INTRODUCTION.

Rural banking in India has been the subject of study Survey Committee Report in 1954,
literally thousands of reports have examined and investigated the problems relating to the
credit delivery for agriculture and rural area. Latest magnum opus on the subject is the
National Agricultural Credit Review report 2000. The Expert Committee on Rural Credit
(Chairman: Professor V.S.Vyas) submitted its report in 2002.One more High Power
Committee headed by Professor Vyas set up by the Reserve Bank of India recently to review
and advice on improving credit delivery to agriculture has also given its report.
Financial liberalization after 1991 decimated the formal system of institutional credit in
rural India. It represented a clear and explicit reversal of the policy of social and development
banking, such as it was, and contributed in no small way to the extreme deprivation and
distress of which the rural poor in India have been victims over the last decade.

Rural credit has been a laboratory for various policies, initiatives, investigations and
improvements since 1955.The first major strategy adopted for improving rural credit delivery
was the institutionalization of the credit delivery system with the cooperative as the primary
channels.

Various approaches have been adopted for improving rural credit from time to time. It was
felt that project lending will revolutionize rural credit. This was followed by area approach
and extension- based schemes and then the lead bank scheme providing for forward and
backward linkages and the scheme of linking banks to Primary Agricultural Credit Societies
and the linkage of bank to microfinance institutions.

To echo the thoughts of C.K. Prahalad, the “bottom of the pyramid” segments will be the
growth drivers of the future – this is certainly being borne out by the market revolution that is
taking place in India’s villages. The Narasimham committee on rural credit recommended
the establishment of Regional Rural Banks (RRBs) in meeting the needs of rural areas.

The purpose of this essay is not to evaluate the rural credit policy of the United Progressive
Alliance government. Nevertheless, it is clear that if any government is seriously to address
the crisis in rural banking, it must reaffirm the commitment of the state to the policy of social
and development banking, and reaffirm the part played by the credit system in redistribution
and poverty alleviation.
The objective of the study is to study marketing of rural banking in India and to study
comparative marketing of rural and urban banking in India.
Research in common parlance refers to a search for knowledge. Descriptive research design
studies are those studies, which are concerned with describing the character of a group.
The researcher makes a plan of the study his research work. The study was based on
questionnaire method. The primary data are those, which are collected a fresh and for the first
time happen to be original in character.
Secondary data are those which have already been collected by someone else and which have
already been passed through the stratified process. It has collected through the books,
journals & Internet.

RRBs' performance in respect of some important indicators was certainly better than that of
commercial banks or even cooperatives. RRBs have also performed better in terms of
providing loans to small and retail traders and petty non-farm rural activities. In recent years,
they have taken a leading role in financing Self-Help Groups (SHGs) and other micro-credit
institutions and linking such groups with the formal credit sector.

RRBs should really be strengthened and provided with more resources with which they can
undertake more of these important activities. And most certainly they should be kept apart
from a profit-oriented corporate motivation that would reduce their capacity to provide much
needed financial services to the rural areas, including to agriculture.

The number of rural branches should be increased rather than reduced; they should be
encouraged to develop more sophisticated methods of credit delivery to meet the changing
needs of farming; and most of all, there should be greater coordination between district
planning authorities, Panchayati raj institutions and the banks operating in rural areas. Only
then will the RRBs fulfill the promise that is so essential for rural development.

REGIONAL RURAL BANKS.

Regional Rural Banks were established under the provisions of an ordinance promulgated on 26th
September 1975 and the RRB Act, 1976 with an objective to ensure sufficient institution credit for
agriculture and other rural sectors. The RRBs mobilize financial resources from rural / semi-urban
areas and grant loans and advances mostly to small and marginal farmers, agricultural labourers and
rural artisans. The area of operation of RRBs is limited to the area as notified by Government of
India covering one or more districts in the state.

As stated earlier RRBs are jointly owned by Government of India, the concerned State Government
and sponsor Banks (27 scheduled commercial banks and one State cooperative Bank); the issued
capital of a RRB is shared by the owners in the proportion of 50 %, 15% and 35% respectively.

