' ^ )

Chapter - 1

Meaning and Concept of Rural

Banking in India

a
 Chapter - 1

Meaning and Concept of Rural Banking in India

The present chapter discusses the meaning and concept of Rural

Development and scenario of the banking industry before and after
nationalization, including cooperative banking. The role of banks in the
development of rural areas has also been discussed in detail in this chapter.

1.1 Introduction

The world is still predominantly rural, especially in the context of

developing countries. In spite of industrialization and urbanization, a vast
majority of people live in rural areas and depend on agriculture and allied
activities for their living. The World Bank estimate report In 1980 revealed that
60 percent of people of this v/orld lived in rural settlements and the
percentage has slightly come down to 54 percent in 1997.^ Since two-third of
the population of the less-developed countries still live and work in the rural
sector, success in achieving the set development objectives of these regions
rests primarily on the performance of the schemes centered round rural
development. Thus, rural development is considered the key to national
development in the less developed regions of the world.^

The rural sector plays a significant role in Indian economy. It affects

directly or indirectly almost all the economic activities in the country and
provides employment to the maximum number of people. It is the most
important source of national income in India. It also supplies food for the
survival of the entire population of India. It also supplies materials necessary
for the major industries of India. A large part of the revenue of the
government is also obtained from the rural sector. In short, the rural sector
can be rightly considered as the backbone of Indian economy. Inspite of the
significant role of the rural sector in the country's economy, it continues to be
neglected. The magnitude of poverty, illiteracy and ill health is higher in rural
areas than in urban areas.^
 It is a fact that India is still predominantly rural and mainly a land of
villages, '* as 76.69 ^ percent of its population live in 5,75,000 villages.^ The
official estimate reveals that 40.4 percent of the rural population live below the
poverty line as against 28.1 percent in urban areas/ For ages, the rural
people have been suffering socially and economically, and little attention has
been paid for their uplift. The foreign rulers did nothing to improve the lot of
the dov\/ntrodden rural masses and their selfish policies made their life quite
miserable. The agricultural policies introduced by the British government
created havoc for the toiling masses of India and further deteriorated their
economic and social condition. The cottage and village industries existing at
that time collapsed. The frequent famines and economic depressions further
drove more and more agriculturists into destitution. During the British rule,
although some measures were taken for industrial development in the urban
sector, yet no effort was made to ameliorate socio-economic conditions of the
poor rural masses. Illiteracy, lack of means of communication, scarcity of
resources of livelihood, unemployment and under-employment, poverty and
economic exploitation of small and marginal farmers and landless laborers
added to the miseries of rural people and stood in the way of their progress,
prosperity and development.^

Rural development for a quite long time was equated with just
agricultural growth. The rationale behind this was that the benefits of growth
would trickle down to poorer communities. However, the expected 'trickling
down' did not actually take place. From the new technology introduced in the
mid-sixties, although independent of farm size, the benefits would largely
accrue to big farmers who had access to resources.^ The resource bias in
favour of big farmers is one of the main factors leading to the widening of
existing inequalities.^^ Thus, much of the hope on 'percolation effect' in India
as well as other developing countries seems to have faltered. In this regard,
the following observation of the 'Planning Commission's Task Force on
Integrated Rural Development' is pertinent. "After careful consideration we
have belatedly decided to talk that what might be considered rather restricted
views of the expression, rural development. It was decided to chose to equate
it with agricultural development in the widest sense so as to embrace besides
crop husbandry, all the allied activities."^^ Here, the word 'allied activities'
encompasses not only agricultural but also all types of development activities
intended to improve the quality of life in the countryside.

- ^ It is also to be noted that after the submission of the report by the All
India Rural Credit Review Committee (1969), the theme of poverty has
brought about a shift in the relative emphasis from purely production issue to
issue relating to distribution, employment and planning for target groups and
backward areas. ^^ A deliberate attempt was made to tailor the programmes
in the field of rural development to suit the needs of the weaker section.

Thus, it is seen that the concept of rural development has changed

gradually from a mere agricultural growth to a comprehensive development of
the rural life. In this connection, the World Bank defines rural development
quite precisely and comprehensively. Rural development is a strategy
designed to improve the economic and social life of a specific group of people
-the rural poor. It signifies extending the benefits of development to the
poorest among those who seek a livelihood in rural areas. The group includes
small scale farmers, tenants and the landless.^^ If these people have to be
employed fully and their economic position has to be improved, it is necessary
to promote certain other activities such as dairy, poultry etc. as allied activities
and also village and cottage industries in order to supplement their meagre
farm/ wage income. To undertake all these activities, supply of adequate
credit is very much important. Most of the economic activities in which the
weaker sections of the society are engaged suffer from credit gaps.^^ The gap
in credit is high on small farms as compared to medium and large farms.^^
Availability of banking and credit facilities may not be a sufficient condition for
the development of people, but certainly an essential condition without which
development cannot and will not take place. Joseph Schumpeter defined
credit as a phenomenon of development and the banking system as a key
agent in the process of development.^^

However, among numerous adversities of agro-climatic and socio-

political dimension, the single biggest problem that the villagers had to
confront was the non-availability of credit at the right time, rate and quantum.

