ECONOMIC AND SOCIAL ISSUES {ESI)

INABARD {SPECIFIC)

----
icHAPTERl
RURAL BANKING AND FINANCIAL
INSTITUTIONS IN INDIA

(NABARD GRADE A/B 2019l

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Topics Covered:

Rural Banking and Financial Institutions in India and their reforms

Contents
1 Rural Ba nking in India: ...................................................................................................... .................................... 3

2 Rural Credit Structure: ...................................................................................................... .................................... 3

2.1 Institutional structures for credit: ....................................................................... .... ........................ .............3

2.2 Non·lnstitutional: .........................................................................................................................................3

2.3 Institutiona l and Non·ln stitut ional lending: ................................................................................................. 3

3 Instit utional Arrangement s for Rural Credit: ....................................................................................................... .4

3.1 Co·operatives: ........................................................................................................ .. .....................................4

3.1.1 The Regulation and Supervision of Co·operative Banks: ...................................................................... 5

3.1.2 Co·operative banks in India finance rural areas under: ....................................................................... 5

3.1.3 Stru ct ure of Cooperat ive Banking in India....................................................... ..................................... 5

3.2 Land Development Banks: ....................................................................................... ..................................... 7

3.2.1 How do the Co·operative Banks differ from the Commercial banking ent ities? .................................8

3.2.2 What has. been the impact of demonetization on the Co-operative Banks? .......................................8

3.3 Lead Bank Sch eme: ....................................................................................................................................... 8

3.4 Regional Rural Banks (RRBs): ........................................................................................................................9

3.4.l Backgrou nd of RRBs: ............................................................................................................................. 9

3.4.2 Ownership of RRBs: .............................................................................................................................. 9

3.4.3 What are the obj ect ives of th e RRBs? .................................................................................................. 9

3.4.4 What are the features of t he RRBs? ................................................................................... .................. 9

3.4.5 PSL Targets for the Regional Rural Banks (RRBs): ............................................................................... 10

3.5 Commercial Banks: ..................................................................................................................................... 10

3.5. 1 Tools available with the Commercial Banks in taking steps towards rural lending/banking ............. 11

Rationing of credit/ Priority sector lending ........................................................................................................ 13

PSL Targets:......................................................................................................................................................... 13

3.6 Stat e Bank of lndia .................................................................. .................................................................... 14

3.7 Local Area Banks (LABs): .......................................................................................... ................................... 14

4 What are the Financial Services provided in Rural India? .................................................................................. 14

4.1 Microfinance ................................................. .............................................................................................. 15

4.2 Rural finan ce ....................... .......................... .............................................................................................. 15

4.3 Agricult ural fina nce ..................................................................................................................................... 15

4.4 Rural microfinance .............. .................... ...... .............................................................................................. 15

4.5 Financial service providers (FSPs) ............................................................................................................... 15

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1 Rural Banking in India:
• Rural Banking in India started since the establishment of banking sector in lndla.
• As the name suggests, it includes banking organizations operating in rural or sub-urban
background.

2 Rural Credit Structure:

The credit facilities are available to the rural agriculturists and artisans through financial
institutional and non-financial institutions which are as under:

2.1 Institutional structures for credit:

✓ Government
✓ Co-operatives
✓ Commercial banks

2.2 Non-Institutional:
✓ Professional money lenders
✓ Agricultural money lenders
✓ Relatives and friends
✓ Trades and commission agents
✓ Land lords
✓ Others

2.3 Institutional and Non-Institutional lending:

• Institutional lending or credit refers to credit or loans provided by financial institutions (in
contrast to creditor loans given by private individuals like money-lenders, wholesale and
retail merchants, landlords and relatives, etc) like cooperative societies, commercial banks,
the RBI, and specially established financial Institutions like regional rural banks, farmers'
service societies, land development banks, lead bank schemes and National Bank for
Agriculture and Rural Development.
• Institutional agencies have organized funds at their disposal and intend to meet short,
medium and long-term needs of rural sector.
• This is not the case in respect of private finance.
• Secondly, institutions follow a set of rules in granting loans. Institutional structure is a
century old system In India.
• The non-institutional credit sources are considered as exploitative and high cost system.
However, they are very much accessible and easily negotiable with t he lenders. It is
observed that non-institutional source of credit is continued to be an important source in
rural areas.

