CHAPTER -1

INTRODUCTION

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Rural banking in India started since the establishment of banking sector in India.
Rural banks mainly focused upon the agro sector and priority sector lending .In
India there are 14,475 rural banks in the country of which 2126 are located in
remote rural areas. SBI is the largest bank catering to rural areas. Other
commercial banks RRB’S, co-operative Banks also have their establishment in
rural areas. NABARD (a wing of RBI) provides credit and regulates banking
in rural india.

It has a high proportion of rural lending is from informal sources.

About 500-600 million people in india still do not have bank accounts.
It has a current demand for credit in Rural India is around
Rs.1,33,000crs.

Its commercial Bank branches cover only 7% of rural sector and large
market is still untapped.

Rural development occupies a significant place in the over all

economic development of the company. Gandhi ji Said – India lives in
Village . He stressed a rural character of economy and the need for re-
generation of rural life .Since independence, it has been constant
endower of our policy maker to give adequate trust to rural
development as the sector is directly related to agriculture. Rural
banking in India started since the establishment of banking sector in
India. Rural Banks in India penetrated every corner of country and
extended a helping hand in the growth process of the country. SBI has
30 Regional Rural Banks in India known as RRBS. The Rural Banks of
SBI are spread in 13 states extending from Kashmir to Karnataka and
Himachal Pradesh to North East.

Rural Banks was established under the provisions of an ordinance

promulgated on the 26th September 1975 and the RRB Act 1976 with
an objective to ensure sufficient institutional credit for agriculture and
other rural sectors. These Regional Rural Banks (RRBs) have been
receiving a high degree of importance and attention in the rural credit
system.

2
Considering the gross absence of banking facilities in the rural areas of
the country, the Reserve Bank of India in consultation with the Central
Government, State Governments and some major nationalized
sponsored banks had set up some Regional Rural Banks in the late
1970s with a view to elevate the economic status of the rural poor as
well as to inculcate a habit of saving among the rural masses.

As per the recommendations of the Working Group on Rural Banks,

the regional rural banks were established in 1975 for supplementing the
commercial banks and co-operatives in supplying rural credit. The
main objective of regional rural banks in India is to advance credit and
other facilities, especially to small and marginal farmers, agricultural
labourers, artisans and small entrepreneurs in order to develop
agriculture, trade, commerce, industry and other usual productive
activities in different rural areas of the country.

At the initial stage, five regional rural banks were established on

October 2, 1975 at Gorakhpur and Moradabad in Uttar Pradesh, Jaipur
in Rajasthan, Bhiwani in Haryana and Malda in West Bengal under the
sponsorship of State Bank of India, the Syndicate Bank, United
Commercial Bank, Punjab National Bank and United Bank of India
respectively.

In the mean time, the regional rural banks have extended their network
throughout the country to a considerable extent. Initially, there were
196 regional rural banks operating in 28 states with nearly 14,700
branches. Till June 1996, these RRBs have been lending annually
nearly Rs 1500 crore to the rural people and more than 90 per cent of
the loan has been advanced to weaker sections.

As on September, 1990, the RRBs had advanced jointly to the tune of

Rs 3,560 crore in the form of short-term crop loans, term loans for
agricultural activities, for rural artisans, cottage and village industries,
retail trade, self-employment projects and consumption loans etc.

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Among all the states, Uttar Pradesh is the state where larger number of
RRB branches has already been opened. Recently, after amalgamation,
the number of RRBs has been reduced to 92.

During the last 30 years, RRBs have been participating actively in

various programmes designed for providing credit assistance to
identified beneficiaries included under the new 20 Point Programme,
IRDP and other programmes designed for scheduled castes and tribes.
RRBs are also advancing loans to weaker sections and physically
handicapped persons under differential rate of industrial (DIR)
schemes.

At the end of June 2014, there were 92 amalgamated RRBs, covering

518 districts of the country with a network of 18,291 branches. Out of
all these branches of RRBs, 4,042 are the rural branches as on June 30,
2014 which constitute about 21.4 per cent of the total branches of
RRBs.

The loans and advances stood at Rs 7,852.7 crore as at the end of

September 1996. Again, Rs 15,423 crore were mobilised as deposits by
RRBs at the end of September 1996. Consequent upon the permission
of the Reserve Bank of India to determine their own lending rate with
effect from 26 August 1996, most of the RRBs have been charging
interest rates on their loans varying between 13.5 to 19.5 per cent per
annum.

In recent years, under the softer interest regime, interest rates on loans
advanced by RRBs have also declined considerably. Again, total
amount of credit advanced to the agriculture by the RRBs increased
considerably from Rs 6,069.79 Crore in 2002-03 to Rs 43,968 Crore in
2010-11.

As on March 31, 2002 total outstanding deposits of RRBs stood at Rs

44,327.81 crore and total outstanding advances stood at Rs 18,586.97
crore. Out of the 196 RRBs, 170 RRBs are making profit in recent

4
years after introducing measures under banking reforms. Chalapathi
Rao Committee on Regional Rural Banks has also recommended
Privatisation of profit making RRBs in a phased manner.

ROLE OF REGIONAL RURAL BANKS

RRBs plays a pivotal role in the economic development of the rural

India. The main goal of establishing regional rural banks in India was
to provide credit to the rural people who are not economically strong
enough, especially the small and marginal farmers, artisans,
agricultural labours, and even small entrepreneurs.

The role of these banks in economic development is examined, their

policies and progress are assessed, and suggestions are given on how
they can help improve and uplift the weaker sections of society. This
latter objective has been largely achieved by the RRBs. They have
succeeded in extending their branch network to the unbanked or under-
banked rural areas, and they have made significant progress in deposit
mobilization, and in extension of credit particularly among the poor.
Furthermore, RRBs have played an important role in the
implementation of various special schemes such as the Integrated Rural
Development Programme.

In rural areas, RRBs account for a substantial 37% of total offices of al

lscheduled RBBs. In semi-urban areas, their share comes to 15%. It
goes without saying that exclusion is more severe in rural areas 91% of
the total workforce in RRBs is posted in rural and semi-urban areas as
compared to 38% for other scheduled RBBs . Even in absolute terms
out of a total workforce of 179,423 deployed by all scheduled RBBs in
rural areas, RRBs share is 25% (45,062). This is significant considering
that at all India level, manpower of RRBs constitute only 7% of the
total manpower of all scheduled RBBs.

At all India level, RRBs account for 18% of loan accounts of all
scheduled RBBs and 3% of loans outstanding. However in rural areas

5
 the share of RRBs in loan accounts is an impressive 38%. More
significantl, despite having 38%of all loan accounts, RRBs account for
only 21% of total credit outstanding in rural areas implying thereby
their better reach to small borrowers

The microfinance services provided through self help groups bank

linkage has so far been the most successful initiative in financial
inclusion. Therefore RRB’s involvement in these Self help groups have
increased financial inclusion at more than faster rate than it was before

RRBs have not only provided financial services to the SHG-Bank

Linkag Program me, but have also played a significant role as self help
promotional institution . As many as 104 RRBs(31 March 2006) are
also functioning as SHPIs with grant assistance from NABARD.

