PROJECT REPORT

ON
"RURAL BANKING IN INDIA"
Submitted to University of Mumbai
in
2016-2017
Partial fulfillment of the requirement of the Degree of
Bachelor of Banking and Insurance
Under Guidance Of
Prof.. Mahendra Pandey

K. M. AGRAWAL COLLEGE OF ARTS, COMMERCE & SCIENCE.

GANDHARE, KALYAN (W)

BYVaibhav H Rao
ROLL NO:
21
EXAM SEAT NO:

K.M.AGRAWAL COLLEGE OF ARTS, COMMERCE & SCIENCE

KALYAN

(Conducted by HINDI BHASHI JANKALYAN SHIKSHAN SANSTHA

KALYAN)
(Affiliated by University of Mumbai)

Bachlor of Banking and

Insurance
CERTIFICATE

This is to certify that Mr. Vaibhav Roll no.21 , Seat No. , has satisfactorily carried
out the project work of the topic RURAL BANKING IN INDIA for the 5th
semester of T.Y.B.B&I ,in the Academic year 2016-2017
PLACE: KALYAN
DATE : __________

Principal
Mrs Anita Manna

Signature of Examiner

B&I
Coordinator

CERTIFICATE

I, Mr. Mahendra Pandey hereby certify that Mr. Vaibhav Rao, of

T.Y.B.B&I (SemV), Roll No. 21 has completed project on Rural Banking
in India in the academic year 2016-2017. The information submitted is
true and original to the best of my knowledge.

Date:

___________________
Signature of Project Guide

DECLARATION

I Vaibhav student of T.Y.B.B&I semester V (2016-2017) hereby declare that

I have completed the project on Rural Banking in India I further declare
that the information imparted is true and fair to the best of my knowledge.

SIGNATURE
(Vaibhav)
ROLL NO.
21

. ACKNOWLEDGEMENT
5

I hereby express my heartiest thanks to all sources who have contributed to

the making of this project. I oblige thanks to all those who have supported,
provided their valuable guidance and helped for the accomplishment of this
project. I also extent my hearty thanks to my family, friends, our coordinator
MR. SUJEET SINGH, college teachers and all the well-wishers.
I also would specially like to thanks my project guide Mr. MAHENDRA
PANDEY for his guidance and timely suggestion and the information
provided by him on this particular topic.
It is matter of outmost pleasure to express my indebt and deep sense of
gratitude to various person who extended their maximum help to supply the
necessary information for the present thesis, which became available on
account of the most selfless cooperation.
Above all its sincere thanks to the UNIVERSITY OF MUMBAI for which
this project is given consideration and was done with outmost seriousness.

10

CONTENTS
Sr.No.

PARTICULAR

Introduction

Need For Regional Rural Banks

Roles & Limitations Of Regional Rural Banks.

Regional Rural Banks & Economic Reforms.

Rural Banking Faces Twin Challenges.

Comparison Of Rrbs With State Cooperative Banks.

The Question Of Ownership.

Regional Rural Banks Today.

SBI Banks Contribution In Rural Banking

10

Key Performance Indicators- Regional Rural Banks.

11

OBJECTIVE

11

Important Trends.

12

(Case Study )Muhammad Yunus & Grameen Bank.

13

CONCLUSION

14

Bibliography.

15

Wiblography

Page
Nos.
1

11

Introduction:Regional Rural Banks were established under the provisions of an ordinance promulgated on
26th September 1975 and the RRB Act, 1976 with an objective to ensure sufficient institution
credit for agriculture and other rural sectors. The RRBs mobilize financial resources from rural /
semi-urban areas and grant loans and advances mostly to small and marginal farmers,
agricultural labourers and rural artisans. 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.
As stated earlier RRBs are jointly owned by Government of India, the concerned State
Government and sponsor Banks (27 scheduled commercial banks and one State cooperative
Bank); the issued capital of a RRB is shared by the owners in the proportion of 50 %, 15% and
35% respectively.
The institution of Regional Rural Banks (RRBs) was created to meet the excess demand for
institutional credit in the rural areas, particularly among the economically and socially
marginalized sections. Although the cooperative banks and the commercial banks had reasonable
records in terms of geographical coverage and disbursement of credit, in terms of population
groups the cooperative banks were dominated by the rural rich, while the commercial banks had
a clear urban bias. In order to provide access to low-cost banking facilities to the poor, the
Narasimham Working Group (1975) proposed the establishment of a new set of banks, as
institutions which combine the local feel and the familiarity with rural problems which the
cooperative possess and the degree of business organization, ability to mobilize deposits, access
to central money markets and modernized outlook which the commercial banks have. The
multi-agency approach to rural credit was also to sub serve the needs of the input-intensive
agriculture strategy (Green Revolution) which had initially focused on betting on the strong but
by the mid-seventies was ready to spread more widely through the Indian countryside.

12

In addition the potential and the need for diversification of economic activities in the rural areas
had begun to be recognized, and this was sector where the RRBs could play meaningful role.
The RRBs Act, 1976 succinctly sums up this overall vision to sub-serve both the
developmental and the redistributive objectives:The RRBs were established with a view to developing the rural economy by providing, for the
purpose of development of agriculture, trade, commerce, industry and other productive activities
in the rural areas, credit and other facilities, particularly

to small and marginal farmers,

agricultural laborers, artisans and small entrepreneurs, and for matters connected therewith and
incidental thereto
Table-1 Expansion of Regional Banking:-1975-1990
Dec.1975

Dec.1980

Dec.1985

Mar.1990

Banks

85

188

196

Branches

17

3279

12606

14443

The following one-and-a-half decades saw large-scale efforts to increase the number of banks,
bank branches, and disbursements nationwide. By 1991, there were 196 RRBs with over 14,000
predominantly rural branches in 476 districts with an average coverage of three villages per
branch. These banks had disbursed over Rs.3, 500 crore in credit and mobilized over Rs.4, 100
crore in deposits. Perhaps the most significant achievement of the RRBs during this period was
in enabling the weaker sections of the rural community access to institutional credit. The
bulk of the loans from RRBs were to the priority sectors, which accounted for over 70 per cent of
the total. Agriculture and allied activities took up more than 50 percent of the total advances.
The year 1990 marks the end of the expansion phase of regional banking, beyond which there
has been no growth in the number of Regional Rural Banks (including branches).
In addition, the RRBs were instrumental in extending credit for poverty alleviation schemes (e.g.
IRDP) and disadvantaged area (drought-prone regions and deserts) development programmes.
13

The expansionary phase of the late seventies and the eighties while more focused on outreach
was not devoid of blueprint for viability of the RRBs, unlike what the mainstream academia and
press claim to be the case. It was understood that the RRBs to survive as credit institutions could
not remain unviable for long time, though the RRBs might not become viable in the initial years.
This expectation was, however, tempered by the prevalent situation on the field and the ultimate
objectives for which these specialized institutions were created. It was realized early that
question of viability of the RRBs could not be the same as other business ventures. A business
unit has all the freedom to take decisions on many matters such as opening branches, deploying
its

resources, staff recruitment, its purchases, methods rendering services etc. But the RRBs

could not be flexible in many of their affairs; even their clientele was specific, scattered, remote
and not assisted by anyone. Keeping in view the objectives, structure and the nature of
operations of the RRBs, these institutions could certainly not be evaluated on the basis of mere
financial viability. There was a general agreement that the viability of the RRBs had to be
assessed in terms of composite criteria including increase in business per branch, recovery rate,
productivity of staff, cost effectiveness of operations, closer monitoring, socioeconomic
upliftment and improvements in the standards of living of the clientele. Again in respect to the
viability question, there was considerable flexibility accorded to banks on the time dimension. It
was estimated that the RRBs would need about seven years to become viable, though for the
RRBs with large number of infant branches even this period might not be adequate. Between
1980 and 1987, while the number of RRBs increased a little 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.