The institution of Regional Rural Banks (RRBs) was created to meet the excess demand for
institutional credit in the rural areas, particularly among the economically and socially marginalized
sections. Although the cooperative banks and the commercial banks had reasonable records in terms
of geographical coverage and disbursement of credit, in terms of population groups the cooperative
banks were dominated by the rural rich, while the commercial banks had a clear urban bias. In order
to provide access to low-cost banking facilities to the poor, the Narasimham Working Group (1975)
proposed the establishment of a new set of banks, as institutions which “combine the local feel and
the familiarity with rural problems which the cooperative possess and the degree of business
organization, ability to mobilize deposits, access to central money markets and modernized outlook
which the commercial banks have”. The multi-agency approach to rural credit was also to sub serve
the needs of the input-intensive agriculture strategy (Green Revolution) which had initially focused
on ‘betting on the strong’ but by the mid-seventies was ready to spread more widely through the
Indian countryside.

BANKING POLICY IN RURAL INDIA

BANKING POLICY IN RURAL INDIA: 1969 TO THE PRESENT

The period from 1969 to the present can be

characterised as representing, broadly speaking, three phases in banking policy vis-à-vis the
Indian countryside. The first was the period following the nationalization of India’s 14 major
commercial banks in 1969. This was also the early phase of the ‘green revolution’ in rural
India, and one of the objectives of the nationalization of banks was for the state to gain access
to new liquidity, particularly among rich farmers, in the countryside. The declared objectives
of the new policy with respect to rural banking - what came to be known as “social and
development banking” - were (i) to provide banking services in previously unbanked or
under-banked rural areas; (ii) to provide substantial credit to specific activities, including
agriculture and cottage industries; and (iii) to provide credit to certain disadvantaged groups
such as, for example, Dalit and Scheduled Tribe households

The introduction of social and development banking policy entailed a radical shift from
prevalent practice in respect of the objective and functioning of commercial banks. An
important feature of the policy of social and development banking was that it recast
completely the role of commercial banks in rural banking. Prior to 1969, the countryside was
not considered to be the problem of commercial banks.5 It was only after 1969 that a multi-
institutional approach to credit provision in the countryside became policy, with commercial
banks, Regional Rural Banks and cooperative institutions establishing wide geographical and
functional reach in the Indian countryside.

The Reserve Bank of India (RBI) issued specific directives with respect to social and
development banking. These included setting targets for the expansion of rural branches,
imposing ceilings on interest rates, and setting guidelines for the sectoral allocation of credit.
Rural credit was an important component of the ‘green revolution’ package; the first post-
nationalization phase of expansion in rural banking saw a substantial growth in credit
advances for agriculture. Specifically, a target of 40 per cent of advances for the “priority
sectors,” namely agriculture and allied activities, and small-scale and cottage industries, was
set for commercial banks. Advances to the countryside increased substantially, although they
were, as was the green revolution itself, biased in respect of regions, crops and classes.6 The
two main crops that gained from the green revolution, as is well recognized, were wheat and
rice, and the application of the new technologies was primarily in the irrigated areas of the
north-west and south of India, with the benefits concentrated among the richer classes of
cultivators.
 In 1975, the Government established by ordinance and then legislation a new network of
rural financial institutions called the Regional Rural Banks (RRBs), which were promoted by
the Government of India, State governments and commercial banks. These were created on
the basis of recommendations by a working group on commercial credit, also called the
Narasimham Committee, and were intended to “combine the cooperatives’ local feel and
familiarity with the business acumen of commercial banks” (Jagan Mohan, 2004, p 22).7 The
number of such banks expanded rapidly, and covered 476 districts by 1987