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3 Institutional Arrangements for Rural Credit:

Commercial Banks Co-operatives Regional Rural Banks

Rural Branches Branches

Long-term credit Short-term credit

( invt"litmcnt credit) ( Production credit)

Federal Struc ture Unitary Structure Slate Co -operative Ranks

State-level State-level District Central

Agriculture and Agriculture and Co-<, perativc
Rural Development Rural Development Banks

Banks I llanks

Primary and Land Primary Agriculture

Development Branches Credit Societies
Banks

The Regional Rural Banks form a part of the Differential Banks.

How are they different from other universal commercial banks? The main difference is that
differential banks are restricted in the geographical expansion and deposit and lending operations.

Apart from the RRBs, we shall also have a look at the Local Area Banks (LABs) which are also a type
of Differential Banks.

We shall be studying each one in detail along with the reforms that have taken place in each:

3.1 Co-operatives:
• The Co-operative bank has a history of almost 100 years.
• The Co-operative banks are an important constit uent of the Indian Financial Syst em, judging
by the role assigned to them, the expectations they are supposed to fulfi ll, their number, and
the number of offices they operate.

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 • Their role In rural financing continues to be Important even today, and their business In the
urban areas also has Increased phenomenally in recent years mainly due to the sharp
Increase in the number of primary co-operative banks.
• Co-operative Banks in India are registered under the Co-operative Societies Act. The RBI
also regulates the cooperative bank.
• They are governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative
Societies) Act, 1965.

3.1.1 The Regulation and Supervision of Co-operative Banks:

• The regulation and supervision of co-operative banks poses several challenges in view of the
large number of such banks, as also the multiple controls by supervisors, including the
Reserve Bank, the State Governments and NABARD.
• The co-operatives are at present under the control of State Governments in all matters
relating to regi stration, membership, election, financial assistance, loaning powers,
business operations, loan recovery and audit.
• Some aspects relating to banking activities are regulated and supervised by the Reserve
Bank of lndia/ NABARD.
• While urban co-operative banks come under the supervisory jurisdiction of the Reserve
Bank, rural co-operatives are regulated by the NABARD.
• There Is thus no clear demarcation of regulatory powers, which at times has resulted In
cross directives from the controlling agencies, thereby undermining the working of co-
operatives.

3.1.2 Co-operative banks in India finance rural areas under:

• Farming
• Cattle
• MIik
• Hatchery
• Personal finance

3.1.3 Structure of Cooperative Banking in India

The structure of cooperative network in India can be divided into 2 broad segments:
✓ Urban Cooperative Banks

✓ Rural Cooperatives

3.1.3.1 Urban Cooperatives

Urban Cooperatives can be furt her divided into scheduled and non-scheduled.

IScheduled and Non-Scheduled Banks:

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 • Scheduled Banks in India refer to those banks which have been included in the Second
Schedule of Reserve Bank of India Act, 1934.
• RBI in turn includes only those banks in this Schedule which satisfy the criteria laid down vide
section 42(6)(a) of the said Act.
• Banks not under this Schedule are called Non-Scheduled Banks.
- - - - - - - - - - -- - - - - - - - - - - - - - - - - - - - - - - - - '
Both the categories are further divided into multi-state and single-state. Majority of these banks
fall in the non-scheduled and single-state category.
• Banking activities of Urban Cooperative Banks are monitored by RBI.

• Registration and Management activities are managed by Registrar of Cooperative Societies

(RCS). These RCS operate in single-state and Central RCS (CRCS) operate in multiple state.

3.1.3.2 Rural Cooperatives

The rural cooperatives are further divided into short-term and long-term structures.
The short-term cooperative banks are three-tiered operating in different states.