RRBs plays a pivotal role in the economic development of the rural

India. The main goal of establishing regional rural banks in India was
to provide credit to the rural people who are not economically strong
enough, especially the small and marginal farmers,
artisans, agricultural labours, and even small entrepreneurs.

PROBLEMS FACED BY RRBs

Apart from the high cost of their operations, RBBs find it difficult to post the clerical
staff to rural centres since the latter prefer to work in urban centers. Even in. respect
of transferable cadres like branch,the banks face a problem in finding the required
staff for rural centres .

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One of the important reasons for the unsatisfactory functioning of many rural
branches is the unwillingness of the urban-oriented staff to get involved in rural
lending to the fullest extent. Both the clerical staff and supervisory staff who have
joined the RBBs with expectations of urban posting and the attendant comforts, are
often averse to staying and touring in villages. On balance, the advantage would seem
to lie in encouraging RBBs to transfer the eligible of their rural branches to RRBs by
them, wherever possible. Rural bank loans to weaker sections may be given priority
for such transfer.

Similarly,rural branches which have not been able to develop adequate business
seven after a reasnable period, so as to cover their own costs of establishment deserve
to be considered for this purpose. On the other hand, where the bigger category of
borrowers are substantial in numbering any rural branch and account for bulk of the
business, it may be retained by the RRBs

The willingness to allow the RRBs these specific considerations notwithstanding,

there were serious attempts to redress the prevalent problems of these banks, the
principal one at the time being the low recovery rates and loan over dues. These had
not only led to capital erosion but more importantly had resulted in non-recycling of
funds, which in turn necessitated increasing dependence on external sources of
refinancing.

The internal factors identified as contributing to low recovery were: weak monitoring
and supervision, apathy towards recovery, failure to link lending with development
and to ensure end use of the loan. The external factors were: political interference,
willful default, drought and floods, underdevelopment, lack of legal and
administrative support from the state government in the matter of recovery, etc.
Generally, recovery was low in respect of loans sanctioned under IRDP and other
poverty alleviation programmes. Besides there were certain organizational problems
such as low capital base, multiple ownership and divided responsibility, lack of
adequate training for the RRB staff, etc. which called for intervention.

It was estimated that the RRBs would need about seven years to become viable,
though for the RRBs with a large number of infant branches even this period might
not be adequate. Between 1980 and 1987, while the number of RRBs increased a little

7
more than two-fold, the number of branches of RRBs increased more than four-fold.
It was not totally unexpected therefore that by the end of the 1980s several of these
banks were showing losses on their books.

KEY DRIVERS OF FINANCIAL EXCLUSION OF RURAL BANKING

Approximately 245 million adults in rural India do not have a bank account today. As
depicted in Following Table, this reflects 24% of the total population. While 60
million out of 245 million may not need banking services because they are below the
poverty line, Diamond believes that approximately 185 million ―potentially
bankable‖ people do not use formal banking services because of reasons like poor
access or usage.

 Total Populate on
 Non Adult Populate on
 Adult Populate on
 Urban Adult Populate on
 Rural Adult Populate on
 Banked Populate on
 Unbank Populate on
 Financialy Constraintnts

Potential ly Bank able 100 47 53 16 37 13 24 6 18 Source: Census India; BSR 2008-

Reserve Bank of India; World Bank & NCAER (2008).

Access Issues for Rural Customers Access is explained in terms of Infrastructure

Physical distance Limited delivery capabilities

Regulatory constraints The economics of rural banking.

The banking infrastructure in rural India is not encouraging, with just 7% of villages
housing a bank branch. What‘s more, the poor physical and social infrastructure also
impacts the access to financial services, with 23% of villages going without
electricity, 67% without a Post Office, and an average rural literacy rate of 59% and

8
secondary school penetration of 12%. This lack of physical and social infrastructure
in rural India is a key issue impacting access to formal financial services.

The average distance to a branch in India is approximately 3.8 Kms. While this
compares favorably to the average distance to a branch in a developed market like the
U.S. (which is 6 Kms6), there are significant additional challenges in India in the
form of unpaved roads and limited access to modern transportation. Most rural
customers are likely to sacrifice an entire day‘s wage to travel to a bank branch which
is open between 10:00am and 5:00pm.

While some banking transactions could be done over phone, this is rarely an option in
a country with such low rural television-density. Limited delivery capability is a
significant challenge. Much of rural India is serviced through branches because ATM
penetration is low and other channels such as Phone and Internet Banking are non-
existent. Intermediaries like Non-Governmental Organizations (NGOs), Self-Help
Groups, and Micro Finance Institutions (MFIs) are being used by banks to improve
access to credit and savings. However, these channels, in their current form, offer
limited services.

There are some regulatory constraints imposed by the Reserve Bank of India (RBI)
which may inadvertently contribute further to the lack of formal banking services in
rural areas. For example, the RBI does not allow banks to post any person other than a
security guard at ATMs.

Hence, banks cannot deploy many ATMs in rural areas as many rural customers
require in-person support. A second regulatory inhibitor is that new banks planning to
establish a branch in a rural area have to receive approval from the Lead Bank and
District Collector of that district. Hence, banks choose not to open new branches in
certain areas even when it is profitable to do so because there is no certainty of getting
approvals.

Many banks view the rural market as a regulatory requirement rather than an
economic opportunity. Banks have from time to time borne the social cost of lending
to the rural economy at rates below their costs. They have also faced capital erosion
because of the write-off of loans, particularly agriculture loans.

9
 CHAPTER -2

PROFILE OF THE COMPANY

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 2.1 Overview of Industry as whole

Reserve Bank of India (RBI)

The Reserve Bank of India (RBI) is India’s central bank, also known as the banker’s

bank. The RBI controls monetary and other banking policies of the Indian
government. The Reserve Bank of India (RBI) was established on April 1, 1935, in
accordance with the Reserve Bank of India Act, 1934. The Reserve Bank is
permanently situated in Mumbai since 1937.

Located in Mumbai, the RBI serves the financial market in many ways. The bank sets
the overnight interbank lending rate. The Mumbai Interbank Offer Rate (MIBOR)
serves as a benchmark for interest rate–related financial instruments in India.

