Rural Banking

Rural Banking
Assistant Professor Prathmesh U Tawade

Indian Economy and Rural Area
As per Economic Survey 2022-23, 65 per cent (2021 data) of the
country’s population lives in the rural areas.
Strengthening of rural economy is the corner stone of India’s

economic development.
Rural economy is predominantly dependent on agriculture. (47 per

cent of the population is dependent on agriculture for livelihood)

Role of Agricultural Sector in Rural
Economy
Contribution to India’s GDP
Mainstay of livelihood and employment
Sources of raw materials
Sources of foreign exchange earnings
Markets for industrial goods and services

Problems of Rural Economy
Economic backwardness
Timely
Gambling of monsoon availability of
Credit can be
Overdependence the solution
Low productivity due to fragmented agricultural land

Institutional Support at Rural Area
Cooperative
Institutional Rural Credit

Societies Institutions
Commercial Banks
Agencies Rural Banks
SHGs and Micro

Finance

Structure of Cooperative Credit System In India

Rural Banking System
It was the nationalization of the commercial banks in 1969 which brought the
commercial banks to the rural sector particularly for lending to agriculture and
allied sectors.
After this remarkable event lending to rural sector is being shared by

cooperatives and commercial banks.
Later, Regional Rural Banks (RRBs), a hybrid banking structure with

cooperative and commercial characters were formed exclusively for the
purpose of promoting rural banking.
Constituents of Rural Banking
Institutional Agencies Non-institutional Agencies
Cooperatives Landlords
Commercial Banks Agricultural Moneylenders
Regional Rural Banks Professional Moneylenders
Micro-Finance Institutions Traders and Commission agents
Relatives & Friends

Cooperatives Vs Commercial Banks
Cooperative Banks Commercial Banks
Service is the main motto of cooperative banks. Help Safety, liquidity and the profitability are the important
to small farmers, marginal farmers, scheduled caste guidelines of commercial banks. Big farmers,
and scheduled tribes, weaker sections of the wholesale traders and large-scale industries are taken
community are given priority. Lending to small scale care of.
industries, cottage and village industries is considered.
Members and customers both coexist in Cooperative Only customer exists in the commercial banks.
banks
Cooperative banks consist of three tier federal Commercial banks do not have such structure
structure viz., state, central and the primary
cooperative banks
State participation is available i.e., contribution of There is no share capital participation from the
share capital by the government to cooperative banks government (except in PSB)
Main objective of cooperative banks is to lend for Commercial banks mainly lend for trade, industry and
agricultural operations. Urban cooperative banks commerce
finance for small traders, artisans, SSI and
the people of small means

Regional Rural Banks (RRBs)
Regional Rural Banks (RRBs) are the subsidiaries of the commercial
banks.
The preamble to the RRBs Act, 1976 states that the object of setting up
the RRBs is to develop the rural economy “by providing for the purpose
of development agriculture, trade, commerce, industry and other
productive activities in the rural areas like credit and other facilities,
particularly to the small and marginal farmers”.

Regional Rural Banks (RRBs)
The government on the recommendation of Narasimhan committee set up Regional
Rural Banks in 1975.
The RRBs Act empowers the Central Government to establish these banks at places
where it considered necessary.
These banks are jointly owned by Government of India, the Government of the State in
which the banks are established and the banks which sponsors it.
They accept all types of deposits from the public, lending various loans required by the
farmers and others including the issue of jewel loan and transact their business as
defined in the Banking Regulation Act.
Objectives of RRB
 To provide cheap and liberal credit facilities to small and marginal farmers, agricultural labourers,
artisans, small entrepreneurs and other weaker sections
 To save the rural poor from the money lenders
 To act as a catalyst element and accelerate the economic growth in the particular region
 To encourage entrepreneurship in rural areas
 To increase employment opportunities by encouraging trade and commerce in rural areas
 To cultivate banking habits among the rural people and mobilize the savings for the economic
development of rural areas
 To develop underdeveloped regions and thereby strive to remove economic disparity between regions