These are:

Short Term Co-operatives

I
District Central Co -operative Banks
I
State Co-operative Banks
I
Primary Agriculture Credit Co-operati ve Societies
I
Branches

Likewise, the long-term structures are further divided into:

✓ State Cooperative Agriculture and Rural Development Banks (SCARDS): These operate at
state-level.

✓ Primary Cooperative Agriculture and Rural Development Banks (PCARDBS): They operate at
district/block level.

Primary Agricultural Credit Societies (PACSs)

• An agricultural credit society can be started with 10 or more persons normally belonging to
a village or a group of villages.
• The value of each share is generally nominal so as to enable even the poorest farmer to
become a member.
• The members have unlimited liability, that is each member is fully responsible for the
entire loss of the society, in the event of failure.

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 • Loans are given for short periods, normally for the harvest season, for carrying on
agricultural operation, and the rate of interest is fixed.
• The primary agricultural credit society was expected to attract deposits from among the
well -to-do members and non-members of the village and thus promote thrift and self-help.
• It should give loans and advances to needy members mainly out of these deposits.

Central Co-operative Banks (CCBs)

• The central co-operative banks are located at the district headquarters or some prominent
town of the district.
• These banks have a few private individuals also who provide both finance and management.
• The central co-operative banks have three sources of funds:

✓ Their own share capital and reserves

✓ Deposits from the public and
✓ Loans from the state co-operative banks

• Their main function is to lend to primary credit society apart from that, central cooperative
banks have been undertaking normal commercial banking business also, such as attracting
deposits from the general public and lending to the needy against proper securities.

State Co-operative Banks (SCBsl

• The state Co-operative Banks finance, co-ordinate and control the working of the central
Co-operative Banks in each state.
• They serve as the link between the Reserve bank and the general money market on the one
side and the central co-operative and primary societies on the other.
• They obtain their funds mainly from the general public by way of deposits, loans and
advances from the Reserve Bank and they are have their own share capital and reserves.

3.2 Land Development Banks:

• The Land Development Banks (LOBs) have a two-tier structure with central Land
Development Banks at the state level and Primary Land Development Banks at the tehsil,
sub-divisional/ district level.
• They supply long-term credit to the cultivators.
• The Primary Cooperative Credit Societies cannot advance long-term loans as they themselves
draw their funds from the Central Co-operative Bank for short and medium-terms.
• The Co-operative also lack necessary expertise to evaluate property in order to advance long-
term loans.
• Commercialization of agriculture requires long-term finance. Hence, the need for land
development banks.

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3.2.1 How do the Co-operative Banks differ from the Commercial banking entities?
• These are established under specific acts of cooperative societies operating in different
states unlike mainstream commercial banks which are mainly joint-stock companies.
• They have a tiered network with a bank at each level of state, district and rural. The state-
level bank forms the apex authority.
• Not all sections of banking regulation act are applicable to cooperative banks
• The ultimate motive is community participation, benefit and growth as against profit-
maximization for commercial banks.

3.2.2 What has been the impact of demonetization on the Co-operative Banks?
• The recent demonetization programme, though laudable, has disrupted the normal life of
people and in particular the operations of credit cooperative institutions (CCI}.
• Kerala, an advanced State in terms of development of CCls, is among the States that were
hit the most by demonetization.
• The problem got accentuated as the RBI barred DCBs from accepting deposits in
demonetized currency, creating panic and loss of confidence among the public towards CCls.
• Currently, even urban cooperative banks are excluded from accepting deposits under the
income declaration scheme, which will end on March 31, 2018.
• The grounds advanced by the Centre/RBI on excluding CCls in Implementing demonetisation,
among others, include tha t CCls are not covered under core banking solutions that they
don't strictly adhere to KYC norms and lack professional management.
• Although the reasons for excluding cooperatives to not stand fully stand up to scrutiny,
particularly in the case of Kerala, there is scope for them to improve their act.
• CCls must take this opportunity to introspect and improve management processes.
• The members who constitute the owners of cooperatives, board of directors who lead,
employees who run the day-to-day affairs, and bureaucrats who represent supervisory
machinery should take It as a challenge to correct themselves.

