Rural Banking in India

ECONOMICALLY empowering, i.e. access to inexpensive credit and other micro-finance services, including savings and insurance, India’s rural population will have a significant impact on India’s economic growth. Economic empowerment is defined here as.  The modern banking system has failed to deliver inexpensive credit to India’s 600,000 villages – despite several expensive attempts to do so. Do we need to rethink the appropriate institutional structure for rural banking in India? The problems of widespread poverty, growing inequality, rapid population growth and rising unemployment all find their origins in the stagnation of economic life in rural areas.

Since the days of the Rural Credit Survey Committee (1954), India has come a long way in its search for an appropriate rural banking set-up. Though there has been some improvement, the problem remains. There has been tremendous progress in quantitative terms but quality has suffered, progress has been slow and halting and significant regional disparities persist. Stagnation in rural banking is noticed in the north and northeastern regions. The focus should be on assisting and guiding small farmers. It is in this context that the role of rural banking institutions has to be reconsidered.

The development strategy adopted and the increasing diversification and commercialisation of agriculture underline the need for the rapid development of rural infrastructure and a larger flow of credit. Activities allied to agriculture – livestock breeding, dairy farming, sericulture etc are being taken up on commercial lines. Further, hi-tech agriculture with an export orientation has brought about higher productivity in cotton, oilseeds, etc.

Progressive and not-so-small farmers have no difficulty in obtaining credit from the commercial banks. Credit for the poorer households is the real problem.

The Narasimham Committee observed that the manning of rural branches “has posed problems for banks owing to the reluctance of urban-oriented staff to work in the rural branches and the lack of motivation to do so. More local recruitment and improved working conditions in rural areas should help to meet this problem.”

Experience of RRBs that have locally-recruited employees; the employees are unhappy in view of the lack of adequate career prospects. Apart from having a basic knowledge of agriculture and rural development, a rural banker is required to handle credit extension work, scheme appraisal work in connection with farm and non-farm investments and the production of different crops, the monitoring/supervision and recovery of loans spread over villages which are not even connected by all-weather roads and in an environment in which vested interests are quite powerful. A person who says he has been in bank service for more than 25 years writes: “That rural credit has become unfashionable is evident from the fact that the subject is accorded only residual focus in the various congregations of our bankers. The placement policy in vogue in our banks is such that exposures in rural credit or agro-financing rarely count for promotions.

Unfortunately a uniform standardized approach to lending has led to rigidities as a result of which a farmer-borrower becomes a defaulter for no fault of his. Also, the agricultural sector is beset with considerable uncertainties – the weather and rainfall problem, the pest problem and the market and price problem.

Government interference that leaves no scope for these apex bodies to show initiative and work out action plans for development on their own is partly responsible for this situation. Another reason for such a state of affairs is that the apex bodies have expanded and prospered at the cost of primary bodies by taking over functions like deposit mobilisation even at the rural level. By way of liberalisation of the federal structure’s working, societies that want to work independently of the federal system should be allowed to exit.