Functions of RRBs
 Mobilization of deposits in rural area
 Provision of credit in favour of the economically weaker section in the rural areas
 Provision of other ancillary banking facilities like remittance of funds and safe deposit and valuables in rural
areas
 Undertaking supply of agricultural inputs and equipment to the farmers
 Provisions of assistance in marketing of agricultural and other products through marketing organizations.
 Encouraging village industries, artisans, craftsmen etc.
 Reducing the dependence of weaker section on money lenders
 Making backward and tribal areas economically better opening new branches and extending micro credit
facilities and operating the schemes of inclusion

Land Development Banks
Land Development Banks (LDBs) provides long term (15 to 30 years)

credit in the agriculture sector. They were earlier called as Land
Mortgage Banks (LMBs).
They give loan primarily for investment purposes. In some States,

they have two tier structure with State level Cooperative Land
Development Bank at the apex and at the village level the Primary
Land Development Banks.
Primary Agricultural Credit Societies
(PACS)
It is an association of the borrower and non-borrower residing in a particular
locality and taking interest in the business affairs of one another.
The affairs of these organizations are managed by the honorary secretaries and
presidents assisted by the board of directors.
All these officials are being elected from among the shareholders on the
principle of ‘One man, one vote’.
These credit societies can extend the loans to its members only for the purpose
of agricultural related activities.
District Central Co-operative Banks
It is a federation of primary societies in a specified area.
They are generally situated at the headquarters of district and have

on their board of management expert people and representatives of
primary societies.
The primary business of the DCCBs consists of financing primary

societies.

State Cooperative Banks
These are the banks at the top of the hierarchy as far as Short Term Rural Co-
operative Banks are concerned.
The state co-operative bank is a federation of central co-operative bank and acts
as a watchdog of the co-operative banking structure in the state.
Its funds are obtained from share capital, deposits, loans and overdrafts from
the Reserve Bank of India.
The state co-operative banks lend money to central co-operative banks and
primary societies and not directly to the farmers.
State Co-operative Agriculture and Development
Banks (SCARDB)
SCARBDs constitute the upper tier of long term co-operative credit

structure.
The objective of these bank is to finance primary agriculture and rural

development banks.

Primary Co-operative Agriculture and Rural
Development Banks (PCARDBs)
PCARDBs is the lowest layer of long term credit co-operatives. It is

primary dependent on the borrowing for their lending business.
They provide credit for the development purpose like minor

irrigation, cultivation, plantation of crops and for diversified purposes
like poultry, dairying and sericulture business.
They get requisite financial assistance from SCARDB.

Micro Finance
 Micro-finance is an innovative financial service for the poor in rural, semi-urban and urban areas and it
is believed to be an instrument to get out of poverty.
 Micro finance is a set of financial services for the poor and vulnerable group of the rural, semi urban
and urban areas at an easy and affordable cost.
 Microfinance consists of micro credit, micro insurance, micro savings and micro remittance.
 According to the Task Force on Supportive Policy and Regulation Framework for Microfinance,
Microfinance is “ the provision of thrift and credit and other financial services including insurance and
products of very small amount to the poor in rural, semi urban and urban areas for enabling them to
higher income levels and improving their living standards”

Comparative Features of Micro- Finance

SHG Bank Linkage Model
 In February 1992 NABARD launch the SHG–Bank Linkage Programme to evolve a
supplementary credit delivery channel for meeting the credit needs of the rural poor
 All categories of banks, viz. public sector banks, private sector banks, regional rural banks
and co-operative banks participate in the programme.
 This model aimed to reach the rural masses, especially women who were always deprived
and remained as disadvantaged section of the society but would have capability to live life
with their skill if they got opportunity.
 This model is quite flexible for members in terms of amount of saving, interest rate of loan;
borrowing etc. which suits the India’s rural society.
SHG Bank Linkage Model
SHG
Models
Model I Model II Model III

SHG Model I
In the first model the bank itself acts as a self-help group promoting
institution (SHPI).
Under this model, SHG linkages are facilitated through NABARD‟s policy of
converting regional rural banks (RRBs) into self-help promoting institutions
(SHPIs).
In this model SHGs are promoted and nurtured by the banks of that local
area and banks provide loans after going through the necessary formalities.