3.3 Lead Bank Scheme:

• The Lead Bank Scheme was introduced in 1969 to provide lead roles to individual banks
(both in public sector and private sector) for the districts allotted to them.
• The Lead Bank Scheme was introduced by RBI on the basis of the recommendations of both
the Gadgil Study Group and Banker's Committee (Nariman Committee).
• The studies by the committees found that the rural areas were not able to enjoy the benefits
of banking. Commercial banks did not have adequate presence in rural areas and also lacked
the required rural orient ation.
• So a bank (public or private) was given some area in which that bank had to play a lead role
in providing financial services to the people, making them aware about the banks and
various benefits of banks and also generating trust among people so that they deposit their
money without any fear of loss or fraud.
• So in this way, all the districts in the country have been allotted to various banks.

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 • The lead bank also acts as a leader for coordination activities and services of all financial
institutions in that area.
• For this a Lead Bank Officer (LBO) now designated as Lead District Manager is also appointed.

3.4 Regional Rural Banks (RRBs):

• Regional rural banks are basically, banking organization for local level operations across the
States in India.
• They are created with a mandate to provide essential or basic banking and financial services
to the rural areas.
• While Regional Rural Banks are meant for rural areas, they can operate in urban areas also.
• The main pur1pose behind setting up the RRBs is to mobilize financial resources from the
rural areas and grant loans to needy and marginal farmers and artisans.
• They also facilitate the movement of government funds to MGNREGA workers, or
distribution of pension.

3.4.1 Background of RRBs:

• The Regional Rural Banks were setup on the basis of Narsimhan Committee report (197S),
by the legislations of the Regional Rural Banks Act of 1976.
• Thereafter, the first Regional Rural Bank was setup in 1975 itself by the name Prathama
Grameen Bank.

3.4.2 Ownership of RRBs:

The equity of RRBs is held by the stakeholders in fixed proportions of 50:15:35 distributed among
the following:

✓ Central Government has 50% share.

✓ State Government has 15% share.
✓ The Sponsor Bank has 35% share.

3.4.3 What are the objectives of the RRBs?

• To bridge the credit gap in rural regions in India.

• To check rural credit outflow to urban areas.
• To reduce regional imbalances in terms of availability of financial facilities.
• To increase rural employment generation.

3.4.4 What are the features of the RRBs?

• RRBs have knowledge of rural constraints and problems like a cooperative because it
operates in familiar rural environment.
• RRBs show professionalism in mobilizing financial resources like a commerclal bank.
• RRBs are supposed to work in its prescribed local limits.

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 • It provides banking facilities as well as credit to small and marginal farmers, small
entrepreneurs, labourers, artisans in rural areas.
• RRBs have to fullfil the priority sector lending norms as applicable on other commercial
banks.

3.4.5 PSL Targets for the Regional Rural Banks (RRBs):

• The Reserve Bank of India (RBI) has revised Priority Sector Lending (PSL) norms for Reglonal
Rural Banks (RRBs).
• As per the new norms, the PSL target has increased to 75% of total outstanding advances
from the existing 60%.
• It has come into effect from January 1, 2016.
• However, the RBI has liberalized the amount they can lend to segments such as agriculture
and also included medium enterprises, social infrastructure and renewable energy under
PSL category.
• Loans to individual farmers has increased to Rs. 50 lakh from the present Rs. 10 llakh
against pledge/ hypothecation of agricultmal produce (including warehouse receipts) for a
period not exceeding 12 months.
• In case of housing loans, loans to individuals up to Rs. 20 lakh onlly are considered as PSL as
against the earlier limit of Rs. 25 lakh.

3.5 Commercial Banks:

• Before nationalization of top 14 commercial banks in June 1969, they had an urban bias.
• They were mainly accepting deposits from the urban people and making loans to trade and
industry.
• Agriculture and rural industries were neglected by them.
• Since agriculture by its very nature was a risky venture, private commercial banks turned
away from rural areas.