The main purpose of the RBI is to conduct consolidated supervision of the financial
sector in India, which is made up of commercial banks, financial institutions, and non-
banking finance firms. Initiatives adopted by the RBI include restructuring bank
inspections, introducing off-site surveillance of banks and financial institutions, and
strengthening the role of auditors

First and foremost, the RBI formulates, implements, and monitors India’s monetary
policy. The bank’s management objective is to maintain price stability and ensure that
credit is flowing to productive economic sectors. The RBI also manages all foreign
exchange under the Foreign Exchange Management Act of 1999. This act allows the
RBI to facilitate external trade and payments to promote the development and health
of the foreign exchange market in India.

The RBI acts as a regulator and supervisor of the overall financial system. This injects
public confidence into the national financial system, protects interest rates, and
provides positive banking alternatives to the public. Finally, the RBI acts as the issuer
of national currency. For India, this means that currency is either issued or
destroyed depending on its fit for current circulation. This provides the Indian public
with a supply of currency in the form of dependable notes and coins, a lingering issue

11
in India. In 2018 the RBI banned the use of virtual currencies by the financial
agencies and banks that it regulates.

Establishment of Reserve Bank of India

The Reserve Bank is fully owned and operated by the Government of India.

The Preamble of the Reserve Bank of India describes the basic functions of the
Reserve Bank as:

 Regulating the issue of Banknotes

 Securing monetary stability in India
 Modernising the monetary policy framework to meet economic challengesThe
Reserve Bank’s operations are governed by a central board of directors, RBI is
on the whole operated with a 21-member central board of directors appointed
by the Government of India in accordance with the Reserve Bank of India Act.

Reserve Bank of India (RBI) is the central bank of the country. RBI is a statutory
body. It is responsible for printing of currency notes and managing the supply of
money in the Indian economy. Initially the ownership of almost all the share
capital was in the hands of non-government share holders. So in order to prevent
the centralisation of the shares in few hands, the RBI was nationalised on January
1, 1949.

Functions of Reserve Bank

1. Issue of Notes —The Reserve Bank has the monopoly for printing the currency
notes in the country. It has the sole right to issue currency notes
of various denominations except one rupee note (which is issued by the Ministry of
Finance). The Reserve Bank has adopted the Minimum Reserve System for
issuing/printing the currency notes. Since 1957, it maintains gold and foreign
exchange reserves of Rs. 200 Cr. of which at least Rs. 115 cr. should be in gold and
remaining in the foreign currencies.

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2. Banker to the Government–The second important function of the Reserve Bank is
to act as the Banker, Agent and Adviser to the Government of India and states. It
performs all the banking functions of the State and Central Government and it also
tenders useful advice to the government on matters related to economic and monetary
policy. It also manages the public debt of the government.

3. Banker’s Bank:- The Reserve Bank performs the same functions for the
other commercial banks as the other banks ordinarily perform for their customers.
RBI lends money to all the commercial banks of the country.  

4. Controller of the Credit:- The RBI undertakes the responsibility of controlling

credit created by the commercial banks. RBI uses two methods to control the extra
flow of money in the economy. These methods are quantitative and qualitative
techniques to control and regulate the credit flow in the country.  When RBI
inflationary situation in the country then it squeezes the money supply through its
tight monetary policy observes that the economy has sufficient money supply and
it may cause  and vice versa.

6. Other Functions:-The Reserve Bank performs a number of other developmental

works. These works include the function of clearing house arranging credit for
agriculture (which has been transferred to NABARD) collecting and publishing the
economic data, buying and selling of Government securities (gilt edge, treasury bills
etc)and trade bills, giving loans to the Government buying and selling of valuable
commodities etc. It also acts as the representative of Government in International
Monetary Fund (I.M.F.) and represents the membership of India.

New department constituted in RBI:- On July 6, 2015 a new department,

named financial market department in reserve bank of India was constituted for
surveillance on financial markets.
This newly constituted dept. will separate the activities of debt management and
monetary operations in future. This department will also perform the duties of
developing and monitoring the instruments of the money market and also monitoring
the government securities and foreign money markets.

13
Objective:

The Main objectives of the Reserve Bank is : “to regulate the issue of Bank notes
and the keeping of reserves with a view to securing monetary stability in India
and generally to operate the currency and credit system of the country to its
advantage.”

Prior to the establishment of the Reserve Bank, the Indian financial system was totally
inadequate dual control of currency by the Central Government and of credit by the
Imperial Bank of India. The Hilton-Young Commission, therefore ended by setting-up
of a central bank — called the Reserve Bank of India — which would regulate the
financial policy and develop banking facilities throughout the country. Hence, the
Reserve Bank of India was established with this primary object in view.

The fundamental object of the Reserve Bank of India is to discharge purely central
banking functions in the Indian money market, i.e., to act as the note- issuing
authority, bankers’ bank and banker to government, and to promote the growth of the
economy within the framework of the general economic policy of the government,
consistent with the need of maintenance of price stability.

Central Board of RBI:

The Reserve Bank’s affairs are governed by a central board of directors. The board is
appointed by the Government of India in keeping with the Reserve Bank of
India(RBI)  Act 1934.

Constitution:

The organization and management of RBI is vested on the Central Board of Directors.
It is responsible for the management of RBI.Central Board of Directors consist of 20
members. It is constituted as follows.

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a) One Governor:

It is the highest authority of RBI. He is appointed by the Government of India for a

term of 5 years. He can be re-appointed for another term.

b) Four Deputy Governors:

Four deputy Governors are nominated by Central Govt. for a term of 5 years.

c) Fifteen Directors:

Other fifteen members of the Central Board are appointed by the Central Government.
Out of these , four directors,one each from the four local Boards are nominated by the
Government separately by the Central Government.

The Central board of directors exercises all the powers of the bank. The Central Board
should meet at-least six times in each year and at least once in three months. Usually,
the Central Board keeps  a meeting in March every year at New Delhi so as to discuss
the budget with the Finance Minister after its presentation in parliament. Similarly, it
keeps a meeting in August at Mumbai  in order to pass the Bank’s annual report and
accounts.

Local Boards :

The RBI is Southern divided into four regions: the Western, the Eastern, the Northern
and the southern regions. For each of these regions there is a Local Board with
headquarters in Mumbai,Kolkata,New Delhi and Chennai.Besides the central board,
there are local boards for four regional areas of the country with their head-quarters at
Mumbai, Kolkata, Chennai, and New Delhi.

Local Boards consist of five members each, appointed by the central Government for
a term of 4 years to represent territorial and economic interests and the interests of co-
operatives and indigenous banks. The function of the local boards is to advise the

15
central board on general and specific issues referred to them and to perform duties
which the central board delegates.

2.2 Profile of the Organization

Organization Structure

Objectives

The primary objectives of RBI are to supervise and undertake initiatives for the
financial sector consisting of commercial banks, financial institutions and non-
banking financial companies (NBFCs).