14

Table 2:- Purpose wise Advances of RRBs, Outstanding (end of Sept, 1990)

Short Term (crop loan)

615

Term Loan and Agriculture Activities

669

Allied Activities

555

Rural Artisans, Village & Cottage Industries

277

Retail Trade and Self-employed etc.

1052

Consumption Loan

54

Other Purpose

290

Indirect Advances

43

Total

3555

15

Need for Regional Rural Banks:The Government accepted the recommendations of Narasimhan Committee and, accordingly, the
ordinance of Regional Rural Banks, 1975 was promulgated on September 26, 1975. This was
replaced by the Regional Rural Banks Act, 1976 on February 9, 1976. The mandates of these
rural financial institutions were to:
Take banking to the doorsteps of the rural masses, particularly in areas without
banking facilities.

Make available cheaper institutional credit to the weaker sections of society,

who were to be the only clients of these banks.

Mobilize rural savings and canalize them for supporting productive activities in
rural areas.

Generate employment opportunities in the rural areas.

Bring down the cost of providing credit in rural areas

The regional rural banks were to form with: Central Government (50 per cent), State
governments (15 per cent) and commercial banks (35 per cent) (as per the recommendations
of Narshiham committee). The number of RRBs rose from just six in 1975 to 196 by 1987,
covering 476 districts. They financed only the weaker sections of the rural community small
and marginal farmers, agricultural labourers, small traders, and so on. Along with commercial
banks, RRBs participated enthusiastically in poverty alleviation schemes (IRDP, for example)
and disadvantaged area (drought-prone regions and deserts) development programmes. They
quickly became an important and integral part of the rural credit system. However, their financial
viability was initially overstretched by policy rigidities coupled with a low capital base in an
environment of inadequate infrastructure and deeper social and economic disparities.

16

After the financial sector reforms, several measures to improve the viability of RRBs were
initiated. More importantly, re-capitalization to cleanse their balance sheets was taken up in
1993-94. Other important reforms are as follows:
Measures included deregulation of interest rates on advances as well as
deposits.
Permission to lend to others outside target groups.
Provision for rationalization of branch network- relocation and merger of lossmaking branches.
Introduction of prudential norms on income-recognition.
Asset classification and provisioning.
Preparation of development action plans and signing of memorandum of
understanding with sponsor bank for sustained viability in a planned manner.
Provision of greater role space and larger operational responsibilities to
sponsor banks in the management of RRBs
Encouragement to function as self-help promoting institutions and financing
of self-help groups and introduction of Kisan Credit Cards to simplify
provision of production credit to their clients.

17

Roles & Limitations of Regional Rural Banks

Provision of credit:The main function of RRBs is to provide short term and long-term finance to farmers. The
finance is provided for the following purposes:

Short term finance to meet working capital needs such as payment of wages, purchase of
seeds and fertilizers, transportation expenses, etc.

Medium term finance to meet medium term needs such as purchase of cattle, digging of
wells etc.

Long term finance to meet fixed capital needs such as purchase of land, purchase of
tractors, etc.

They provide finance at low interest rates. This has resulted in less dependence on money lenders
in respect of agricultural credit.

Research and Developments:The RRBs finances research and development in the field of agriculture. Such R & D activities
help to develop new and better inputs, techniques and technology, as a result, better quality of
seeds, fertilizers and farm equipment is developed. This helped to improve the production and
productivity of agricultural crops.

Community Developments:18

RRBs have helped in improving the life in rural areas. They provide social education to farmers
and others in villages so that they give up their bad habits like gambling, drinking liquor etc.
Through workshops and documentaries the RRBs have made attempts to make rural masses
about social evils like child marriages, reckless spending during festivals, marriages etc.

Marketing Services:The RRBs assists the farmers in their marketing activities. They provide advice to the farmers in
respect of proce, packing, transportation; etc. the marketing advice helps the farmers to take
proper marketing decisions. This in turn helps the farmers to get better prices for their products.

Supply of Funds:The RRBs not only provide funds, but they also make efforts to supply good quality inputs like
seeds ,fertilizers, pesticides, etc. this helps to improve the productivity of land. The inputs are
provided at good rates as part of the discount on bulk purchases is passed on to the farmers.

Limitations of Regional Rural Banks :-

19

The institutional agriculture credit in India is faced with many problems. The Indian continues to
depend on the money lenders for his financial requirements in spite of the institutional
framework.
The various problems are:
Inadequate Finance:A basic feature of the credit problem is its overall inadequacy; particularly of the institutional
credit. The credit provided by the cooperative banks and commercial banks is not sufficient to
meet the requirements of the farmers. The banks mostly provide short term credit and not the
long term credit. There is a need of more long term finance from land development banks.
Not only the right quantity of long term institutional finance is available, but also it is not
available at the right time. Hence the farmers depend upon moneylenders for their requirements.
Problem of Security:Normally the banks insist on security to sanction loans to the farmers. The security may be in
form of land or other assets. The small and marginal farmers find it difficult to obtain funds as
they have limited amount of land to offer as security.
Problem of Maintaining Branches:The commercial banks as well as the cooperative banks find it difficult to maintain branches in
rural areas. This is due to low banking business and high overheads in form of staff salaries,
offices rent, and other overheads. Hence the banks do not give much importance to set up
branches in certain rural areas. The commercial banks also have face problems in sanctioning
and monitoring of a large no. of small advances in their rural branches, as it is time consuming
and unprofitable.
Lack of Trained Manpower:20

The banks often face problem of untrained manpower in rural areas. The staff and the officers
often lack knowledge of the financial requirements of the farmers and again they may have a
negative attitude towards the farmers. In order to achieve about the financial requirements of the
farmers.
Problem of Recovery:There is the problem of recovery of credit provided to the farmers both the rich farmers as well
as the poor ones. The large and rich farmers deliberately avoid repaying loans and the small
farmers find it difficult to repay their loans. Also quite often, there is political pressure on the
banks to write off the loans. This result in demotivation to the banks to provide credit in rural
areas.
Corrupt officials:The officials of banks adopt corrupt practices. They often provide finance to their friends and
relatives. Small and marginal farmers face great difficulty in obtaining finance. Hence they have
to depend upon the money lenders for their financial requirements. Not only the officials favour
their friends and relatives to obtain loans. But they are also corrupt in sanctioning loans. They do
ask for the bribes and adopt other corrupt practices at the time of sanctioning, and disbursement
of loans.