Other factors obstructing flow of bank credit to agriculture were:

✓ Inability of farmers to provide security;
✓ Difficulties in recovering loans;
✓ Lack of clear-cut and up-to-date accounting of agricultural transactions;
✓ The small amount of loan and
✓ The consequent high transaction cost.

• However, one of the objectives of nationalization of commercial banks was to ensure a

smooth flow of credit to agriculture and small-scale industries-the two top priority sectors
of Indian economy.
• Since the nationalization of commercial banks in 1969 the stress has been on expanding and
strengthening the institutional structure of rural credit.
• However, even today the rural areas in India are yet not properly served by banking insti-
tutions.
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 • Most commercial banks feel shy to block their funds in risky agricultural operations.
• There is very little chance of loan recovery in most cases due to high risks associated with
natural calamities.
• Of course, commercial banks finance the marketing of crops by advancing funds to traders.
• But sometimes loan is made directly to rural borrowers. However, the quantum of such loans
Is very small.
• Of course, there has been a distinct change in the attitudes and lending policies of commer-
cial banks afte·r nationalisation.
• Commercial banks now provide both direct and Indirect finance to agriculture.
• Direct finance is provided for short and medium terms to enable farmers carry out
agricultural operations smoothly. Indirect finance is provided in the form of advances for the
purchase of inputs like seeds and fertilisers. Such loan is also provided through PACs.
• Commercial banks not only provide assistance for agricultural operations but also for
extending credit to service units which provide infrastructural facilities such as storing and
warehousing of agricultural produce, marketing, transporting and repairing of agricultural
implements.
• Since the nationalisation of commercial banks, there has occurred a rapid expansion of their
rural branches.
• Commercial banks also provide finance to the FCI (Food Corporation of India) and the State
Government agencies for food procurement operations.
• Banks also provide credit for storing and distribution of agricultural inputs.

The following tools/provisions help the Commercial banks in taking steps towards rural
lending/banking:

3.5.1 Tools available with the Commercial Banks in taking steps towards rural
lending/banking

3.5.1.1 Branch authorization Policy of RBI:

• In a fresh set of guidelines released on 18th May, 2017, the Central bank has relaxed the
branch authorization policy, bringing all branches and fixed business correspondent outlets
under the definition of banking outlets and removing restrictions on opening branches in
Tier 1 centres.
• According to the revised policy, RBI has defined "a banking outlet" for a scheduled
commercial, a payments bank or a small finance bank as a fixed point service delivery unit,
manned by either the bank's staff or its business correspondent, where services of
acceptance of deposits, encashment of cheques, cash withdrawal or lending of money are
provided for a minimum of 4 hours per day for at least five days a week" . Those outlets
which do not meet this criteria will be called "part-time banking outlet."
• While the policy has removed restrictions on opening banking outlets in Tier 1 to Tier 6
centres without taking RBl's permission in each case, the regulator has mandated that
banks open 25% of these outlets in unbanked rural centres (URC).
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 • Under the revi sed policy, a URC Is defined as a "rural (Tier 5 and 6) centre that does not
have a core banking system (CBS}-enabled 'banking outlet' of a scheduled commercial
bank, a small finance bank, a payment bank or a regional rural bank nor a branch of local
area bank or licensed co-operative bank for carrying out customer-based banking
transactions".
• With the expansion in definition of a branch, RBI has allowed all extension counters,
satellite offices, part-shifted branches, ultra-small branches and specialized branches, to be
treated as 'banking outlets' or 'part-time banking outlets'.
• However, ATMs, E-lobbies, bunch note acceptor machines, cash deposit machines, e- kiosks
and mobile branches will fall outside the purview of "banking outlets". This is a shift from
the earlier definition of a " branch" which also included off-site ATM s.
• The proposal to rationalise the branch authorization policy was introduced under former
RBI governor Raghuram Rajan in the April 2016 monetary policy.
• This policy will help In further penetration in rural areas and increase the profitability of the
organization.