Some key initiatives are:

i. Restructuring bank inspections

ii. Fortifying the role of statutory auditors in the banking system

16
Legal Framework

The Reserve Bank of India comes under the purview of the following Acts:

 Reserve Bank of India Act, 1934

 Public Debt Act, 1944
 Government Securities Regulations, 2007
 Banking Regulation Act, 1949
 Foreign Exchange Management Act, 1999
 Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002
 Credit Information Companies(Regulation) Act, 2005
 Payment and Settlement Systems Act, 2007

 Major Functions of RBI

Monetary Authority 

 Formulating and implementing the national monetary policy.

 Maintaining price stability across all sectors while also keeping the objective
of growth.

Regulatory and Supervisory 

 Set parameters for banks and financial operations within which banking and
financial systems function.
 Protect investors interest and provide economic and cost-effective banking to
the public.

Foreign Exchange Management

 Oversees the Foreign Exchange Management Act, 1999.

 Facilitate external trade and development of foreign exchange market in India.

Currency Issuer

17
  Issues, exchanges or destroys currency and not fit for circulation.
 Provides the public adequately with currency notes and coins and in good
quality.

Developmental role

 Promotes and performs promotional functions to support national banking and

financial objectives.

RBI Annual publications 

Annual Report – The annual report is a statutory report of the Reserve Bank of India
that is released every year. This report consists of valuation and progress of the Indian
economy. Overview of the economy, the working of the Reserve Bank during that
year and the RBI’s projected vision and agenda for the following year along with the
annual accounts of the Reserve Bank

Report on Trend and Progress of Banking in India – This document is an

assessment of the policies and progress of the financial sector for the preceding year.

Lectures – The Reserve Bank of India has constituted three annual lectures. Two of
these lectures are conducted by past Governors of the Reserve Bank and one lecture is
by a noted economist.

Report on Currency and Finance – This report is documented and presented by the
staff of Reserve Bank of India bank and focusses on a particular theme and presents a
detailed economic analysis of the issues related to the theme. Handbook of Statistics
on the Indian Economy – This report is an important initiative by the Reserve Bank
to improve data distribution. It is a resourceful storehouse of major statistical
information.

18
State Finances: A Study of Budgets – The report is an essential source of segregated
state-wise financial data and provides an analytical data-driven conceptualisation on
the fiscal position of state governments across India. These data inputs are used to
analyse specific issues of relevance.

Statistical Tables Relating to Banks in India – This annual publication contains

holistic timeline data with regards to the Scheduled Commercial Banks (SCBs) of
India. The report also covers the information of balance sheets and performance
indicators for each SCB in India. The journal also includes segregated data sources on
some essential factors relating to bank-wise, bank group-wise and state-wise level of
information.

Basic Statistical Returns – This is another data-focused yearly journal which

represents complex information on the number of offices, employees, deposits and
credit of Scheduled Commercial Banks in minute levels of detail such as, region-wise,
state-wise and district-wise information. This information also trickles down to the
population and credit requirements in each bank.

RBI Policies 

Repo Rate Repo or repurchase rate is the benchmark interest rate at which the RBI
lends money to all other banks for a short-term. When the repo rate increases,
borrowing from RBI becomes more expensive and hence customers or the public bear
the outcome of high-interest rates. Reverse Repo Rate (RRR) Reverse Repo rate is
the short-term borrowing rate at which RBI borrows money from other banks. The
Reserve Bank of India uses this method to reduce inflation when there is excess
money in the banking system. Cash Reserve Ratio (CRR) is the particular share of
any bank’s total deposit that is mandatory and to be maintained with the Reserve
Bank of India in the form of liquid cash. Statutory liquidity ratio (SLR) Leaving
aside the cash reserve ratio, banks are required to maintain liquid assets in the form of
gold and approved securities. A higher SLR disables the banks to grant more loans.

19
Payment System Initiatives

 The Reserve Bank has taken many steps towards initiating and updating
secure and sustainable methods of payment systems in India to meet public
requirements.
 Currently, payment methods in India consist of paper-based
instruments, electronic instruments and other instruments, such as pre-paid
system (e-wallets), mobile internet banking, ATM-based transactions, Point-
of-sale terminals and online transactions.

Paper-based Payments

 Use of paper-based instruments such as cheques and demand drafts accounts

for nearly 60% of the volume of total non-cash transactions in India. These
forms of payments have been steadily decreasing over a period of time due to
the electronic modes of payments gaining popularity due to the comparative
convenience, safety and overall efficiency.
 Magnetic Ink Character Recognition (MICR) technology was introduced by
RBI  in the paper-based payment method for speeding up and bringing in
efficiency in the processing of cheques.
 A separate clearing system for paper-based payment method was introduced
for clearing cheques of high-value ranging from rupees one lakh and above. 
Also, the introduction of cheque truncation (CTS) system restricts the physical
movement of cheques and utilises images for enhanced secure payment
processing.

Electronic Payments

The initiatives taken by the Reserve Bank in the domain of electronic payment
systems are immense and vast. The types of electronic forms of payment by the RBI
are as follows:

 Electronic Clearing Service (ECS) – This enables customer bank accounts to

be credited with a specified value and payment on a set date. This makes
EMIs, or other monthly bills hassle free.

20
  National Electronic Clearing Service (NECS) – This facilitates multiple
advantages to beneficiary accounts with destination branches against a single
debit of the account of the sponsor bank.
 Electronic Funds Transfer (EFT) –  This retail funds transfer system was to
enable an account holder of a bank to electronically transfer funds to another
account holder with any other intermediate or participating bank.
 National Electronic Funds Transfer (NEFT) –  A secure system to facilitate
real-time fund transfer between individuals/corporates.
 Real Time Gross Settlement (RTGS) – A funds transfer function in which
transfer of money takes place from one bank to another on a real-time basis
without delaying or netting with any other transaction.
 Clearing Corporation of India Limited (CCIL) – This system is for banks,
financial institutions, non- banking financial companies and primary dealers,
to serve as an industry service mechanism for clearing settlement of trades in
money market, government securities and foreign exchange markets.

NABARD

NABARD was established on the recommendations of B. Sivaramman Committee,

(by Act 61, 1981 of Parliament) on 12 July 1982 to implement the National Bank for
Agriculture and Rural Development Act 1981. It replaced the Agricultural Credit
Department (ACD) and Rural Planning and Credit Cell (RPCC) of Reserve Bank of
India, and Agricultural Refinance and Development Corporation (ARDC). It is one of
the premier agencies providing developmental credit in rural areas. NABARD is
India's specialised bank for Agriculture and Rural Development in India.

The initial corpus of NABARD was Rs.100 crores. Consequent to the revision in the
composition of share capital between Government of India and RBI, the paid up
capital as on 31 May 2017, stood at Rs.6,700 crore with Government of India holding
Rs.6,700 crore (100% share). The authorized share capital is Rs.30,000 crore.