Regional Rural Banks and Economic Reforms:-

21

In the year 1989 for the first time, the conceptualization of the entire structure of Regional Rural
Banks was challenged by the Agricultural Credit Review Committee (Khusro Committee), which
argued that these banks have no justifiable cause for continuance and recommended their
mergers with sponsor banks. At the time such a policy move was politically unthinkable, so the
Reserve Bank and the Government of India quite prudently pushed the khusro committee report
under the carpet without a public debate. With the onset of the neo-liberal economic reforms and
the liberalization of the financial system, the RRBs came under the scanner ones again, but this
time in a policy regime that was too willing to let the market principles rule. The committee on
financial Systems, 1991(Narasimham committee) stressed the poor financial health of the RRBs
to the exclusion of every other performance indicator.172 of the 196 RRBs were recorded
unprofitable with an aggregate loan recovery performance of 40.8 percent. (June 1993) The low
equity base of these banks (paid up capital of Rs.25 lakhs) didnt cover for the loan losses of
most RRBs. In the case of a few RRBs, there had also been an erosion of public deposits, besides
capital. In order to impart viability to the operations of RRBs, the Narasimham Committee
suggested that the RRBs should be permitted to engage in all types of banking business and
should not be forced to restrict their operations to the target groups proposal which was readily
accepted. This recommendation marked a major turning point in the functioning of RRBs as we
shall see below. For the time being though, the suggestion of mergers of the RRBs with their
sponsor bank, which the Committee on Financial Systems had put forth in a slightly modified
form-sponsor banks might decide whether to retain the identities of sponsored RRBs or to
merge them with rural subsidiaries of commercial banks to be set up on the recommendation of
the committee- was put on hold. In the ensuing years, reforms of the RRBs largely followed the
same format as that of the commercial banks, irrespective of the fact that their very role in the
society required a special status and a different set of policies. Since the early 1990s, there was a
complete freeze on recruitment of new staff in the RRBs. As a part of comprehensive
restructuring programme, recapitalization of the RRBs was initiated in the year 1994-45, a
process which continued till 1999-2000 and covered 187 RRBs with aggregate financial support
of Rs.2188.44 crore from stakeholders. Simultaneously, prudential norms on income-recognition,
asset classification and provisioning for loan-losses following customary banking benchmarks
were introduced. From 1996/1997, there has been a tendency to allow greater role and larger

22

operational responsibilities to sponsor banks in the management of RRBs. The rest of the section
discusses a few of the major policy changes and their observed outcomes.

Provision for rationalization of branch network including relocation and merger of

loss-making branches:-

One of the regulations that the RRBs faced was regarding the limited area of operations and their
narrow client base. In 1993, RBI gave permission to RRBs to relocate branches that were
consistently making losses for more than three years. This policy provided an opportunity to the
RRBs shift branch premises to more commercially promising areas from localities where they
had incurred sustained losses. As Table 3 indicates, between 1996 and 2003, about 459 offices of
RRBs were closed and relocated to semi-urban and urban centers so that the overall number of
branches of RRBs would remain constant.

In addition, there were relocations within the rural areas from remote locations to commercial
places (not captured by the data). The transfer of banking business to semi-urban and urban
centers was even more drastic with a 6 percent decline in share of rural areas in credit amount
outstanding, over the seven years, as the banks adjusted their clientele.

Table 3:- Relocation OF RRBs Business from Rural to Semi-Urban & Urban Areas
23

Distribution of Credit Outstanding

Number of offices

Rural
Semi-Urban
Urban
Metropolitan
All-India

(%)

1996

2003

1996

2003

12448
1844
373
7
14672

11989
2183
477
22
14671

77.45
17.72
4.78
0.06
100.00

71.51
21.76
6.50
0.24
100.00

Sources: RBI, Basic Statistical Returns, March 1996 and March 2003.

Permission to lend to others outside target groups and deregulation of interest rates:

Before the initiation of banking reforms, lending from the RRBs was largely restricted to the
priority sector. From September1992 onwards, the RRBs were allowed to finance non-target
groups to the extent not exceeding 40 percent of their incremental lending. This limit was
subsequently enhanced to 60 percent in 1994.As a result; the RRBs diversified into a range of
non-priority sector (NPS) advances, including jewel and deposit-linked loans, consumer loans
and home loans. The RRBs adopted new innovations for credit delivery with lower risk of
default such as self-help Group linked lending, non priority sector collateralized lending, Kisan
Credit Card scheme for landed agriculturists, etc. As a proportion of total advances, priority
sector lending dipped from around 70 percent in 1990 to 57 percent in 2001.Even among the
categories that were eligible as priority sector, the attempt was to minimize credit risk and make
easy loans. Between 1995 and 2003, while short term agriculture credit under the priority sector
increased at about 29 percent per annum, term loans declined by 2.6 percent a year.
Sinha et al (2003) in a field study of 5 RRBs find that non-priority sector advances increased
sharply in the second-half of the 1990s for all the sample banks. Of these, 4 banks have a
significant 25 percent of their portfolio invested in non-priority sector loans. The interviewed
RRB managers agree that this was a deliberate strategy to improve viability. Non-priority sector
24

advances are mostly collateralized and therefore carry low risk; they are generally market based
and of a higher value extended to higher-income clients or to low income clients through deposit
and jewelry linked loans; and banks have freedom to charge cost-covering interest rates on nonpriority sector advances. The bank managers candidly accept that the RRBs have been able to
raise their profitability by refusing to serve low-income clients!

Rising investments in banks portfolios:-

The RRBs in following the trend set by the commercial banks increased the share of investment
assets in the portfolio. Not only did the share of investments in government securities increase
beyond the SLR norms, simultaneously there was diversion of an increasing share of the
investment portfolio into other approved securities such as PSU bonds and debentures. The
importance of investments in the portfolio of the RRBs can be gauged from the fact that the
interest on investments was about 52 percent of the total income in 2003 while interest on
advances was 37 percent of the income. Mujumdar (2001) attacks this reverse flow of funds from
the rural to the urban areas as the most retrogressive policy initiated by the RBI. Priority sectors
including agriculture, small industry, retail trade, the whole range of non- farm activities in the
rural sector have no access to the capital market and hence the emphasis should be to promote
flow of resources from the urban to the rural areas. However, an indulgent RBI has yielded to the
biased perspective that there arent enough avenues to invest bank resources in the rural sector.