The second phase, which began in the late 1970s and early 1980s, was a period when the
rhetoric of land reform was finally discarded by the ruling classes themselves, and a period
when the major instruments of official anti-poverty policy were programmes for the creation
of employment. Two strategies for employment generation were envisaged, namely wage-
employment through state-sponsored rural employment schemes and self-employment
generation by means of loans-cum-subsidy schemes targeted at the rural poor. Thus began a
period of directed credit, during which credit was directed towards “the weaker sections.”
The most important new scheme of this phase was, of course, the Integrated Rural
Development Programme or IRDP, a scheme for the creation of productive income-bearing
assets among the poor through the allocation of subsidized credit. The IRDP was initiated in
1978-79 as a pilot project and extended to all rural blocks of the country in 1980. There is
much writing on the failure of IRDP to create long-term income-bearing assets in the hands
of asset-poor rural households.8 Among the many reasons for this failure were the absence of
agrarian reform and decentralized institutions of democratic government, the inadequacy of
public infrastructure and public provisioning of support services and the persistence of
employment-insecurity and poverty in rural society. Nevertheless, the IRDP strategy did lead
to a significant transfer of funds to the rural poor.

The second phase also involved an expansion and consolidation of the institutional
infrastructure of rural banking. “Even ardent critics of India’s growth strategy,” wrote a noted
scholar of India’s banking system, “would admit that what the country achieved in the area of
financial sector development before the present reform process began, particularly after bank
nationalization, was unparalleled in financial history” (Shetty 1997, 253). After bank
nationalization, as Shetty points out, there was “an unprecedented growth of commercial
banking in terms of both geographical spread and functional reach”

The third and current phase, which began in 1991, is that of liberalization. The policy
objectives of this phase are encapsulated in the Report of the Committee on the Financial
System, which was chaired, ironically, by the same person who recommended the
establishment of Regional Rural Banks, M. Narasimham (RBI, 1991). In its very first
paragraph, the report called for “a vibrant and competitive financial system…to sustain the
ongoing reform in the structural aspects of the real economy.” The Committee said that
redistributive objectives “should use the instrumentality of the fiscal rather than the credit
system” and, accordingly, that “directed credit programmes should be phased out.” It also
recommended that interest rates be deregulated, that capital adequacy norms be changed (to
“compete with banks globally”), that branch licensing policy be revoked, that a new
institutional structure that is “market-driven and based on profitability” be created, and that
the part played by private Indian and foreign banks be enlarged.

Let us make it clear that, before the 1990s, the banking system was open to much criticism,
particularly of its bureaucratic failures, its insensitivity to the social and economic contexts in
which it functioned, and class and regional inequalities in lending patterns. The reforms
proposed in 1991, however, were not attempts to bring rural banking closer to the poor, but to
cut it back altogether and throw the entire structure of social and development banking
overboard.

Need for Regional Rural Banks:-

The Government accepted the recommendations of Narasimhan Committee and, accordingly, the
ordinance of Regional Rural Banks, 1975 was promulgated on September 26, 1975. This was
replaced by the Regional Rural Banks Act, 1976 on February 9, 1976. The mandates of these rural
financial institutions were to:

● Take banking to the doorsteps of the rural masses, particularly in areas without
banking facilities.

● Make available cheaper institutional credit to the weaker sections of society,

who were to be the only clients of these banks.

● Mobilize rural savings and canalize them for supporting productive activities in
rural areas.

● Generate employment opportunities in the rural areas.

● Bring down the cost of providing credit in rural areas

The regional rural banks were to form with: Central Government (50 per cent), State
governments (15 per cent) and commercial banks (35 per cent) (as per the recommendations of
Narshiham committee). The number of RRBs rose from just six in 1975 to 196 by 1987, covering
476 districts. They financed only the weaker sections of the rural community – small and marginal
farmers, agricultural labourers, small traders, and so on. Along with commercial banks, RRBs
participated enthusiastically in poverty alleviation schemes (IRDP, for example) and disadvantaged
area (drought-prone regions and deserts) development programmes. They quickly became an
important and integral part of the rural credit system. However, their financial viability was initially
overstretched by policy rigidities coupled with a low capital base in an environment of inadequate
infrastructure and deeper social and economic disparities.