International associates of NABARD include World Bank-affiliated organisations and

global developmental agencies working in the field of agriculture and rural

21
development. These organizations help NABARD by advising and giving monetary
aid for the upliftment of the people in the rural areas and optimising the agricultural
process. 

The National Bank for Agriculture And Rural Development is popularly referred to as
NABARD.

NABARD is designated as an apex development bank in the country.This national

bank was established in 1982 by a Special Act of the Parliament, with a manadate to
uplift rural India by facilitating credit flow in agriculture, cottage and village
industries, handicrafts and small-scale industries. It is also required to support non-
farm sector while promoting other allied economic activities in rural areas. NABARD
functions to promote sustainable rural development for attaining prosperity of rural
areas in India.

It is basically concerned with “matters concerning policy, as well as planning and

operations in the field of credit for agriculture and other economic activities in rural
areas in India”. It is worth noting with refernce to NABARD that RBI has sold its
own stake to the Government of India. Therefore, Government of India holds 99%
stake in NABARD.

Role of NABARD

NABARD has been instrumental in grounding rural, social innovations and social
enterprises in the rural hinterlands. It has in the process partnered with about 4000
partner organisations in grounding many of the interventions be it, SHG-Bank
Linkage programme, tree-based tribal communities’ livelihoods initiative, watershed
approach in soil and water conservation, increasing crop productivity initiatives
through lead crop initiative or dissemination of information flow to agrarian
communities through Farmer clubs. Despite all this, it pays huge taxes too, to the
exchequer – figuring in the top 50 tax payers consistently. NABARD virtually
ploughs back all the profits for development spending, in their unending search for

22
solutions and answers. Thus the organisation had developed a huge amount of trust
capital in its 3 decades of work with rural communities.

 It is an apex institution which has power to deal with all matters concerning
policy, planning as well as operations in giving credit for agriculture and other
economic activities in the rural areas.

 it is a refinancing agency for those institutions that provide investment and

production credit for promoting the several developmental programs for rural
development.

 It is improving the absorptive capacity of the credit delivery system in India,

including monitoring, formulation of rehabilitation schemes, restructuring of
credit institutions, and training of personnel.

 It co-ordinates the rural credit financing activities of all sorts of institutions

engaged in developmental work at the field level while maintaining liaison
with Government of India, and State Governments, and also RBI and other
national level institutions that are concerned with policy formulation.

 It prepares rural credit plans, annually, for all districts in the country.

 It also promotes research in rural banking, and the field of agriculture and
rural development.

1. NABARD is the most important institution in the country which looks after the
development of the cottage industry, small scale industry and village industry, and
other rural industries.

2. NABARD also reaches out to allied economies and supports and promotes
integrated development.

3 .NABARD discharge its duty by undertaking the following roles :

1. Serves as an apex financing agency for the institutions providing investment

and production credit for promoting the various developmental activities in
rural areas.
2. Takes measures towards institution building for improving absorptive capacity
of the credit delivery system, including monitoring, formulation of

23
 rehabilitation schemes, restructuring of credit institutions, training of
personnel, etc.
3. Co-ordinates the rural financing activities of all institutions engaged in
developmental work at the field level and maintains liaison with Government
of India, state governments, Reserve Bank of India (RBI) and other national
level institutions concerned with policy formulation
4. Undertakes monitoring and evaluation of projects refinanced by it.

5. NABARD refinances the financial institutions which finances the rural sector.
6. NABARD partakes in development of institutions which help the rural
economy.
7. NABARD also keeps a check on its client institutes.
8. It regulates the institutions which provide financial help to the rural economy.
9. It provides training facilities to the institutions working in the field of rural
upliftment.
10.It regulates and supervise the cooperative banks and the RRB's, through out
entire India.

Functions of NABARD

NABARD gives high priority to projects formed under IRDP.

 It provides refinance for IRDP accounts in order to give highest share for the
support for poverty alleviation programs run by IRDP.
 Other than the activities included under IRDP, it also makes the service area
plan, to provide backward and forward linkages and also infrastructural
support.
 NABARD also prepares guidelines for promotion of group activities under its
programs and provides 100% refinance support for them.
 It is making efforts to establish linkages between Self-help Group(SHG) that
are organized by voluntary agencies for poor and needy in rural areas and
other official credit agencies.

24
 It refinances to the complete extent for those projects that are taken under the
‘National Watershed Development Programme‘ and the ‘National Mission of
Wasteland Development‘.
 It also has a system of District Oriented Monitoring Studies, under which,
study is conducted for a cross section of schemes that are sanctioned in a
district to various banks, to ascertain their performance and to identify the
constraints in their implementation, It also initiates appropriate action to
remedy them.
 It also supports Vikas volunteer Vahini programs which offer credit and
development activities to poor farmers.

 It also inspects and supervises the cooperative banks and RRBs to periodically
ensure the development of the rural financing and farmers’ welfare.
 NABARAD also recommends about licensing for RRBs and Cooperative
banks to RBI.
 NABARD also provides assistance and support for the training and
development of the staff of various other credit institutions, that are engaged
in credit distributions.
 It also runs programs for agriculture and rural development.
 It is engaged in regulations of the cooperative banks and the RRB’s, and
manages their talent acquisition through IBPS CWE conducted across the
country.

25
2.3 Problems of the Organization

1. Bad loans

At nearly Rs10 lakh crore, India’s pile of bad loans is bigger than the gross domestic
products of at least 137 countries. But so far, the RBI’s attempts to reduce Non-
Performing Assets (NPAs) in the banking sector have yielded little result.

The share of gross NPAs in India could inch up to 10.2% by March 2018, from 9.6%
in March 2017, according to the FSR. In September 2016, gross NPAs were at 9.2%.

Currently, the worst-hit are the state-owned banks, which dominate the Indian
banking system. In March 2017, the average bad loans of PSBs stood at 75% of their
net worth. These bad loans are squeezing banks’ profitability and capital positions,
threatening the health of some of India’s biggest banks.In the report, the RBI
cautioned that the situation could get worse with any unforseen stress in the economy.

2. Cyber threats

An estimated 95% of transactions in India are paid for in cash but with the growing
penetration of computers and smartphones, and increasing access to the internet,
Indians are taking to digital channels for their banking needs.

Cybercrime is becoming a greater threat as a result.The FSR labeled cyber-attacks as

a high-risk zone for India’s banking sector. The RBI classifies bank fraud as

26
transactions involving any cheating, negligence, misappropriation of funds, or forged
documents.

“Not only simple attacks using phishing, vishing and social engineering, but also
increasingly audacious attacks by organised gangs with or without backing by state
players have come to light,” the RBI said.The RBI recommended that banks invest in
preventive software and frequently assess the risks at hand, not just for in-house
operations but also for the external vendors that the lenders employ.

3. Bank fraud

Another pressing concern for the banking regulator is the increased number of
fraudulent transactions at Indian banks. What’s adding to the concerns is that banks
often seem reluctant to report these cases.