Rural Banking Faces Twin Challenges

25

Banking in rural India is faced with the twin challenges of regulation and distribution.
Regulation with respect to banking has been designed for delivery in urban India and distribution
required more manpower to be deployed in rural areas. Initiatives like cheque transaction
where the electronic image and not the actual cheque is sent have in mind the urban customer,
about 500-600 million people in India still do not have bank accounts. For the rural segment, one
needs to design no-frills products and deliver hard core value. The other handicap was that while
Rs 1- crore business in microfinance required 30 people in terms of manpower, the same volume
of business in other portfolios required only one person. Also, contract farming and supply chain
integration has not gone the way they should have. Power, telecommunications, banking and
transportation had reduced the urban-rural divide. Besides traditional banking services, people in
the rural and semi-urban areas are expressing interest in liability and investment products. Rural
India is fast transforming a nation of savers into a nation invest

More Recent Measures

It is only in the past few years that the unwanted effects of reform measures on rural banking
have begun to be recognized in certain official quarters. That the improved performances of the
RRBs 163 out of 196 RRBs were earning profits in 2003-2004 was largely a result of the banks
abrogating their credit intermediation role rather than a sign of their genuine health and vibrancy
is pitifully obvious. Moreover, the agrarian distress and stagnation of the rural economy has
become too stark and imminent and, of course, the political ramifications of the crisis can no
longer be ignored.Among the various official committees that were set up review the situation
and make policy recommendations on the future course of development of the RRBs, the
Parliamentary Estimates Committee (2002-03) had come up with a number
of useful
suggestions to tackle the shrinking credit delivery to the priority sector and the rural areas:

Among RRBs which are making absolute profit, the credit-deposit ratio should not be
lower than 75% and for those which are making profits but still have accumulated losses,
an increasing trend of the ratio should be ensured and their investment portfolio should
get reduced accordingly.

The priority sector lending by RRBs has been declining and as per latest figures, priority
sector lending to agriculture and other allied activities comes to about 57 % of the total
26

lending..There could be no rationale for fixing the same norms for lending to
priority/agricultural sector by the RRBs as in the case of commercial banks. The RBI
should apply proper checks to ensure that the present level of 57% of lending by the
RRBs to the priority sector is not allowed to decline further. And it should look into the
.desirability of enhancing the percentage of lending to the priority sector.

The committee is constrained to note that the percentage of loans to small and marginal
farmers out of total loans disbursed by the RRBs has been declining steadily. The RRBs
do not maintain separate details of number of accounts of small and marginal farmers. In
the absence of such information it is difficult to understand as to how RRBs ensure credit
disbursement to small/marginal farmers and other weaker sections of society as per the
guidelines issued by the Government/the RBI. The committee recommended that the
RRBs should take steps for compiling and maintaining data regarding credit facility
extended to small and marginal farmers and other weaker sections of the society to
monitor that credit facilities being provided by the RRBs reach the targeted beneficiaries.

A number of RRBs were charging compound interest on agriculture loans. Even on the
subsidy part, certain RRBs were charging compound interest, which was in utter violation
of the guidelines issued by the RBI. The committee is of the view that this trespass should
be dealt with severely More distressing is the fact that even though in the case of a
number of banks this irregularity was pointed out in the Inspection Reports by NABARD,
neither had the RRBs taken any corrective measures in this regard nor was any serious
note of it taken by the sponsor banksIt appears the RBI, NABARD and the sponsor
banks seem content with issuing of circulars and conducting mandatory inspections
without ensuring compliance of the guidelines issued by them and rectification of
irregulations noticed during inspections.

On the issue of NPAs of the RRBs, the committee expressed its dissatisfaction at the current
levels. While the official statistics highlights the decline in NPAs from 34 percent in March 1996
to 3.99 percent in March 2006.Very few of the above recommendations were, in fact, accepted
by the RBI/Government of India. From the year 2003-04, the RBI revised upwards the lending

27

target for priority sector to 60 percent of the total advances for the RRBs. Ambitious overall
credit targets were laid down for the RRBs by the Union Government.
The farm credit target for the RRBs at Rs 11,900 crore for the fiscal year 2005-2006 is 40
percent higher than Rs 8,500 crore target set during the fiscal year 2004-2005. But little else
happened. In reviewing the action taken by the RBI/GOI on the proposals of the Estimates
Committee (2002-2003), the committee in 2004-2005 finds that no specific action has been
taken on most of the major recommendations.\

No further merger of RRBs:-

There is a need for policy refinement regarding further merger of RRBs. The Vyas Committee
had recommended merger of all RRBs in the same State. Currently, RRBs of the same sponsor
bank are merged at State-level. By April 2007, the number of RRBs was reduced to 96. If
sponsor banks are to have the requisite initiative to support their RRBs fully, they would need
assurance that there will be no further mergers. The Committee is of the view that further merger
of all RRBs at State-level is not required. It may also not be desirable if there has to be a firm
reinforcement of the rural orientation of these institutions with a specific mandate on financial
inclusion. The Committee, therefore, recommends that the process of merger should no proceed
beyond the level of sponsor bank in each State.

Recapitalization of RRBs with negative Net Worth:-

Recapitalization of RRBs with negative net worth has to be given a serious consideration as it
would facilitate their growth, provide lenders a level of comfort and enable their achieving
standard capital adequacy ratios. As on March 2004, 98 RRBs were in need of Rs 3,050 crore for
making the net worth positive. The position, as on 31March 2006, is that 40 RRBs would require
Rs. 1,718 crore.

Widening network and Expanding Coverage:-

28

As on 01 April 2007, RRBs were covering 535 districts. They may be directed to cover all
unbanked areas in these districts, taking the village as a unit, either by opening a branch
(wherever feasible) or through the BF/BC model in a time bound manner.
As on 01 April 2007, 87 districts in the country were not covered by RRBs and their area of
operation may be extended to cover these districts.

Computerization:-

With a view to facilitate the seamless integration of RRBs with the main payment system, there
is a need to provide computerization support to them. Banks will be eligible for support from the
Financial Inclusion Funds on a matching contribution of 50% in regard to districts other than
tribal districts and 75% in case of branches located in tribal districts under the Tribal Sub plan.

Strengthening Boards of Management:-

Further ,now that RRBs are being merged and are becoming large size entities, it is necessary
that their Boards of Management are strengthened and powers delegated to them on policy and
business operations ,viz. introduction of new liability and credit products, investment decisions,
improving market orientation in raising and deployment of resources, non-fund based business,
career progression, transfer policy etc.

Tax Incentives:-

From 2006-07, RRBs are liable to pay income tax. To further strengthen the RRBs, profits
transferred to reserves could be exempted from tax till they achieve standard capital adequacy

29

ratios. Alternatively, RRBs may be allowed tax concessions to the extent of 40% of their profits,
as per provisions under sec.36 (1) (viii) of the Income Tax Act.

Implementation of RBI initiatives for financial inclusion:-

All recent circulars relating to financial inclusion, viz., no frills accounts, GCC, One Time
Settlement (OTS) for loans up to Rs 25, 000, use of intermediaries, etc., should be implemented
by RRBs.

NRFIP for RRBs:-

The strategy recommended earlier for NRFIP for commercial banks would be equally applicable
for RRBs. The process of undertaking a survey, identification of excluded households,
dissemination of the information, settings of bank-wise/ branch-wise targets etc., could be
followed. RRBs will have certain handicaps in executing the plan. They would require
promotional, funding and technology support in different areas as outlined below. RRBs may
Endeavour to cover to a large part of their incremental lending thru the group mode
(SHGs/JLGs) as it will enhance their outreach to the financially excluded. Lending thru group
mode would also keep NPAs at low level.