After the financial sector reforms, several measures to improve the viability of RRBs were initiated.
More importantly, re-capitalization to cleanse their balance sheets was taken up in 1993-94. Other
important reforms are as follows:

● Measures included deregulation of interest rates on advances as well as

deposits.
 ● Permission to lend to others outside target groups.

● Provision for rationalization of branch network- relocation and merger of loss-

making branches.

● Introduction of prudential norms on income-recognition.

● Asset classification and provisioning.

● Preparation of development action plans and signing of memorandum of

understanding with sponsor bank for sustained viability in a planned manner.

● Provision of greater role space and larger operational responsibilities to

sponsor banks in the management of RRBs

● Encouragement to function as self-help promoting institutions and financing

of self-help groups and introduction of Kisan Credit Cards to simplify
provision of production credit to their clients.
Limitations of Regional Rural Banks :-

The institutional agriculture credit in India is faced with many problems. The Indian continues to
depend on the money lenders for his financial requirements in spite of the institutional framework.
The various problems are:

Inadequate Finance:-

A basic feature of the credit problem is its overall inadequacy; particularly of the institutional credit.
The credit provided by the cooperative banks and commercial banks is not sufficient to meet the
requirements of the farmers. The banks mostly provide short term credit and not the long term credit.
There is a need of more long term finance from land development banks.
Not only the right quantity of long term institutional finance is available, but also it is not available at
the right time. Hence the farmers depend upon moneylenders for their requirements.

Problem of Security:-

Normally the banks insist on security to sanction loans to the farmers. The security may be in form
of land or other assets. The small and marginal farmers find it difficult to obtain funds as they have
limited amount of land to offer as security.

Problem of Maintaining Branches:-

The commercial banks as well as the cooperative banks find it difficult to maintain branches in rural
areas. This is due to low banking business and high overheads in form of staff salaries, offices rent,
and other overheads. Hence the banks do not give much importance to set up branches in certain
rural areas. The commercial banks also have face problems in sanctioning and monitoring of a large
no. of small advances in their rural branches, as it is time consuming and unprofitable.

Lack of Trained Manpower:-

The banks often face problem of untrained manpower in rural areas. The staff and the officers often
lack knowledge of the financial requirements of the farmers and again they may have a negative
attitude towards the farmers. In order to achieve about the financial requirements of the farmers.

Problem of Recovery:-

There is the problem of recovery of credit provided to the farmers both the rich farmers as well as the
poor ones. The large and rich farmers deliberately avoid repaying loans and the small farmers find it
difficult to repay their loans. Also quite often, there is political pressure on the banks to write off the
loans. This result in demotivation to the banks to provide credit in rural areas.

Corrupt officials:-

The officials of banks adopt corrupt practices. They often provide finance to their friends and
relatives. Small and marginal farmers face great difficulty in obtaining finance. Hence they have to
depend upon the money lenders for their financial requirements. Not only the officials favour their
friends and relatives to obtain loans. But they are also corrupt in sanctioning loans. They do ask for
the bribes and adopt other corrupt practices at the time of sanctioning, and disbursement of loans.

Rural Banking Faces Twin Challenges

Banking in rural India is faced with the twin challenges of regulation and distribution. Regulation
with respect to banking has been designed for delivery in urban India and distribution required more
manpower to be deployed in rural areas. Initiatives like cheque transaction – where the electronic
image and not the actual cheque is sent – have in mind the urban customer, about 500-600 million
people in India still do not have bank accounts. For the rural segment, one needs to design no-frills
products and deliver hard core value. The other handicap was that while Rs 1- crore business in
microfinance required 30 people in terms of manpower, the same volume of business in other
portfolios required only one person. Also, contract farming and supply chain integration has not gone
the way they should have. Power, telecommunications, banking and transportation had reduced the
urban-rural divide. Besides traditional banking services, people in the rural and semi-urban areas are
expressing interest in liability and investment products. Rural India is fast transforming a nation of
savers into a nation invest