Details of tier-wise claulflcation of centres based on population

I) Claulf~tlon of centres (tier-wise) Population(as per 2011 Census)

Tier 1 1, 00,000 and above

Tier 2 50,000 to 99,999

Tier 3 20,000 to 49,999

Tier 4 10,000 to 19,999

Tier5 5,000 to 9,999

Tier6 Less than 5000

3.5.1.2 On-Tap Licensing Policy of RBI: The criteria of opening branches in the Rural
areas:
The On-Tap Licensing Policy was released by the Reserve Bank of India in the year 2016.

• An 'on-tap' facility would mean the RBI will accept applications and grant license for banks
throughout the year. The policy allows aspirants to apply for universal bank license at any
time, subject to the fulfillment of the set conditions. It Is for the first time in post
nationalization phase that there comes such an open bank license policy.
• The new license policy is designed for universal banks. Banks that can perform the whole set
of allowed services and products under universal bank license.

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One of the ten key guidelines for 'on tap' licensing of universal banks In the private sector Is as
follows:

The bank shall open at least 25 per cent of its branches in unbanked rural centres and should
comply with the priority sector lending targets and sub-targets as applicable to the existing domestic
scheduled commercial banks.

3.5.1.3 Priority Sector Lending:

Rationing of credit/ Priority sector lending

• Priority sector refers to those sectors of the economy which may not get timely and
adequate credit in the absence of this special dispensation.
• It Is aimed to provide institutional credit to those sectors and segments fo r whom it is
diffic ult to get credit.
• Typically, these are small value loans to fa rmers for agriculture and allied activities, micro
and small enterprises, poor people for housing, students for education and other low Income
groups and weaker sections.

Priority Sector includes the following categories:

Agriculture
Micro and Small Enterprises
Education
Housing
Export Credit
Others

PSL Targets:
RBI has given specific targets for certain categories. The limits (sub-categories) and Implementation
tlmellne are different for domestic banks, foreign banks having less than 20 branches In India and
foreign banks having 20 or more than 20 branches in India.

Thus, for domestic banks,

categories Percentage of loans

Total Priority Sector 40%
Agriculture 18% (8% of this to small and marginal
farmers)
Micro-Enterprises 7.5%
Weaker Sections 10%
Others 4.5%

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3.6 State Bank of India

• The State Bank of India opened specialized branches known as 'Agricultural Development
Branches' (ADBs) at selected intensive centres' fo r catering exclusive to the credit needs of
agricultural and allied activities.
• These ADBs provide a package of assistance, which decides credit-support including technical
and other facilities.

3.7 Local Area Banks (LABs):

• The Local Area Banks (LABs) are small private banks, conceived as low-cost structures which
would provide efficient and competitive financial intermediation services in a limited area
of operation, i.e., primarily in rural and semi-urban areas, comprising three cont iguous
districts.
• LABs were set up to enable the mobilization of rural savings by local institutions and, at the
same t ime, to make them available for investments in the local areas.
• LABs were created following an announcement made by the then Finance Minister in the
Union Budget in August 1996.
• LABs were required to have a minimum capital of Rs. 5 crore.
• The promoters of the bank may comprise of private individuals, corporate entities, trusts
and societies with a minimum capital contribution of Rs. 2 crore.
• The area of operation of LAB is limited to a maximum of three geographically contiguous
districts and are allowed to open branches only in its area of operation.
• Since LABs are being set up in district towns, their activities are focused on the local
customers wit h lending primarily to agriculture and allied activities, small scale industries,
agro-industrial activit ies, trading activities and the non-farm sector.
• LABs are also required to observe the priority sector lending targets at 40% of net bank
credit (NBC) as applicable to other domestic banks.
• Within the above target, these banks will adhere to the requirement of lending at least 25%
of their priority sector deployments {10% of NBC) to the weaker sections.
• Around 5 LABs were licensed by 2002 under Section 22 of the Banking Regulation Act 1949
from amongst hundreds of applicants. Presently, four LABs are function ing satisfactorily.
• In 2014, RBI has permitted LABs to be converted into small finance banks subject to them
meeting t he p:rescribed eligibility criteria.