Strategic microfinance plan with NABARD support:-

RRBs have potential and capability to emerge as niche operators in microfinance. They are
playing major role in SHG-Bank Linkage Programmed especially also as SHPIs. It is significant
that as an institution they have the expertise and potential to fulfill both the requirements of
SHGs formation plus nurturing and financial service provisions (credit plus).Their dual role
has special meaning in areas which face severe financial exclusion and which do not have a
sufficient presence of well performing NGOs. However, to upscale the programmed to a level
where it can really make a visible impact, RRBs need handholding particularly in the areas of
training, promotion and development, NABARD may provide required assistance.
30

NABARD should prepare a strategic action plan RRB-wise, for promotion and credit linkage of
SGHs. RRBs may be asked to form, nurture and credit link at least 3,000 SHGs in all districts
covered by them in North-Eastern, Eastern and central Regions. A Memorandum of
Understanding (MoU) may be signed by RRBs with NABARD for a period of 5 years with
NABARD providing the promotional and development assistance out of the Financial Inclusion
Promotion and Development Fund and RRBs forming, nurturing and providing financial
services to SHGs. RRBs may accomplish the task with the support of individual rural volunteers,
BFs, their staff members, etc. NABARD may closely monitor the programme-with focus on
qualitative aspects.

Separate credit plan for excluded regions:-

The Committee recommends that RRBs operating in predominantly tribal areas and having high
levels of exclusion may prepare annual credit plans having a separate component for excluded
groups, which would integrate credit provision with promotional assistance such as agriculture
services and BDSs for the farm and nonfarm sectors respectively including entrepreneurship
development and formation and strengthening of producers organizations like dairy
cooperatives. Refinance and promotional support may be provided by NABARD to RRBs on a
large scale for implementation of these credit plans.

NABARD to support HR development in RRBs:-

31

RRBs should serve, with the support of NABARD, GoI, RBI and the sponsor banks, as active
financial inclusion players especially in areas with high levels of financial exclusion. In order to
build up the skills and expertise of the personnel of RRBs, NABARD has played a crucial role
since the inception of RRBs. But for the efforts of NABARD and initiative of sponsor banks
besides RRB managements themselves in HR development and in implementation of the reform
package, the changes in business performance of RRBs would not have been possible. The work
could be accomplished by NABARD working in close tandem with GoI and RBI besides the
sponsor banks. NABARD would continue to give special priority to RRBs to train their staff
through the training institutions like the bankers Institute of Rural Development (BIRD) at
Lucknow and the Regional Training Colleges at Mangalore and Bolpur, specially set for meeting
the training requirement of RRBs. NABARD my design suitable training programmes to enable
RRBs to meet the challenges in post merger environment. This training may also cover members
of the Board of RRBs. This support should be provided by NABARD working in close tandem
with GOL, RBI and the sponsor banks.

Pilot testing of BF/BC Model by RRBs:-

RRBs should adopt the BF and BC models as a major strategy of financial inclusion. NABARD
should extend the required support including running pilots in selected banks. The proposal for a
technology based intervention under the BF/BC model would be equally relevant for RRBs.
However, RRBs would require some handholding in implementing the proposal. NABARD may
identify 10 RRBs across the country giving greater weightage to regions manifesting higher
levels of financial exclusion and work in strategic alliance with these RRBs and their sponsor
banks in implementing the proposal. The RRBs identified by NABARD for the project will
require, developing a core banking software for proper integration of the technology model
proposed. NABARD should enter into a MoU with identified sponsor banks and RRBs and
provide initial funding and technology support.

Comparison of RRBs with State cooperative Banks

32

A note is about state government-run cooperative banks on how they compare with RRBs. Both
rural financial institutions are in same rural credit market but with different ownership and
management patterns. Indias cooperative banks were instituted in the fifties, also to meet the
rural credit requirements each district of the country. They are managed by the respective state
governments under cooperative Act. There are basically three-tier cooperative structures in most
of the states. Primary Agricultural Cooperatives at grass-root level, District cooperative Bank at
District level and State Cooperative Banks at State level with each supporting the lower one.
The co-operative credit system has come under increasing pressure from the emerging
competitive scenario of low interest rate regime. Cooperative Banks have also continued to
suffer from several weaknesses that do not augur well for building-up their ability to compete
with banking structure in the emerging liberalized environment. In part they have not been
successful due to excessive political interference in their management. It may be noted that the
elected boards of 478 cooperative banks out of 1186 were superseded for a variety of reasons
including political interference.
RRBs on the other hand are the result of a Parliamentary Act and they are managed by the
sponsor bank (which has the experience of running a big bank) with an equity stake of 35%. The
Central Government and the local State Government hold 50% and 15% equity stake in RRBs.
The board of RRBs constitutes the officials of NABARD and RBI. Each RRB, like cooperatives
is confined to a single or two districts of the country. RRBs were sought to be a blend of
cooperatives and commercial banks. State governments have no/limited role in the management
of the bank.

The Question of Ownership

33

The approach of the Estimates Committee in looking at the Regional Rural Banks was unique in
that most other official committees in the recent years even while noting the deteriorating
patterns in credit activities by RRBs have completely bypassed the subject while making the
policy recommendations. Instead attention is held by issues of ownership and requirements for
RRBs as necessary steps towards restructuring. At present there is no capital to risk weighted
asset ratio (CRAR) prescription for RRBs. The Internal Working Group on RRBs (RBI, 2005)
has recommended that the RRBs be asked to maintain a CRAR of 5 percent to begin with, and
over time they may align themselves to the Basle I standards. To wipe out the accumulated
losses, provide for the NPAs, and maintain 5 percent CRAR for the RRBs in the existing
scenario, the Working Groups calculations show that capital to the extent of Rs.3, 050 crore
would have to be infused. It is obvious that the RRBs are being restructured along the same lines
as the commercial banks. Is the step necessary? Hold that it is not. Even if one were to believe in
a case for CRAR for commercial banks on the lines that the new freedom given to banks to
determine their portfolio, including investments in stock markets might result in high levels of
risks in the system, which the regulars believe can be contained through capital requirements,
same logic cannot be applied to the RRBs simply because such Portfolio choices can never be
allowed for these institutions. On the other hand, given that the income recognition and asset
classification norms have already caused these institutions to shy away from credit activities to
an unacceptable extent, further prudential norms involving high risk-weight on most loaning
business can only exacerbate these tendencies further. It is widely established in the developing
country contexts that the response of banks to hitting regulatory constraints on their capital ratio
is mostly through cutting back loans or by switching from higher to lower risk weight assets,
rather than by raising capital. At a time when most rural areas are starved of credit, it is difficult
to comprehend the urgency to impose capital requirements on the RRBs.
The subject of consolidation of the RRBs as a way of raising their viability and profitability has
recurred several times since the beginning of the reform process but without any policy outcome.
Various working group and committees have prescribed different measures as also models for
reconstructing the RRBs. Pick up the most recent threads. The chalapathy Rao Committee (2002)
had proposed that the government reduce the number of RRBs to around 40 from the present
196. Option for mergers could be mergers of RRBs following one-sponsor bank approach or
34