More Recent Measures

It is only in the past few years that the unwanted effects of reform measures on rural banking have
begun to be recognized in certain official quarters. That the improved performances of the RRBs –
163 out of 196 RRBs were earning profits in 2003-2004 was largely a result of the banks abrogating
their credit intermediation role rather than a sign of their genuine health and vibrancy is pitifully
obvious. Moreover, the agrarian distress and stagnation of the rural economy has become too stark
and imminent and, of course, the political ramifications of the crisis can no longer be ignored.Among
the various official committees that were set up review the situation and make policy
recommendations on the future course of development of the RRBs, the Parliamentary Estimates
Committee (2002-03) had come up with a number of useful suggestions to tackle the shrinking
credit delivery to the priority sector and the rural areas:
 Among RRBs which are making absolute profit, the credit-deposit ratio should not be lower
than 75% and for those which are making profits but still have accumulated losses, an
increasing trend of the ratio should be ensured and their investment portfolio should get
reduced accordingly.

 The priority sector lending by RRBs has been declining and as per latest figures, priority
sector lending to agriculture and other allied activities comes to about 57 % of the total
lending……..There could be no rationale for fixing the same norms for lending to
priority/agricultural sector by the RRBs as in the case of commercial banks. The RBI should
apply proper checks to ensure that the present level of 57% of lending by the RRBs to the
priority sector is not allowed to decline further. And it should look into the …….desirability
of enhancing the percentage of lending to the priority sector.
 The committee is constrained to note that the percentage of loans to small and marginal
farmers out of total loans disbursed by the RRBs has been declining steadily. The RRBs do
not maintain separate details of number of accounts of small and marginal farmers. In the
absence of such information it is difficult to understand as to how RRBs ensure credit
disbursement to small/marginal farmers and other weaker sections of society as per the
guidelines issued by the Government/the RBI. The committee recommended that the RRBs
should take steps for compiling and maintaining data regarding credit facility extended to
small and marginal farmers and other weaker sections of the society to monitor that credit
facilities being provided by the RRBs reach the targeted beneficiaries.

 A number of RRBs were charging compound interest on agriculture loans. Even on the
subsidy part, certain RRBs were charging compound interest, which was in utter violation of
the guidelines issued by the RBI. The committee is of the view that this trespass should be
dealt with severely…… More distressing is the fact that even though in the case of a number
of banks this irregularity was pointed out in the Inspection Reports by NABARD, neither had
the RRBs taken any corrective measures in this regard nor was any serious note of it taken by
the sponsor banks……It appears the RBI, NABARD and the sponsor banks seem content
with issuing of circulars and conducting mandatory inspections without ensuring compliance
of the guidelines issued by them and rectification of irregulations noticed during inspections.
On the issue of NPAs of the RRBs, the committee expressed its dissatisfaction at the current levels.
While the official statistics highlights the decline in NPAs from 34 percent in March 1996 to 3.99
percent in March 2006.Very few of the above recommendations were, in fact, accepted by the
RBI/Government of India. From the year 2003-04, the RBI revised upwards the lending target for
priority sector to 60 percent of the total advances for the RRBs. Ambitious overall credit targets were
laid down for the RRBs by the Union Government.

The farm credit target for the RRBs at Rs 11,900 crore for the fiscal year 2005-2006 is 40 percent
higher than Rs 8,500 crore target set during the fiscal year 2004-2005. But little else happened. In
reviewing the action taken by the RBI/GOI on the proposals of the Estimates Committee (2002-
2003), the committee in 2004-2005 finds that ’no specific action has been taken’ on most of the
major recommendations.\

 No further merger of RRBs:-

There is a need for policy refinement regarding further merger of RRBs. The Vyas Committee had
recommended merger of all RRBs in the same State. Currently, RRBs of the same sponsor bank are
merged at State-level. By April 2007, the number of RRBs was reduced to 96. If sponsor banks are
to have the requisite initiative to support their RRBs fully, they would need assurance that there will
be no further mergers. The Committee is of the view that further merger of all RRBs at State-level is
not required. It may also not be desirable if there has to be a firm reinforcement of the rural
orientation of these institutions with a specific mandate on financial inclusion. The Committee,
therefore, recommends that the process of merger should no proceed beyond the level of sponsor
bank in each State.