3
The organized institutional credit had hardly played any role for the farming
community during the early years. The All India Rural Credit Survey Report
has revealed that the share of Institutional agencies comprising the
government, the cooperatives and the commercial banks financing the
borrowings of the rural households was 7.1 percent In 1951-52, whereas the
corresponding share of private money tenders (excluding relatives, traders
and commission agents, landlords and others) was as high as 68.6 percent.^^
As a result, the money lenders resorted to several questionable practices due
to the helplessness, ignorance and necessity ot the borrowers.^^

In this context, It is worthwhile to examine critically the development of

rural credit In India. Since the beginning of this century, a number of
experiments have been conducted on India's rural credit scene. The
cooperatives have been considered as the first Institutional agency set up for
providing credit and other facilities to the rural sector. But the performance of
cooperatives could not play any major role in mitigating the miseries of the
village farmers. A critical review of the development of cooperative credit in
mid-1960s has revealed that although the overall performance of the
cooperative credit structure had considerably improved, yet It was marked by
regional disparities and imbalances. Further, It was observed that the small
and marginal farmers and agricultural labourers did not receive their proper
share in the credit and other facilltles.^^ The cooperative finance was often
considered, inelastic, dilatory and Inadequate largely owing to inefficiency,
corruption and selfishness of the managing committee and usually turned to
be a place of resort to affluent person.^° The report of the All India Rural
Credit Review Committee, the proportion of a small cultivator who has access
to cooperative credit was relatively low In all the states and that the bigger
cultivators received a much larger share of cooperative credit.^^ Another study
aptly points out that the dependence of the cooperatives on the government
for funds and day to day intervention of the bureaucratic and political
functionaries turned these sahakari units into sarkari agencies.^^ Moreover, it
is rightly observed that even in the states where the cooperative institutions
are working satisfactorily, the credit provided by them is far too Inadequate to
satisfy the needs of agriculture.^^
 Another study finds that, in many subtle ways, the social objective of
cooperation to improve the economic condition of the weaker sections is
thwarted in reality. Quite often, it is seen that the economically well placed
agricultural castes or groups in the area also dominate the cooperative
scene.^'* It has been pointed out that the main reason for the failure of the
cooperatives is mainly because the cooperatives in other countries have
emerged as a reaction against poverty and have resorted to self-help and
mutual well-being. Charles Guide defines cooperatives as the children of
necessity and the state has nothing to do with them. Contrary to this, the
cooperatives in India have emerged with a piece of legislation. The movement
was born in response to challenges of poverty and hunger, but the necessity
had been felt not by the persons affected, but by the state. ^^

1.2 Genesis and Status of Banking Industry before

Nationalization
Banking in India has been in practice since times Immemorial. The
origin of banking in India can be traced back to as early as 500 B.C. Our
Vedas and Manusmhti bear a good testimony to the existence and working of
the banking system in India. From the laws of Manu, it appears that money
lending and allied activities had assumed considerable importance and the
deposit banking in some form had come into existence by the second or third
century of the Christian era.^^ During the smriti period, the business of banking
was carried out by the Vaish community. The bankers in the smriti period
performed most of these functions, which the modern time banks perform
such as accepting of deposits, granting loans to kings in grave crisis, acting
as a banker and treasurer to the state and issuing and managing the currency
of the country.^^ Similarly, during the Ramayana and Mahabharta era, banking
had become a full-fledged business activity. ^^

The literature of the Buddhist period supplies ample evidence

regarding the existence of Shresths, Seths, Shahukars and bankers in all the
important trade centres which had widespread influence on the society of the
day. The famous French traveller J.B. Travermer of the seventeenth century
has mentioned that every Indian village had money changers called Shroff
who, according to him, acted as a banker to make remittance of money and
issue letters of exchange. During the medieval period too, shahukars
continued to carry out the banking business. Prestion has admitted that the
system of banking had eminently suited India's the-then requirements and
was enforced in this country many centuries before the science of banking
became an accomplished fact in India.^^

During the Mughal period, the indigenous bankers were very

prominently connected with financing of trade, offering credit through the use
of certain banking instruments such as Hundis to the people for trade
purposes. However, these indigenous bankers were mainly from specified
communities like Vaishyas, Chettiars, Khattris, Aroras, Multans, Shroffs and
Rastogis, etc., and their activities were confined mostly to lending money,
though, sometimes, they used to accept deposits for safe-keeping, on which
they used to pay no interests while, at times, they used to charge some
service charges for safe-keeping. ^°