they could be amalgamated with their sponsor banks, and thereafter the RRBs could operate as
commercial entities . The Vyas committee II (June2004), on the other hand, has forwarded a
more logical solution. After weighting the various options for amalgamation, it decided that it
could not consider the option of merger with the sponsor bank, as it would go against the
rationale of third channel for rural credit with a clear rural focus and regional orientation.
Instead, it recommended merger of RRBs so as to create a zonal bank for RRBs in the NorthEast and Rural banks at the state level for the rest of the country. These banks would work on a
stand alone basis and the sponsor banks plus NABARD would contribute to equity. In the latest
document on the subject, the Internal Working Group on RRBs (RBI, 2005) has also proposed
consolidation of the RRBs as the merged entities will have a larger area of operation and the
merger process will help in strengthening some of the weak RRBs. Eliminating the option of
merger of RRBs with sponsor banks, the group has put forth two option: merger between RRBs
of the same sponsor bank in same state and merger of RRBs sponsored by different banks in
same state.
Independent of the official deliberations, the All Indian Regional Rural Banks Employees
Associations (AIRRBEA) has proposed that the RRBs be amalgamated to form zonal or statelevel RRBs. They have cited two strong reasons to make the case. The RRBs must be
restructured into zonal or state level RRBs under any public sector apex banking institutions or
NABARD, so as to ensure the unity of command and cross subsidization... As in any banking
institution, if the central balance sheet is prepared at the apex level, the losses of the few RRBs
(in the Eastern, North-Eastern and Central regions)..can easily be taken care of with the huge
aggregate profit of a majority of the RRBs. Further, a national body like that of NABARD
should monitor the activities of such RRBs. Opposing the demands of All-India RRB officers
Federation for amalgamation of RRBs with the sponsor banks as the only route to sustainability,
AIRRBEA has demanded de-linking of the RRBs from the sponsor banks so as to ensure
functional autonomy for the rural banks, and to relieve the burden of sole commercial
orientation so that the rural credit activities can be pursued more freely. (Emphasis ours)

35

The AIRRBEA statement clearly takes the issue of ownership beyond the current preoccupation
with profitability, and asserts that not only can viability issues be handled better by restructuring
the RRBs along the lines suggested by them, but more importantly it can enable improved
performance vis--vis credit activities, which is the urgent need today. The control of sponsor
banks on RRBs needs to be seriously revaluated. At a time when the sponsor banks are
themselves constrained to make cuts in the manpower and credit to agriculture or the SSI sector,
they are unable to extend the help to the RRBs on which their sponsorship was premised. In a
view, it is necessary that along with the Vyas Committee recommendations, which have astutely
defined the post-merger banking structure in terms of state-level banks, the policymakers also
take into consideration the legitimate demand for functional autonomy and to rid the RRBs of the
sole commercial orientation such that the present decline of rural banking might be reversed.

Regional Rural Banks Today

36

At the end of fiscal 2005-2006, there were 133 RRBs spread over 23 states/Union Territories and
with a network of 14,494 branches, accounting for 44.5 per cent of the total rural network of all
scheduled commercial banks (including RRBs). The rural and semi-urban branches of RRBs
constitute 98 per cent of their network. Their deposits and advances as on March 31, 2003, were
Rs. 71,329 crore and Rs.22, 028 crore respectively. Thus RRBs have done well in mobilizing
rural deposits and infusing the thrift habit in their clients.
Out of 196 RRBs, in 2002-2003 the number of profit making banks stood at 167 in 2001-2002 as
compared with 170 in 2000-2001.However 111 RRBs out of total 133 registered profits in the
year 2005-06. The combined Net Profit of RRBs for the year 2001-2002 aggregated Rs.608
crores as against the combined net profit of Rs.601 crores in the previous year. The aggregate
accumulated losses of RRBs declined from Rs.2752.59 crores as on 31 March 2001 to Rs 2637
crores as on 31 March 2006.
As a result of the various reforms measures, the RRBs showed substantial turn-around in their
performance. The RRBs also displayed qualitative improvement in their NPA management and
gross NPAs as percentage of gross advances stood at 3.99% as on 31-3-2006, down from 32.8 at
March-end 1998.Similarly, the recovery performance of the RRBs steadily improved with the
percentage of recovery to demand raised at 80% as on 2005-2006 from 61.2% at end-June
1998(41.2% at end-June 1993).
The bulk of the loans from RRBs have been to priority sectors, which accounted for over 70 per
cent of the total. Agriculture alone took up 46 per cent of the priority sector advances. The
involvement of RRBs in providing credit support to small and retail trade and other non-farm
rural activities is better than that of co-operative and commercial banks. As on March 31, 2002,
the outreach of RRBS in terms of number of deposits and advances was 50.02 million and 11.94
million respectively. Clientele for loans and deposits in the rural sector are low-value, but large
volume. RRBs have served this clientele in a more productive and efficient manner vis--vis
other Banks.

37

Per-employee, 885 accounts are handled by RRBs against the national average of 464 accounts
per employee in the banking industry.
RRBs have also taken a lead role in financing of Self Help Groups (SHGs) mostly comprising of
women leading to their economic and social empowerment. The share of RRBs in SHG-Bank
linkage programme is equally commendable as under:

38

SBI Contributions in Rural Banking

State Bank of India
State Bank of India Caters to the needs of agriculturists and landless agricultural specialized
branches which have been set up in different parts of the country exclusively for the development
of agriculture through credit deployment. These branches include 427 Agricultural Development
Branches (ADBs) and 547 branches with Development Banking Department (DBDs) which cater
to agriculturists and 2 Agricultural Business Branches at Chennai and Hyderabad catering to the
needs of hi-tech commercial agricultural projects.
Their branches have covered a whole gamut of agricultural activities like crop production,
horticulture, plantation crops, farm mechanization, land development and reclamation, digging of
wells, tube wells and irrigation projects, forestry, construction of cold storages and godowns,
processing of agri-products, finance to agri-input dealers, allied activities like dairy, fisheries,
poultry, sheep-goat, piggery and rearing of silk worms.
The branch also has farmers meet in villages to explain to farmers about various schemes
offered by the bank.
To give special focus to agriculture lending Bank has set up agri business unit. Bank has also agri
specialists in various disciplines to handle projects/ guide farmers in their agri ventures.
Advances are given for very small activity covering poorest of the poor to hi-tech activities
involving large fund outlays. They are the leaders in agri finance in the country with a portfolio
of Rs. 18,000 crores in agri advances to around 50 lakhs farmers.
State Bank of India has sponsored 30 RRBs, which operate in 102 districts of 16 States viz.
Andhra Pradesh, Arunachal Pradesh, Assam, Bihar, Chattisgarh, Himachal Pradesh, Jammu &
Kashmir, Jharkhand, Karnataka, Madhya Pradesh, Meghalaya, Mizoram, Nagaland, Orrissa,
Uttaranchal and Uttar Pradesh, with a network of 2336 branches.