Almost all corporate loan-related fraud cases get seasoned for two to three years as
NPAs before they are reported as fraud,” the RBI said in the report. In the last five
years, the volume of bank fraud has increased by 19.6% to 5,064 cases.

2.4 S.W.O.T Analysis of the Organization

A. Strengths:

 All these Private banks have professional, dedicated and well-trained

manpower.
 In contrast to their Public Sector counterparts, Efficiency is maintained at the
highest level.
 The new Private Banks have commenced with strong financials and with a
clean slate i.e. without having to pursue NPAs.
 Almost all these banks have complied with Capital Adequacy requirements
and prudential norms.
 Most of these banks are fully computerized and techno-savvy.

27
B. Weaknesses:

 Both old and new private banks are operating in a limited area confined to a
region.
 Although highly networked, the number of branches is limited.
 The employee turnover appears to be on higher side.
 There is dissimilarity between old and new private banks by virtue of their
age, functional area, products and services, etc.

C. Opportunities:

 Being in private sector, these banks enjoy high level of autonomy

facilitating them for faster decision making
 To face stiff competition, they can innovate new products and services
and achieve high customer satisfaction
 With full computerization, they can offer cost-effective services like
ATMs, Electronic Fund Transfer, etc.

D. Threats:

 Expansion of foreign banks in the post WTO era poses severe competition.
 Dominant PSBs which are recharged with a high market share will
overshadow the Private Sector Banks.
 Frequent announcements of takeover / Mergers & Acquisitions by PSBs as
well as new Private sector banks disturb the very functioning of old Private
Sector Banks.
 RBI / GOI relaxation of FDI investment norms cause worry among the
managements.

28
 CHAPTER-3

RESEARCH METHODOLOGY

29
 3.1 Overview of the Project

The present study uses the latest available published data for the years 2014-
2015compiled from Financial Statement of Regional Rural Banks and Statistics on
Regional Rural Banks compiled by the National Bank for Agriculture and Rural
Development for the relevant year.

As per this database, in the years 2014-2015 there were 196 regional rural banks
(RRBs) in India. We take 1993-94 as the cut off year to compare efficiency pre and
post restructuring.

The first step in the analysis is the measurement of bank’s productive efficiency.
Following Bhattacharya et al. (1997), performance has been associated with technical
efficiency (hereafter referred to as ‘efficiency’). It is the ability to transform multiple
resources into multiple financial services. The efficiency has been calculated using
variable returns to scale (VRS) input oriented model of the DEA methodology.

To measure efficiency as directly as possible, that is, management’s success in

controlling costs and generating revenues (that is, x-efficiencies), two input and two
output variables, namely, interest expenses, non-interest expenses (inputs) and net
interest income and non-interest income (outputs) have been used. These variables
capture all the activities undertaken by the bank and have been used in prior studies
(see Avkiran, 2015 for example). Interest income captures the loan and investment
activities undertaken by the bank, non-interest income captures other activities
(mainly fee based) of the bank. Interest expenses capture the efficiency (low cost) in
raising funds and non-interest expenses capture the operating

30
The choice of inputs and outputs in DEA is a matter of long standing debate among
researchers. Two approaches exist. One is called the production approach while the
other an intermediation aproach.

The production approach uses number of accounts of deposits or loans as inputs and
outputs respectively. This approach assumes that banks produce loans and other
financial services. The intermediation approach on the other hand considers banks as
financial intermediaries and uses volume of deposits, loans and other variables as
inputs and outputs. Most of the DEA studies follow an intermediation approach.
Within the intermediation approach, the exact set of inputs and outputs used depends
largely on data availability. As already stated DEA is sensitive to the choice of input-
output variables. This is strength of the technique, since it reveals which of the input-
output variables need to be closely monitored by bank management to improve
efficiency.

Data Envelopment Analysis

DEA is a linear programming technique initially developed by Charnes, Cooper and

Rhodes (1978) to evaluate the efficiency of public sector non-profit organisations.
Sherman and Gold (1985) were the first to apply DEA to banking. DEA calculates the
relative efficiency scores of various Decision-Making Units (DMUs) in the particular
sample. The DMUs could be banks or branches of banks.

3.2 Objectives of Study

 To analyze the usage of bank facility by the rural customer

 To trace out the genesis and concepts of rural banking.
 To know the reasons for unprofitable of rural banking in India.
 To identify the cost per transaction of Indian Banks and purpose of borrowings
 To analyze the financial performance of Regional Rural Banks in India before
and after amalgamation.
 To understand the working of Regional Rural Banks in India.
 Bridging the credit gap in rural areas.
 To check the outflow of rural deposits to urban areas.

31
  To reduce regional imbalances and increase rural employment.
 To provide credit and other facilities, especially to the small and marginal
farmers, agricultural laborers, artisans etc.
 To save the rural poor from the moneylenders.
 To act as a catalyst element and thereby accelerate the economic growth in the
particular region.
 To increase employment opportunities by encouraging trade and commerce in
rural areas.
 To encourage entrepreneurship in rural areas.
 To cater to the needs of the backward areas which are not covered by the other
efforts of the Government.

3.3 Limitations of the Study

The present study is undertaken to maximize objectivity and minimize the

errors. However, there are certain limitations of the study which are to be
taken

into consideration for the present work.

1.  Haste and Lack of Co-ordination in Branch Expansion:

Haste in branch expansion programme in many cases has resulted in lopsidedness due
to lack of co-ordination. In several cases, it could not be ensured that the branches of
the RRBs are opened at centres where no commercial or co-operative banking
facilities were provided.

2.  Difficulties in Deposit Mobilisation:

The RRBs encountered a number of practical difficulties in deposit mobilisation. On
account of their restrictive lending policy which excludes richer sections of the village
society, these potential depositors show least interest in depositing their money with
these banks.

32
3.  Constraints in Deposit Mobilisation:
The RRBs exclude the richer sections of the village society in providing direct
financial assistance. These sections have potential savings to deposit. But, they are
least interested in depositing them with the RRBs in view of the restrictive credit
policy of these banks. Further, state and local governments and their agencies also
have not co-operated much by maintaining their deposit accounts with the RRBs.

4.  Slow Progress in Lending Activity:

The RRBs’ pace of growth in loan business is slow. For this the following reasons
may be given: (i) There have been limited scope for direct lending by RRBs in their
fields of operations;

(ii) It is always difficult to identify the potential small borrowers and the bank staff
have been required to make special and sincere efforts in this regard;

(iii) Most of the small borrowers do not like the bank formalities and prefer to borrow
from the informal/indigenous sources of finance, such as moneylenders;

(iv) The anomalies in the Differential Interest Rate (DIR) Scheme also posed a special
problem to the RRBs. While the RRBs charge 14 per cent interest, the commercial
banks charge only 4 per cent under the DIR Scheme in rural areas.