The first joint-stock bank which was established in India under

European auspices, was the 'Bank of Hindustan'. This institution was
established as a branch of the business of Alexander & Com, one of the
leading Calcutta firms of the period in the year 1770. Prior to that the function
of the banker had been exercised by the great agency house of Calcutta, who
besides being merchant and agents, conducted all branches of the banking
industry. They were agents of the whole of the military services, the planters
and the merchants scattered over the upper provinces and they were styled
as the merchant princes of India. In 1832, this bank was liquidated due to
failure of its parent firm. The next bank that came into existence in 1790 was
the 'Bengal Bank'. The Bengal Bank of 1790 has no connection whatever,
with the starting of present Bank of Bengal. ^^

The first presidency bank was established in Calcutta in 1806 under

the name of 'Bank of Calcutta'. Later on, in 1809, it was renamed as the 'Bank
of Bengal'. The other two presidency banks were 'The Bank of Bombay' and
'The Bank of Madras' which were established in 1840 and 1843 respectively.
In 1920, these banks were amalgamated and a new bank 'Imperial Bank of
India' was formed. Several other joint-stock banks were established in 1813,
but most of those banks did not stay for long and they did not confine
themselves to banking business only. The Audh Commercial Bank
established in 1881 was the first bank with limited liability. In 1894, the Punjab
National Bank was also established under the Indian Management. ^^

The Swadeshi movement that began in 1906 gave much stimulus to

banking and between this year and 1913 the number of banks with capital and
reserve of over Rs. 5 lac increased from 9 to 18 with a total paid up capital
and reserve of Rs. 4 crores and total deposit of Rs. 22 crores. The number of
banks established during this period was much greater. Some of the
prosperous Indian banks of the present time viz. the Central Bank of India,
Bank of India, Bank of Madras, Bank of Baroda and Bank of Mysore were
established during this period. The boom was followed by the banking crises
during 1913-1917. The major banking industry events during the inter-war
period (1918-39), were amalgamation of the three Presidency Banks into the
Imperial Bank of India in 1921 and the setting up of the Reserve Bank of India
in 1935. After the establishment of the Reserve Bank of India, the Imperial
Bank ceased to act as the Government Banker and banks' Banker. It was,
however, decided that the Imperial Bank of India will function as the sole
agent of the RBI at all places in India where the latter had no branches.^^

After Independence, where the first step was to create the legislative
framework appropriate for banking in the newly independent nation. The
Banking Regulation Act passed in 1948 provided the legal framework for
regulation of the banking system by the RBI. The Act prohibited the use of the
word 'Bank' by financial companies which were not complying with certain
minimum requirements such as minimum paid up capital and reserves.^
There were 620 banking companies operating mostly in state capitals and
urban centres. The Imperial Bank of India was the biggest bank those days
with 433 branches and present day subsidiaries of the State Bank of India
were independent banking companies mostly in the former princely states.
Beside the Indian Bank, there were 15 exchange banks (Foreign banks) with
branches in big cities only; and they were dealing mostly in financing the
export and import of companies.^^

With the introduction of economic planning in 1951, the branch

expansion by banks and increase in rural credit including credit to the small
scale sector became imperative. All India Rural Credit Survey Committee had
recommended setting up of State Bank of India as a strong commercial
banking institution with an effective machinery of branches, spread throughout
the country to stimulate banking development, by providing vastly extended
remittance facilities for the cooperative and other banks and by following a
policy, consistent with national policies adopted by the government without
departing the canon of sound business.^^ Consequently, the Imperial Bank of
India was nationalized in 1955 and renamed as State Bank of India. Later on,
in 1960, seven other banks were made subsidiaries of SBI.^^

There have been some qualitative changes in banking industry

activities during these years. There was a decline in the financing of textile
and sugar industries and emphasis was shifted to export financing and heavy
industries financing (viz. cement, chemicals, iron and steel). A review of
ownership of bank deposits during this period reveals the nexus between
business houses and banking companies, indicating the nature of control of
38
these banks by business houses.