 Recapitalization of RRBs with negative Net Worth:-

Recapitalization of RRBs with negative net worth has to be given a serious consideration as it would
facilitate their growth, provide lenders a level of comfort and enable their achieving standard capital
adequacy ratios. As on March 2004, 98 RRBs were in need of Rs 3,050 crore for making the net
worth positive. The position, as on 31March 2006, is that 40 RRBs would require Rs. 1,718 crore.
 Widening network and Expanding Coverage:-
As on 01 April 2007, RRBs were covering 535 districts. They may be directed to cover all unbanked
areas in these districts, taking the village as a unit, either by opening a branch (wherever feasible) or
through the BF/BC model in a time bound manner.

As on 01 April 2007, 87 districts in the country were not covered by RRBs and their area of
operation may be extended to cover these districts.

 Computerization:-

With a view to facilitate the seamless integration of RRBs with the main payment system, there is a
need to provide computerization support to them. Banks will be eligible for support from the
Financial Inclusion Funds on a matching contribution of 50% in regard to districts other than tribal
districts and 75% in case of branches located in tribal districts under the Tribal Sub plan.

 Strengthening Boards of Management:-

Further ,now that RRBs are being merged and are becoming large size entities, it is necessary that
their Boards of Management are strengthened and powers delegated to them on policy and business
operations ,viz. introduction of new liability and credit products, investment decisions, improving
market orientation in raising and deployment of resources, non-fund based business, career
progression, transfer policy etc.

 Tax Incentives:-

From 2006-07, RRBs are liable to pay income tax. To further strengthen the RRBs, profits
transferred to reserves could be exempted from tax till they achieve standard capital adequacy ratios.
Alternatively, RRBs may be allowed tax concessions to the extent of 40% of their profits, as per
provisions under sec.36 (1) (viii) of the Income Tax Act.
  Implementation of RBI initiatives for financial inclusion:-

All recent circulars relating to financial inclusion, viz., no frills accounts, GCC, One Time
Settlement (OTS) for loans up to Rs 25, 000, use of intermediaries, etc., should be implemented by
RRBs.

 NRFIP for RRBs:-

The strategy recommended earlier for NRFIP for commercial banks would be equally applicable for
RRBs. The process of undertaking a survey, identification of excluded households, dissemination of
the information, settings of bank-wise/ branch-wise targets etc., could be followed. RRBs will have
certain handicaps in executing the plan. They would require promotional, funding and technology
support in different areas as outlined below. RRBs may Endeavour to cover to a large part of their
incremental lending thru’ the group mode (SHGs/JLGs) as it will enhance their outreach to the
financially excluded. Lending thru’ group mode would also keep NPAs at low level.

CONCLUSION

RRBs' performance in respect of some important indicators was certainly better than that of
commercial banks or even cooperatives. RRBs have also performed better in terms of
providing loans to small and retail traders and petty non-farm rural activities. In recent years,
they have taken a leading role in financing Self-Help Groups (SHGs) and other micro-credit
institutions and linking such groups with the formal credit sector.

RRBs should really be strengthened and provided with more resources with which they can
undertake more of these important activities. And most certainly they should be kept apart
from a profit-oriented corporate motivation that would reduce their capacity to provide much
needed financial services to the rural areas, including to agriculture. Ideally, the best use of
the resources raised by RRBs through deposits would be through extensive cross-
subsidisation. This, in turn, really requires an apex body that would cover and oversee all the
RRBs, something like a National Rural Bank of India (NRBI).
The number of rural branches should be increased rather than reduced; they should be
encouraged to develop more sophisticated methods of credit delivery to meet the changing
needs of farming; and most of all, there should be greater coordination between district
planning authorities, Panchayati raj institutions and the banks operating in rural areas. Only
then will the RRBs fulfill the promise that is so essential for rural development.

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