A PROJECT REPORT ON RURAL BANKING IN INDIA (Regional Rural Banks in

India)

PRIYANKA DUBEY

INTRODUCTION

INDIAN ECONOMY
India is the 12th largest economy in the world in terms of gross domestic product (GDP), and
fourth in terms of purchasing power parity (PPP). The growth of the economy is equally
impressive with an average of over 8.0% during the last three years2. However, in terms of GDP
per capita, India ranks a lowly 160th among other nations. Within the country, there is a stark
divide in the incomes of urban and rural areas with the average monthly per capita consumption
expenditure (MPCE) in urban India being almost double that of rural India. In addition, there are
significant disparities in urban and rural consumption expenditure between different states.
Jharkhand and Orissa, for example, have an MPCE of approximately Rs. 900 in urban areas and
Rs. 410 in rural areas. In other states like Punjab and Haryana, the urban rural disparity is
significantly lower. A fifth of the Indian population is below the poverty line (BPL) today with a
MPCE below Rs 340. In some states like Jharkhand and Orissa, the proportion of BPL is greater
than 40%. Diamond believes that the segments that are not considered BPL should all be
considered as “potentially bankable” with genuine financial needs that could be met by formal
financial and banking systems.
Regional Rural banks in India
Regional Rural Banks (RRBs) are Indian Scheduled Commercial Banks (Government Banks)
operating at regional level in different States of India. They have been created with a view of
serving primarily the rural areas of India with basic banking and financial services. However,
RRBs may have branches set up for urban operations and their area of operation may include
urban areas too.
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. RRBs also perform a variety of different functions. RRBs
perform various functions in following heads:

 Providing banking facilities to rural and semi-urban areas.

 Carrying out government operations like disbursement of wages of MGNREGA workers,
distribution of pensions etc.
 Providing Para-Banking facilities like locker facilities, debit and credit cards, mobile
banking, internet banking, UPI etc.
 Small financial banks.

Regional Rural Banks were established under the provisions of an Ordinance passed on 26
September 1975 and the RRB Act 1976 to provide sufficient banking and credit facility for
agriculture and other rural sectors. As a result, Five Regional Rural Banks were set up on 2
October 1975, Gandhi Jayanti. These were set up on the recommendations of The narshimham
committee Working Group[1] during the tenure of Indira Gandhi's Government with a view to
include rural areas into economic mainstream since that time about 70% of the Indian Population
was of Rural Orientation. The development process of RRBs started on 2 October 1975,Gandhi
Jayanti with the forming of the five RRBs. First RRB,the Prathama Bank,Head Office at
Moradabad (U.P.) with authorized capital of Rs 5 crore at its starting. Prathama bank was
sponsored by Syndicate Bank.As on 2 October,1975 Out of the remaining four RRBs in the
country one was Set up at Malda in West Bengal under the name of Gaur Gramin Bank,
(Sponsored Bank:UCO Bank) which was the first RRB in the Eastern Region of India.Other
three RRBs are Gorakhpur Kshetriya Gramin Bank,Gorakhpur,U.P.(Sponsored
Bank:SBI),Haryana Kshetriya Gramin Bank Bhiwani,Haryana (Sponsored Bank:PNB),Jaipur-
Nagpur Anchalik Gramin Bank Jaipur,Rajasthan (Sponsored Bank:UCO Bank).
The Regional Rural Banks were owned by the Central Government, the State Government and
the Sponsor Bank (Any commercial bank can sponsor the regional rural banks) who held shares
in the ratios as follows Central Government – 50%, State Government – 15% and Sponsor Banks
– 35%.
CURRENT STATE OF INDIAN BANKING
An important metric to determine the level of financial outreach/inclusion is the ratio of the
number of deposit accounts to population. It gives a snapshot of the penetration of deposit
accounts and credit accounts in India in comparison with a few select countries with similar
socio-cultural and economic conditions. Even in comparison with other developing economies,
India has a significant opportunity for increasing penetration of both deposit and credit accounts.
Not only is there a large disparity between India and other countries in banking penetration but
there is also a large variation in banking penetration within urban and rural India. While urban
India seems to be over-banked with more than 100% penetration (many urban Indians have more
than one bank account), rural India lags far behind with a 19% penetration. The variance in rural
and urban deposit and credit account penetration is not restricted only to few states but is
common across all states.
In addition, the average value of a deposit account and a credit account is also quite low in rural
areas as compared to urban areas. Diamond believes that the reasons for lower penetration levels
are partly economic, as explained by the low GDP per capita in the rural areas of the country,
and partly a result of “controllable” factors that are inherent in formal banking systems in India
today. The low deposit and credit account penetration and low average values in deposit and
credit accounts demonstrate that banking outreach in rural India is suboptimal. This low outreach
can be explained by two key parameters: access and usage. Simply defined, access is the
availability of financial services, and usage is the actual use of those services. Access is
influenced by issues such as the basic economic state of rural India, lack of physical
infrastructure facilities, regulatory constraints, and the economics of rural banking. Usage is
constrained by social issues such as illiteracy, incomplete service offerings by banks, and high
transaction costs in the formal banking system. Access and usage are not synonymous, as people
may have access to financial services, but decide not to use them, either for socio-cultural
reasons or because opportunity costs are too high.

LIST OF RURAL BANK IN INDIA