39

VARIOUS SCHEMES OFFERED BY STATE BANK OF INDIA

CROP LOAN (ACC)

Purpose
To provide financial assistance to meet cultivation expenses for various crops.

Eligibility for crop loan

Agriculturists, Tenant farmers and share Croppers who actually cultivate the lands are eligible
for these loans. All categories of farmers Small/Marginal (SF/MF) and others are included.
Loan Amount
Loan amount is worked based on the cost of cultivation incurred for each crop per acre of crop
cultivated and 90% of the cost of cultivation (Scale of Finance) is given as loan.

40

 KISAN CREDIT CARD SCEME (KCC) :-

Purpose
To extend adequate and timely support to farmers for their short term credit needs.

Eligibility for the loan

Farmers with excellent repayment record for 2 years and new farmers with sizeable deposits with
branches for 3 to 4 years are eligible. Borrowers with good track record in other Banks are also
eligible. Farmers who have defaulted in repayment but have liquidated the outstanding are also
eligible.

Loan Amount
Loan amount is decided based on the cropping pattern, ancillary and contingency needs of the
farmer for the full year. 90% of the cost of cultivation (Scale of Finance) is given as loan per
acre. 100% of the cost is available as loan up to Rs. 50,000/- and 85% of the cost is available as
loan above Rs. 1, 00,000/-

41

 FARM MECHANISATION SCHEMES

Purpose
Credit for purchase of farm equipment and machinery for agricultural operations. The scheme
covers activities ranging from purchase of tractors and accessories, trailers. Power tillers,
combine harvesters, power sprayers, dusters, threshers etc.

Eligibility for Term Loans

Farmers owning mare than minimum acreage of perennially irrigated lands are eligible (for
power tillers 2 acres, for tractors 4 acres for > 35 HP and 6 acres for above 35 HP and for
combine 8 acres). Eligibility for purchase of other farm equipment is decided on the income
generated by the agri activity undertaken by.

Loan amount
Up to Rs. 50,000/- 100% of the cost of the asset is provided as loan. Above Rs. 50,000/- up to
85% of the cost of the asset provided as loan.

42

 LAND DEVELOPMENT SCHEMES

Purpose
To provide credit solution for land development projects in the form of direct finance to
cultivators for better productivity.
Loans under this head cover various activities like land clearance ( removal bushes, trees, etc.),
land leveling and shaping, contour/ graded bunding, bench terracing for hilly areas, contour stone
walls, staggered contour trenches, disposal drains, reclamation of saline/ alkaline soils and
fencing etc.

Eligibility for Term Loans

All farmers owning agricultural land are eligible.

Loan amount
Up to Rs. 50,000/- 100% of the cost of the asset / project cost is provided as loan. Above Rs.
50,000/- up to 85% of the cost of the asset / project is given as loan.

43

 LOAN AGAINST WAREHOUSE RECEIPTS / COLD STORAGE

RECEIPTS

Purpose
The Bank extends financial assistance to farmers storing produce in private / government
warehouse/ cold storages against pledge of warehouse / cold storage receipt to prevent distress
sale. The maximum repayment period of the loan is 6 months.

Who is eligible for the loan

All categories of farmers availing crop loan.

Loan amount
The lone amount will be 60% of the value (minimum support price) of the produce stored.

MINOR IRRIGATION SCHEMES

Purpose
To provide credit for creating irrigation facilities from underground / surface water sources. All
structures and equipments connected with it are also financed. Loans cover various activities like
digging of new wells (open/bore wells), deepening of existing wells (traditional/in well bore),
energisation of wells (oil engine/electrical pump set), laying of pipe lines, installing drip/
sprinkler irrigation system and lift irrigation system.
44

Eligibility for Term Loans

All farmers having a known source of water which can be exploited for irrigation purpose.

Loan amount
Up to Rs. 50,000/- 100% of the cost of the asset/ project cost is provided as loan. Above Rs.
50,000/- up to 85% of the cost of the asset / project is provided as loan.

Key Performance Indicators: RRBs

Amount in Rs. Crore
Nos.

Indicators

Year
31.03.2011

31.03.2012

31.03.2013

1.

No. of RRBs

196

196

133

2.

No. of districts
covered
No. of branches
No. of staff
Credit-deposit (CD)
ratio (%)

518

523

525

14446
69249
46%

14484
68912
53%

14494
68629
56%

3.
4.
5.

45

Key Performance Indicators: RRBs

Amount in Rs. Crore
Nos.

Indicators

Year
31.03.2011

31.03.2012

31.03.2013

1.

Owned Funds

5438

6181

6647

2.

Deposits

56350

62143

71329

3.

Borrowings

4595

5524

7303

4.

Investments

36135

36761

41182

5.

Loans outstanding

26114

32870

39713

Key Performance Indicators: RRBs

Amount in Rs. Crore
Nos.

Indicators

Year
31.03.2011

31.03.2012

31.03.2013

1.

Loans issued

15579

21082

25427

2.

No. of RRBs having

accumulated losses
Accumulated losses
No. of RRBs in profit
Net NPA (%)

90

83

58

2725
163
8.55%

2715
166
4.84%

2637
111
3.99%

3.
4.
5.

46

Key Performance Indicators: RRBs

Amount in Rs. Crore
Nos.

Indicators

Year
31.03.20011

31.03.2012

31.03.2013

1.

Recovery (%)
(as on 30 June)

73%

78%

80%

2.

Per branch
Productivity
Per staff
Productivity

5.71

6.56

7.66

1.19

1.38

1.62

3.

Important Trends

111 RRBs out of total 133 registered profit in the year 2005-06.

CD Ratio has been increasing from 46% on 31 March 2004 to 53% on 31 March 2005
and further to 56% on 31 March 2006.

Recovery percentage has been improving from 73% during 2003-04 to 80% during 200506.

Consequently, net NPAs have declined from 8.55% on 31 March 2004 to 3.99% on 31
March 2006.

Loans disbursement registered an impressive 35% annual growth in 2004-05 and 21% in
2005-06.
47

Per branch productivity has increased from Rs. 5.71 crore on 31 March 2004 to Rs. 7.66
crore on 31 March 2006.

Per staff productivity has increased from Rs. 1.19 crore on 31 March 2004 to Rs. 1.62
crore on 31 March 2006.