SHG Model I

SHG Model II
 In this model SHGs are promoted and guided by NGO or government agency like DRDA etc. and financed by
banks.
 Here banks opened saving accounts and then provided credit directly to the SHGs, while NGOs acted as
facilitators.
 NGO’s and other government agency like District Rural Development Authority or village level institutions are
entrusted with the duty of forming and nurturing the groups.
 Training programmes are conducted on saving and credit management for proper functioning of the group
which are financed by banks.
 This approach has been widely accepted by the practitioners partly because of the large scale participation of
state government through development agencies like the District Rural Development Agency (DRDA), District
Women Development Agency (DWDA), and some of the centrally sponsored social sector missions, and also
because of special initiatives of NABARD. Assistant Professor Prathmesh U Tawade
SHG Model II

SHG Model III
Under the third model the NGOs act both as facilitators and microfinance
intermediaries.
First they promote groups, nurture them, and train them, and then they approach
banks for bulk loans for lending to the SHGs.
Under this model, NGOs formed SHG federations and then facilitated them to
assume the role of MFIs.
This model is expected to gain wider recognition with smaller banks venturing into
large scale financing of SHGs.

SHG Model III

Timeline for Financial Inclusion And Rural Banking
2005 to 2011 to
Post 2015
2010 2014

2005 To 2010
2005- RBI advised banks to provide no-frills accounts
2006- Banks were permitted to use NGOs, MFIs and SHGs as business
correspondents (BCs) and business facilitator (BFs) to extend banking
services.
2008-09- National Automated Clearing House (NACH) and National

Financial Switch (NFS) were launched by the National Payment
Corporation of India (NPCI) to make retail payments seamless.

2011 To 2014
2011- The Swabhimaan Scheme was launched by the government which
covered more than 74,000 villages with a population of over 2000 with banking
services.
2012- RuPay cards were introduced by NPCI as a domestic payment network.
2013- The DBT scheme was launched for simpler and faster flow of
information/funds.
2014-The remarkable revolutionizing PMJDY was introduced with an aim of

linking every household with banking facilities.
Post 2015
2015- The introduction of payment bank and small finance bank

licence by the RBI to broaden the reach of payment and financial
services to small businesses, low-income households, small and
marginal farmers, etc.
2016- Bharat Interface for Money (BHIM), a payment app, was

launched by NPCI to enable fast, secure, reliable cashless payments
through mobile phones.
Banking Correspondent Model
 BCs are agents contracted by banks for providing basic banking services at locations other
than a bank branch or ATM.
 BCs are ideally an extended arm of the bank, and thus are vital in the promotion of financial
services and expanding the outreach of banks to unbanked and underbanked regions.
 BCs are engaged by banks to provide a variety of core banking services, which include (but
are not limited to):
 Bank account opening
 Transactional banking-deposits, transfer and withdrawal

Existing Banking Correspondent (BC)
Model
Introduced by RBI in 2006
Banks can third-party, non-bank agents that extend their services to

customers in rural areas
Fees and commissions are paid by sponsored banks
A fixed fee is usually paid to BCs for every new account. For transactions
like deposits, withdrawals and transfers, BCs get a variable fee that is
between 0.3% and 0.5% of the transaction amount.
Need for Banking Correspondent (BC) in Rural India
Excessive capital for banks
High operational costs banks Address these problems

and provide last mile
connectivity
Reducing margins on financial transactions
Lack of financial literacy at banking points

Who can be Banking Correspondent? (BC)
Retired government servants like postmasters, employees and ex-servicemen
Individual owners of ‘kirana’, medical, petrol pumps and fair price shops
Public call office (PCO) operators
Agents of small savings scheme of the government
Authorised functionaries of SHGs, which are linked to banks
Non-bank private entities

Priority Sector Lending
 Priority Sector means those sectors which the Government of India and Reserve Bank
of India consider as important for the development of the basic needs of the country
and are to be given priority over other sectors.
 The banks are mandated to encourage the growth of such sectors with adequate and
timely credit.
 The goal of a PSL initiative is to provide credit to the weaker sections of the society, as
opposed to funding only profitable sectors or spaces that are solely important to
economic growth. All sectors considered as a priority are able to easily access financial
support like apply for loans that the banks are required to allot at a lower interest rate.
Categories of PSL
Agriculture
Micro, Small and Medium Enterprises
Export Credit
Education
Housing
Social Infrastructure
Renewable Energy
Others Assistant Professor Prathmesh U Tawade

