RRBs established included the National Bank for Agriculture and Rural Development (NABARD), United Bank of India (UBI) etc.

These changes in the growth process of rural banking led to the foundation of important concepts like microfinance and microcredit which could benefit the poor in a way even these large establishments like the banks couldn’t. Though the problem of rural credit still persists due to widespread ignorance and illiteracy, these steps have definitely impacted a comfortable number of people and gone a long way in changing their lives.