OBJECTIVE OF THE STUDY

48

1. To study marketing of rural banking in India.

2. To study comparative marketing of rural and urban banking in India.

3. To study about Institutional sources consist of the co-operative and commercial

banks including Regional Rural Banks (RRBS)

4. To study about Non institutional or private sources including money lender

traders commission agents and landlords

49

Muhammad Yunus & Grameen Bank:- (CASE STUDY)

Nobel Peace Prize winner Muhammad Yunus

Muhammad Yunus ideas about lending to the poor to lift millions out of poverty. Have changed
lives in his native Bangladesh and beyond. Known as the banker to the poor, Yunus, winner of
the 2006 Nobel Peace Prize, has helped people rise above poverty by giving them small, usually
unsecured loans through his Grameen Bank.
Through Yunuss efforts and those of the bank he founded, poor people around the world,
especially women, have been able to buy cows, a few chickens or the cell phone they desperately
needed to get ahead.
Yunus is the first Nobel Prize winner from Bangladesh, a poverty-stricken nation of about 141
million people located on the Bay on Bengal.
Yunus received a Ph.D. in economics from Vanderbilt University in 1970 and taught at Middle
Tennessee University from 1969 to 1972. After returning to Bangladesh,

50

he joined the University of Chittagong as head of the Economics Department. He also holds
honorary doctorate degrees from dozens of universities around the world.
Yonus has won dozens of international awards, including the Simon Bolivar Prize, the Indira
Gandhi Peace Prize, the Seoul Peace Prize and the Freedom Award of the International Rescue
Committee.
He has also been appointed as an International Goodwill Ambassador for UNAIDS by the United
Nations and inducted as a member of Frances Legion dHonneur.
From 1993 to 1995, Yunus was a member of the International Advisory Group for the Fourth
World Conference on Women, a post to which he was appointed by the U.N. secretary general.
He has served on the Global Commission of Womens Health, the Advisory Council for
Sustainable Economic Development and the U.N. Expert Group on Women and Finance.
In addition to Grameen Bank, Yunus has created numerous other companies in Bangladesh to
address poverty and development issues. Those companies are involved in a range of industries,
including mobile telephony, Internet access, capital management and renewable energy.
Grameen Bank was the first lender to hand out microcredit, giving very small loans to poor
Bangladeshis who did not quality for loans from conventional banks. No collateral is needed and
repayment is based on an honor system.
Grameen, which means rural in the Bengali language, says the method encourages social
responsibility.

51

A LOOK AT GRAMEEN BANK

WHAT IS IT: The Grameen Bank hands out microcredit, or very small loans, to the poor
peoples of Bangladesh who, do not qualify for loans from conventional banks. No collateral is
needed and repayment is based on an honor system.
HOW DID IT START: In 1974, Yunus, then an economics professor recently returned from the
United States, lend a total of $27 to 42 villages who, made bamboo furniture. The loans, which
were all paid back, allowed them to cut out the middlemen and purchase their own raw materials.
Emboldened by his experiment, Yunus won government approval in 1983 to open Grameen,
Bengali for rural.
WHO QUALIFIES: Anyone can qualify, but they must belong to a five-member group. Once
the first two members begin to pay back their loans, the others can get theirs. While there is no
group responsibility for returning the loans, the bank believes it creates a sense of social
responsibility, ensuring all members pay back their loans.
DOES IT WORK: Grameen claims a 99 percent repayment rate. According to a recent Grameen
survey, 58 percent of the families of Grameen borrowers have crossed the poverty line.
WHO OWNS THE BANK: The government of Bangladesh owns 6 percent of the bank while
the borrowers own the other 94 percent.
WHAT ARE THE NUMBERS: The bank has handed out $ 5.72 billion since its inception to
6.61 million people had been repaid $ 5.07 billion. Women account for 97 percent of the loan
takers. Grameen Bank has 2,226 branches, works in 71,371 villages and has a total staff of
18,795.

52

Other Information
Earns Profit-Ever since Grameen Bank came into being, it has made profit every year except in
1983, 1991 and 1992. It has published its audited balance-sheet every year, audited by two
internationally reputed audit firms of the country.
Revenue and Expenditure: Total revenue generated by Grameen Bank in 2006 was Tk 9.43
billion (US $134.90 million). Total expenditure was Tk 8.03 billion (US $ 114.90 million).
Interest payment on deposits of Tk 3.47 billion (US $ 35.35 million) was the largest component
of expenditure (43 per cent). Expenditure on salary, allowances, and pension benefits amounted
to Tk 2.03 billion (US $ 28.97 million), which was the second largest component of the total
expenditure (25 per cent). Grameen Bank made a profit of Tk 1398 million (US $ 20.00 million)
in 2006. Entire profit is transferred to a Rehabilitation Fund created to cope with disaster
situations. This is done in fulfillment of a condition imposed by the government for exempting
Grameen Bank from paying corporate income tax.
Low Interest Rates: Government of Bangladesh has fixed interest rate for government-run micro
credit programmes at 11 per cent at flat rate. It amounts to about 22 per cent at declining basis.
Grameen Banks interest rate is lower than government rate.
There are four interest rates for loans from Grameen Bank : 20% (declining basis) for income
generating loans, 8% for housing loans, 5% for student loans, and 0% (interest-free) loans for
Struggling Members (beggars). All interests are simple interest, calculated on declining balance
method. This means, if a borrower takes an income-generating loan of say, Tk 1,000, and pays
back the entire amount within a year in weekly installments, shell pay a total amount of Tk
1,100, i.e. Tk 1,000 as principal, plus Tk 100 as interest for the year, equivalent to 10% flat rate.

53

Deposit Rates:

Grameen Bank offers very attractive rates for deposits. Minimum interest offered is 8.5 per cent.
Maximum rate is 12 per cent.

Beggars as Members
Begging is the last resort for survival for a poor person, unless he/she turns into crime or other
forms of illegal activities. Among the beggars there are disabled, blind, and retarded people, as
well as old people with ill health. Grameen Bank has taken up a special programme, called
Struggling Members Programme, to reach out to the beggars. About 100,505 beggars have
already joined the programme. Total amount disbursed stands at Tk. 107.16 million. Of that
amount of Tk. 74.39 million has already been paid off.

54

CONCLUSION
RRBs' performance in respect of some important indicators was certainly better than that
of commercial banks or even cooperatives. RRBs have also performed better in terms of
providing loans to small and retail traders and petty non-farm rural activities. In recent
years, they have taken a leading role in financing Self-Help Groups (SHGs) and other
micro-credit institutions and linking such groups with the formal credit sector.
RRBs should really be strengthened and provided with more resources with which they
can undertake more of these important activities. And most certainly they should be kept
apart from a profit-oriented corporate motivation that would reduce their capacity to
provide much needed financial services to the rural areas, including to agriculture.
Ideally, the best use of the resources raised by RRBs through deposits would be through
extensive cross-subsidisation. This, in turn, really requires an apex body that would cover
and oversee all the RRBs, something like a National Rural Bank of India (NRBI).
The number of rural branches should be increased rather than reduced; they should be
encouraged to develop more sophisticated methods of credit delivery to meet the
changing needs of farming; and most of all, there should be greater coordination between
district planning authorities, Panchayati raj institutions and the banks operating in rural
areas. Only then will the RRBs fulfill the promise that is so essential for rural
development

55

BIBLIOGRAPHY

Books:Development Issues of INDIAN ECONOMY: - Mario Dias

News Papers:The Economic Times.

Articles regarding Muhammad Yunus & Grameen Bank:The Grameen Bank & Associated Press.

56

WIBLOGRAPHY

Websites:www.indiatogether.org
www.thehindubusinessline.com
www.nabard.org
www.sbi.co.in

57