Targets for PSL to Commercial Banks

Background of PSL
 It came into being in 1972, following the National Credit Council’s plea that more emphasis should
be given by commercial banks to the priority sector.
 In 1974, the commercial banks were given a target of 33.33% of total credit which was revised to
40 % of the total credit under the recommendations of Dr K S Krishanaswamy Committee.
 The last revision took place in 2012 under the recommendations of the M.V. Nair Committee.
 If in case the bank is unable to meet the targets then it will have to finance the development
programmes run by the government for the particular sectors.
 In April 2016, RBI has introduced Priority Sector Lending Certificates so that banks can trade the
loan certificates given to the different sectors to meet their targets in the event of a shortfall.
Priority Sector Lending Certificates
A mechanism to enable banks to achieve the priority sector lending
target and sub-targets by the purchase of these instruments in the
event of the shortfall is Priority Sector Lending Certificates (PSLCs).
This also incentives surplus banks as it allows them to sell their excess
achievement over targets thereby enhancing lending to the categories
under priority sector.

Rural Banking

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Rural Banking

Assistant Professor Prathmesh U Tawade

Strengthening of rural economy is the corner stone of India’s

Rural economy is predominantly dependent on agriculture. (47 per

Assistant Professor Prathmesh U Tawade

Mainstay of livelihood and employment

Sources of raw materials

Sources of foreign exchange earnings

Markets for industrial goods and services

Assistant Professor Prathmesh U Tawade

Low productivity due to fragmented agricultural land

Assistant Professor Prathmesh U Tawade

Institutional Rural Credit

Agencies Rural Banks

SHGs and Micro

Assistant Professor Prathmesh U Tawade

Assistant Professor Prathmesh U Tawade

After this remarkable event lending to rural sector is being shared by

Later, Regional Rural Banks (RRBs), a hybrid banking structure with

Assistant Professor Prathmesh U Tawade

Assistant Professor Prathmesh U Tawade

Assistant Professor Prathmesh U Tawade

artisans, small entrepreneurs and other weaker sections

 To save the rural poor from the money lenders

 To encourage entrepreneurship in rural areas

 To increase employment opportunities by encouraging trade and commerce in rural areas

development of rural areas

Assistant Professor Prathmesh U Tawade

 Undertaking supply of agricultural inputs and equipment to the farmers

 Encouraging village industries, artisans, craftsmen etc.

 Reducing the dependence of weaker section on money lenders

Assistant Professor Prathmesh U Tawade

Land Development Banks (LDBs) provides long term (15 to 30 years)

They give loan primarily for investment purposes. In some States,

They are generally situated at the headquarters of district and have

The primary business of the DCCBs consists of financing primary

Assistant Professor Prathmesh U Tawade

SCARBDs constitute the upper tier of long term co-operative credit

The objective of these bank is to finance primary agriculture and rural

Assistant Professor Prathmesh U Tawade

PCARDBs is the lowest layer of long term credit co-operatives. It is

They provide credit for the development purpose like minor

They get requisite financial assistance from SCARDB.

Assistant Professor Prathmesh U Tawade

Assistant Professor Prathmesh U Tawade

Assistant Professor Prathmesh U Tawade

Model I Model II Model III

Assistant Professor Prathmesh U Tawade

Assistant Professor Prathmesh U Tawade

Assistant Professor Prathmesh U Tawade

Assistant Professor Prathmesh U Tawade

Assistant Professor Prathmesh U Tawade

Assistant Professor Prathmesh U Tawade

Assistant Professor Prathmesh U Tawade

2008-09- National Automated Clearing House (NACH) and National

Assistant Professor Prathmesh U Tawade

2012- RuPay cards were introduced by NPCI as a domestic payment network.

2014-The remarkable revolutionizing PMJDY was introduced with an aim of

2015- The introduction of payment bank and small finance bank

2016- Bharat Interface for Money (BHIM), a payment app, was

 Bank account opening

 Transactional banking-deposits, transfer and withdrawal

Assistant Professor Prathmesh U Tawade

Banks can third-party, non-bank agents that extend their services to