Thus, no borrower would go to RRBs or co-operative societies in the area when a loan
from the commercial bank is available under the DIR Scheme;

(v) There is no effective link between the RRBs and PACS and the farmers’ service
societies; (vi) There is lack of co-ordination between officials of the district credit
planning committees and the RRBs.

5.  Urban-Orientation of Staff:

A crucial practical difficulty experienced in their working by the RRBs is the urban
orientation of their staff which is rarely inclined to serve in rural areas. There is no
true local involvement of the bank staff in the village where they serve.

33
6.  Procedural Rigiditi
The RRBs follow the procedures of the scheduled commercial banks in the matter of
deposits and advancing loans which are highly complicated and time-consuming from
the villagers’ point of view. The rural borrowers always appreciate informal ways and
simple procedures as have been followed by the money-lenders and the indigenous
bankers.

CHAPTER -4

ANALYSIS AND PRESENTATION

34
This section says about different aspects associated with structural growth of RRBs,
geographical distribution of RRBs, mobilization and deployment of funds, credit-
deposit and investment-deposit ratio of RRBs, purpose-wise distribution of loans and
advances of RRBs, and financial performance of RRBs.

The present study based on estimation of financial performance of RRBs, it

has two important objectives. The proposed research has 2 prime objectives.
The first objective of the research is to evaluate financial performance of all
study period RRBs by taking data from NABARD, RBI, Committee reports
of RBI and from various previously published articles presenting and
interpreting it in simpler and in tabular manner to understand the financial
performance RRBs are gradually rising in better structure and improving
costumer’s strength.
It is too difficult to improve this in rural areas through network. RRBs
covered total 11 districts with 518 branches and further grown up to 14,446
branches. RRBs covered 45 percent in the country; it is a large network in
rural areas and forming the branches in to commercial level. RRBs future
orientation is to alarmed constraint in rural and semi urban bank branches
constituting more than ninety seven percent of the total network branches. It
is enabled through RRBs and has banking in rural range.

STRUCTURAL GROWTH OF REGIONAL RURAL BANKS

It is know through inception that RRB has seen a gradual rise in better
structure and delivering a better strength. There are other feature which are
far more remarkable and doo address a massive expansion through networks
in rural areas.
There are other beginning which RRB’s which cover s all the branches like
of 17 branches and other 11 districts and have districts covered as 518 and
which further grown up to 14,446 branches working more than the 45 percent

35
 of the country larger network in rural area and forming a better orientation for
the present 45 percent branches in commercial level.
There are further orientation of RRB’s which do act as a formidable
constraint in rural and semi urban 68 branches constituting more than 97
percent of the network branch, the branch network can be enabled through
RRB’s and have banking in rural range

GROWTHS OF INDIAN RRBs

YEAR No. of Growth No. of Growth No. of Growth

RRBs Rate Branches Rate District Rate
Of RRBs Covered
with RRBs
2007-08 91 - 6.2 14761 1.31 594 11.23

2008-09 86 -6.49 15181 2.84 617 3.87

2009-10 82 -5.65 15480 1.96 618 0.16

2010-11 82 0 16001 3.36 620 0.32

2011-12 82 0 16909 5.67 638 2.9

2012-13 64 -22.97 17861 5.63 635 0.47

2013-14 57 -11.84 19082 6.84 642 1.1

2014-15 56 -1.7 19964 4.6 642 0

2015-16 56 0 20342 1.84 648 0.93

2016-17 56 0 20924 2.86 648 0

Mean 80 -13.02 16927 3.12 606.38 2.7

SD 40. 13.17 1960 2.06 45.89 3.7

3
CV 51. -101.31 9.01 75.73 8.17 141.56

36
 38

Source: NABARD Key Indicators of RRBs for the Year-2017

State-wise Spread of Regional Rural Banks and their Network and

Coverage at

The end of March – 2017

Sr. No. Name of the Number of Number of Number of

State RRBs Branches Districts
Covered
1. Andhra 4 1642 23
Pradesh
2. Arunachal 1 30 8
Pradesh
3. Assam 2 428 27
4. Bihar 3 1718 38
5. Chhattisgarh 3 555 28
6. Gujarat 3 529 26
7. Haryana 2 507 23
8. Himachal 2 188 12
Pradesh
9. Jammu & 2 323 26
Kashmir
10. Jharkhand 2 442 24
11. Karnataka 3 146 30
12. Kerala 2 506 15
13. Madhya 3 1132 50

37
 Pradesh
14. Maharashtra 2 645 33
15. Manipur 3 28 9
16. Meghalaya 2 76 7
17. Mizoram 1 71 8
18. Telangana 1 92 7
19. Nagaland 2 10 5
20. Orissa 2 901 30
21. Pondicherry 1 30 2
22. Punjab 3 311 24
23. Rajasthan 3 1157 36
24. Tamil nadu 2 374 31
25. Tripura 1 133 8
26. Uttar Pradesh 8 3518 81
27. Uttaranchal 1 237 13
28. West Bengal 3 921 18
28. TOTAL 56 17856 635
Source NABARD, Key Indicators of RRBs for the year – 2017.

38
 CHAPTER-5

FINDINGS

5.1 Conclusion and Recommendations

RRBs are well positioned to play a major role in financial inclusion particularly in
areas with high rates of financial exclusion. RRBs were originally created to cater to
neglected sections as they were expected to have sound financial management
combined with local feeling and familiarity .RRBs should concentrate on asset quality
and earnings. With the increasing competition among banks to meet customer
expectations, banks should offer abroader range of deposits, Investments and credit
products through diverse distribution channels including ATMs, telephone, internet.

39
The RRB staff is required locally and their postings or transfers are within the banks
area of operation which is ordinarily a districts or two. The need formatting the local
ethos makes it imperative that the emoluments and services conditions of the RRB
staff should be inline with those of State Government staff in comparable cadres who
constitute bulk of the salaried people in the area and with whom the former have to
establish a closer apart for their day to day work.

Therefore, the emoluments of the staff should be continued to be determined as per

the state government scales. It is obvious that the terms of service and facilities
available to the government staff may differ from state to state. However the terms
and service conditions of the staff of RRBs operating within a state have to be
uniform .RRBs face many problems in finding suitable staff and in giving them
adequate raining. The sponsor banks are in a good position to assist RRBs in this
respect.

The key personnel should continue to be provided by sponsor banks till RRBs are in
a position to develop their own personnel through suitable training and otherwise to
take over the relevant responsibilities. In this context, training of RRB personnel
assumes great importance; while the SBI has set up separate training centres for the
RRB staff, sponsor banks should conduct special courses for the RRB staff at centres
meant for their staff. However, the existing arrangement cannot be said to be
adequate. In States like U.P, Bihar, West Bengal etc. RRBs could not adhere to their
branch expansion programmes for lack of adequate technical assistance in project
formulation by RRBs.