4 What are the Financial Services provided in Rural India?

Since the early 1980s, innovations in the delivery of financial services have enabled millions of
people formerly excluded from the financial sector t o gain access to these servi ces on an ongoing
basis.

While there are overlaps in the financial sector among micro, rural and agricultural finance, it is
important to understand how they differ:

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4.1 Microfinance
Financial services that focus on low-income households and small scale businesses in both rural and
urban areas. Growing beyond micro credit, microfinance has blossomed since the early 2000s to
include a range of financial services targeted to low-income clients, including savings, money
transfer and insurance products.

Microfinance refers to an array of financial services, including loans, savings and insurance,
available to poor entrepreneurs and small business owners who have no collateral and wouldn't
otherwise qualify for a standard bank loan.

In India, a microfinance service is defined as "providing fina ncial assistance to an individual or an

eligible client, either directly or through a group mechanism for:

An amount, not exceeding rupees fifty thousand in aggregate per Individu al, for small and tiny
enterprise, agri culture, allied activities (including fo r consumption purposes of such Individual) or
An amount not exceeding rupees one lakh fifty thousand in aggregate per individual for housing
purposes, or
Such other amounts, for any of the purposes mentioned at items (i) and (ii) above or other purposes,
as may be prescribed.

4.2 Rural finance

Financial services th at focus on households and businesses in rural areas, encompassing both
agricultural and non-agricultural activities, and t argeting poor and non-poor women and men. Rural
finance encompasses the fu ll range of financial services that farmers and rural households require.

4.3 Agricultural finance

Financial services that focus on on-farm activities and agricultural businesses, without necessarily
targeting poor people. Fresh thinking has Identified some of the key features of successful
agricultural microfinance, replacing the heavily subsidized, unsustainable and unsuccessful
approaches of the past.

4.4 Rural microfinance

Financial services that focus on relatively small-scale products and services targeted to poor clients
in rural areas. Given its focus on women, youth, indigenous peoples and poor p eople in rural areas,
this is IFAD's main area of focus.

4.5 Financial service providers (FSPs)

• Institutions and community groups that offer financial services, including commercial and
development banks, non-bank financial institutions, cooperatives, savings and credit
cooperative organizations (SACCOs), postal savings banks, self-help groups (SHGs), village
savings and loan associations (VSLAs), financial service associations (FSAs), and even
telecommunications providers (particularly in providing remittance services).

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 • Input suppliers, traders and agro processing companies can also provide financial services,
such as credit for inputs and insurance to farmers through the value chain.

Note: An Important financial institution in India responsible for providing Rural Credit is NABARD
(The National Bank for Agriculture and Rural Development).

We have covered it Unit: Agriculture - Characteristics/ Status - Technical and Institutional changes in
Indian Agriculture - Agricultural performance - Issues In Food Security In India - Non-Institutional and
Inst it ut ional Agencies in rural credit.

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 ECONOMIC AND SOCIAL ISSUES (~I~
NABARD (SPECIFIC}

RURAL BANKING AND FINANCIAL

INSTITUTIONS IN INDIAj

WORKSHEET

(NABARD GRADE A/B 201 ~

Ed uTa.. .,
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Fill in the blanks:
1. Institutional lending or credit refers to cred it or loans provided by _ _ __
2. Regional Rural Banks are type of _ _ _ _ _banks.
3. Co-operative Banks in India are registered under the _ _ _ __
4. Scheduled Banks in India refer to those banks which have been included in the
_ _ _ _ _Schedule of Reserve Bank of India Act, 1934.
5. _ _ _ _ serve as the link between the Reserve Bank and the general money market on
the one side and the central co-operative and primary societies on the other.
6. Lead Bank Scheme was introduced in the year _ _ _ __
7. The Regional Rural Banks were setup on the basis of Narsimhan Committee report (1975), by
the legislations of the _ _ __ _

True/False
1. The Central Government (RRBs) has 50% ownership of RRBs (True/False).
2. The Revised Branch Authorization Policy has been put forth by the Government of India In
the year 2017 (True/False).
3. The On-Tap Licensing Policy w as put fo rt h by the Reserve Bank of India in the year 2014
(True/False).
4. The IDBI bank has opened specialized branches known as 'Agricultural Development
Branches' (ADBs) at selected intensive cent res' for catering exclusively to the credit needs of
agricultural and allied activities (Tru e/ False).
5. The Local Area Banks are also required to adhere to the Priority Sector Lending norms
(True/False).
6. A Tier-1 banking centre has a population greater than 1 lakh (As per population Census 2011)
(True/false).