Facilities for recruitment and training and technical assistance should continue to be
provided by the sponsor banks, on the same terms for a period of 10 years for each
RRB. Thereafter, any arrangement of assistance of this type can be decided upon by
mutual agreement between the sponsor bank and the RRB.

There are 185 million bankable adults in rural India who are unbanked because of
access and usage issues. This presents a significant opportunity for commercial banks.
However, to reach this market and subsequently build an inclusive financial system,
there must be a coordinated and concerted effort by the three key stakeholders: the
Government of India, the Reserve Bank of India and the commercial banks. In
addition, a partnership between banks and business correspondents, and collaboration

40
amongst banks is critical. Furthermore, banks should tailor their product and service
mix to meet rural.

Using published data, we calculated the production efficiency score of regional rural
banks in India for the years 2012 to 2016.

The scores were calculated using the non-parametric technique of Data Envelopment
Analysis. As a major restructuring of these banks occurred in the year 2000-2002 the
mean efficiency scores of pre-restructuring and post restructuring years were
compared using ANOVA to test whether restructuring has resulted in improving
efficiency of these banks. The study shows that the mean efficiency score of RRBs
has shown a significant increase.

This study recommends that the existing policy of bringing down non-performing
assets as well as curtailing the establishment expenditure through voluntary retirement
scheme for bank staff and rationalization of rural branches are steps in the right
direction that could help these banks improve efficiency further over a period of time.
The findings may be of use to rural banking institutions and policy makers in
developing countries and to academics researchers in the area of banking efficiency.

5.2 Scope of Further Study

The Reserve Bank of India has a mandate to be closely involved in matters

relating to rural credit and banking by virtue of the provisions of Section 54
of the RBI Act. The major initiative in pursuance of this mandate was taken
with sponsoring of All-India Rural Credit Survey in 2017-18.
This study made agency-wise estimates of rural indebtedness and observed
that cooperation has failed but it must succeed. The Report of the Committee
on Directions is still considered a classic on the subject, and two of the four
members were, incidentally, from Andhra Pradesh. This is the origin of the

41
policy of extending formal credit through institutions while viewing local,
traditional and informal agencies as usurious. In the first stage, therefore,
efforts were concentrated on developing and strengthening cooperative credit
structures.

The Reserve Bank of India has also been making financial contributions to
the cooperative institutions through evolving institutional arrangements,
especially for refinancing of credit to agriculture. While enacting the State
Bank of India Act in 1955, the objective was stated to be the extension of
banking facilities on a large scale, more particularly, in rural and semi-urban
areas. SBI, therefore, became an important instrument of extending rural
credit to supplement the efforts of cooperative institutions.
In 2016, 14 major commercial banks were nationalised and the objective,
inter alia, was "to control the heights of economy". The nationalised banks
thus became important instruments for advancement of rural banking in
addition to cooperatives and State Bank of India. The next step to supplement
the efforts of cooperatives and commercial banks was the establishment of
Regional Rural Banks in 12016 in different states with equity participation
from commercial banks, Central and State Governments. By 2015 to
consolidate the various arrangements made by the RBI to promote/ supervise
institutions and channel credit to rural areas, NABARD was established.
Though several efforts were made to increase the flow of institutional credit
for agricultural and rural lending, there were mismatches in credit and
production. Field studies conducted to determine the reason, revealed that it
was due to absence of effective local level planning. It was felt that with the
establishment of large network of branches, a system could be adopted to
assign specific areas to 45 each bank branch in which it can concentrate on
focussed lending and contribute to the development of the area.

With a view to implementing this approach, RBI introduced a scheme of

"Service Area Approach" for commercial banks. To further supplement the
institutional mechanism, the concept of Local Area Banks was taken up in
1996-97 and in-principle approval has been given for 8 Local Area Banks. As
regards cost of credit, for most of the period, the administered interest rate

42
regime was applicable for bank lending and this included concessional terms
for priority sector.
Currently, all interest rates on bank advances including in rural areas are
deregulated and there is no link between priority sector and interest rate,
though there are some regulations on interest rates by size of advance i.e.
below Rs. 2 lakh in respect of commercial banks. As regards policy measures
to enhance flow of credit to rural areas, apart from availability of credit lines
from the Reserve Bank of India, the concept of priority sector was evolved to
ensure directed credit.

Currently, the stipulation is that domestic commercial banks should extend

credit to the extent of 40 per cent of the total net bank credit to priority sector
as a whole, of which 18 per cent should be specifically for agriculture. Out of
the target of 18 per cent for agriculture, at least 13.5 per cent should be by
way of direct loans to agriculture and remaining could be in the form of
indirect loans.
Where a bank fails to fulfil its commitment towards priority sector lending, it
is currently required to contribute to Rural Infrastructure Development Fund
set up by NABARD.

NABARD in turn provides these funds to State Governments and state

owned corporations to enable them to complete various types of rural
infrastructure projects. It is pertinent to recognise that there are a large
number of credit linked programmes sponsored by the Government for direct
assault on poverty. In programmes relating to self-employment and women
welfare, the multiplicity of programmes has been reduced by having a
comprehensive and consolidated programme named Swaranjayanti Gram
Swarojgar Yojna.

43
BIBLIOGRAPHY

Refrences

o The Performance of Regional Rural Banks (RRBs) in India:

Has Past Anything to Suggest for Future? By Biswa Swarup
Misra World Bank 2008.

44
o National Sample Survey Organization (NSSO), Household
Consumer, Expenditure in India (2016)

o Access to and Usage of Financial Services, World Bank

2017.

o A project report on rural banking in India submitted by:

Kinjal Prajapati, Aisha Shah.
o Bhatt, N and Y S P Thorat (2001), “India’s Regional Rural
Banks: The
o Institutional Dimension of Reforms”, Journal of
Microfinance.

o National Bank for Agriculture and Rural Development

(2017), “Report of the Committee to suggest Amendments in
RRB Jaipur.

o National Bank for Agriculture and Rural Development

(2004), Annual
Report 2003- 04, NABARD, Jaipur

o Reserve Bank of India (2015), “Handbook of Statistics on

Indian Economy, 2016-17”, RBI, Jaipur.

o Reserve Bank of India (2003), “Report on Trend and

Progress of
Banking in India, 2002-03”, RBI, Jaipur.

45
 o Reserve Bank of India (May 2005) "Report of the Internal
Working group on RRBs"

o Reserve Bank of India, “Statistical Tables Relating to Banks

in India” (various years) RBI,Jaipur.

Websites

 www.rbi.org.in
 www.geocities.com
 www.alternativefinance.org
 www.nabard.com

46
 www.rrbs.org.in

47