Match the Following:

Institutional Structure for Credit Features

Co-operative Banks The area of operation of such banks Is limited to a

maximum of three geographically contiguous districts
and are allowed to open branches only in its area of
operation.
Regional Rural Banks In order to obtain license, the bank shall open at least
25 per cent of its branches in unbanked rural centres.

Commercial Banks The ownership of such banks Is split between the

Central Governm ent, St ate Government and the
Sponsor Bank.
Local Area Banks The regulation and supervision of such banks poses
several challenges in view of the large number of such
banks, as also the multiple controls by supervisors,

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 including the Reserve Bank, t he State Governments and
NABARD.

Answers:

Fill in the blanks:

1. Financial Institutions. Institutional lending or credit refers to credit or loans provided by

fi nancial institutions (in contrast to creditor loans given by private individuals like money-
lenders, wholesale and retail merchant s, landlords and relatives, etc) like cooperative
societies, commercial banks, the RBI, and specially established financial Institutions like
regional rural banks, farmers' service societies, land development banks, lead bank schemes
and National Bank for Agriculture and Rural Development.
2. Differential Banks. There are two kinds of banking licences that are granted by the Reserve
Bank of India - Universal Bank licence and Differentiated Bank Licence. Differentiated Banks
(niche banks) are banks that serve the needs of a certain demographic segment of the
population . Niche banks typically target a specific market and t ailor the bank's operations to
this target market's preferences. The differentiation could be on account of capital
requirement, t he scope of activities or area of operations. As such, they offer a limited range
of services/products or function under a different regulatory dispensation.
3. Banking Laws (Co-operative Societies) Act, 1965. They are also covered under the Banking
Regulation Act, 1949.
4. Second Schedrule of the RBI Act, 1934.
5. State Co-operative Banks. The st at e Co-operative Banks finance, co-ordinate and control
the working of the central Co-operative Banks in each state.
6. 1969. It was introduced t o provide lead roles to individual banks (both in public sector and
private sector) for the districts allotted to them. The Lead Bank Scheme was introduced by
RBI on the basis of the recommendations of both the Gadgll Study Group and Banker's
Committee (Nariman Committee).
7. Regional Rural Banks Act, 1976.

True/False

1. True. The St ate Governments have 15% share and the Sponsor Banks have 35% share.
2. False. The Reserve Bank of India has come out with the Branch Authorization Policy on 18th
May, 2017.
3. False. It was brought out In the year 2016 by the Reserve Bank of India.
4. False. These 'Agricultural Development Branches' (ADBs) were opened by the State Bank of
India (SBI).

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 5. True. LABs are also required to observe the priority sector lending targets at 40% of net
bank credit (NBC} as applicable to other domestic banks. Within the above target, these
banks will adhere to the requirement of lending at least 25% of their priority sector
deployment s (10% of NBC) to the weaker sections.
6. True. There are totally 6 Tier Centres (Tier 1 to Tier 6).

Match the Following:

Correct Order:

Institutional Structure for Credit Features

Co-operative Banks The regulation and supervision of such banks poses

several challenges in view of the large number of
such banks, as also the multiple controls by
supervisors, including the Reserve Bank, the State
Governments and NABARD.
Regional Rural Banks The ownership of such banks is split between the
Central Government, State Government and the
Sponsor Bank.
Commercial Banks In order to obtain license, the bank shall open at
least 25 per cent of its branches in unbanked rural
centres.
Local Area Banks The area of operation of such banks is limited to a
maximum of three geographically contiguous
dlistricts and are allowed to open branches only in its
area of operation.

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