1.3 Scenario of Banking Industry after Nationaiization

The Social Control Act of 1968 brought banking industry in the purview
of social lending and the nationalization of banks marked a phase of
government control and domination.^^ The ordinance to nationalize the 14
major banks having deposits of Rs. 50 crores or more was issued on ^9^^ July
1969 to serve better the needs of development of the economy in conformity
with the national priorities and objectives. This brought approximately 85
percent of all the bank deposits, advances and investment under the control
of the government. These 14 banks with 4135 branches had as total paid up
capital of Rs. 285 crores, their deposits and credit stood at Rs. 2714.80 crores
and Rs. 1683.66 crores respectively.'*^
 Eleven years after the nationalization of 14 commercial banks, the
government on 15*^ April 1980 took over six more scheduled commercial
banks, each with time and demand liabilities exceeding Rs. 200 crores
through an ordinance issued by the President. The banks were: Andhra Bank
Ltd., Corporation Bank Ltd., New Bank of India Ltd., Oriental Bank of
Commerce Ltd., Punjab and Sindh Bank Ltd. and Vijaya Bank Ltd.^^

The highlights of nationalized banking have put greater stress on

district credit planning, revamping of branch expansion policy, intensive hunt
for deposits mobilization, introduction of schemes and programmes like-Lead
Bank Scheme (LDB), differential rate of interest (DRI) scheme, 20 point
economic programme, Integrated rural development programme (IRDP) and
schemes for unemployed graduates etc. Thus, banking industry adopted a
new social philosophy of achieving socialistic pattern of society through
allocation of available resources to the poor and under privileged classes,
thereby raising levels of employment and income.^^

The year 1991-92 was a watershed in the economic history of Indla.^^

During this year many reforms were introduced in the Indian banking industry
sector. A framework of these reforms was provided by a report of the
Narasimham Committee. These reforms sought to enhance the efficiency,
productivity and ability of the banking system, to meet the challenges which a
market driven, competitive and outward looking Indian economy would place
on the financial system and prepare it for the 21®' century.^

1.4 Structure of Banking Industry in India

structure plays an important role in defining the authority and

responsibility of a particular organization. Who will work under whom is
defined by the organization? The present Indian banking system is constituted
by a number of Institutions comprising Reserve Bank of India, Indian
commercial banks, cooperative banks, regional rural banks, foreign banks and
other specialized banking institutions.
 As is evident from Figure 1.1, all the scheduled and non-scheduled
banks do functioning under the agencies of the RBI in rural as well as in urban
areas.

1.5 Cooperative Banking and Rural Areas

Cooperative means working together. The principle of cooperation is*

as old as human society. It is truly the basis of domestic and social life. What
is known as cooperative effort is ultimately the group instinct in man which
enables him to live together, work together and help each other in times of
stress and strain. The history of modern civilization is, in fact, the history of
cooperation, for without it social and economic progress would have been
impossible. According to E.R. Bowen, cooperation is the universal instrument
of creation.'*^ R. Philips is of the opinion that cooperative association is an
association of firms or households for business purposes and economic
institution through which economic activities are conducted in the pursuit of
economic objectives.^^ The Cooperative Planning Committee has defined
cooperation as a form of organization in which persons voluntarily associate
together on the basis of equality for the promotion of their economic interest.^^
The genesis of the cooperative movement and its application in rural areas
and in the economic field can be traced after the industrial revolution in
England during the second half of the eighteenth and the first half of the
nineteenth century. Cooperation is a new philosophy, therefore, developed as
a result against capitalism and is irrational in quality. The bane of capitalism
cooperation was conceived as an answer to the injustice of capitalism and
was developed as its antidote.

In 1937, there were 810000 cooperative societies of various types in

103 countries of the world. These societies had a membership of more than
143 million. If this membership represented a like number of families it would
correspond to something like 30 percent of ail the families in the world.^^
Since 1937, cooperatives have been growing by leaps and bounds
throughout the world.

10
 Structure of the Banking Industry

Reserve Bank of India

State Cix»pcrati\c
Banks

Foreign Bank' Indian Baziks

State Bank of India and Nationalized Regional Rural

its Association Banks Banks

Figure 1.1
Source: www.rbi.org.in

11
 The cooperative banking has a crucial role to play in the Indian
financial system and also for the rural development of India. The Cooperative
principles of managing finance in India serves a via media between the
sophisticated institutions like commercial banks on the one hand and the
unscrupulous money - lenders on the other. Despite the fact that nationalized
banks are spreading their operations into the rural areas, the cooperative
banking remains the best answer for catering to the need of small
borrowers.^^

By the end of the 19^ century the condition of rural masses in India
was quite deplorable. The countryside was studded with the problem of
poverty, ignorance, improvidence and ancestral debt and sudden outbreak of
natural calamities. The outcome of all these factors resulted in rural
indebtedness. With a view to saving the peasants from the clutches of money
- lenders, provincial government enacted several measures of relief, such as
Deccan Agriculture Relief Act (1879), Land Improvement Loan Act (1883) and
Agriculturist Loan Act (1884). These measures could not leave the impact
due to stringent and cumbersome official procedures. Later on, after series of
measures on the recommendation of committees, the first Cooperative
Societies Act 1904 came into existence.^"

The passage of this Act was the first milestone in the cooperative
movement in India. It aimed at encouraging thrift habits among poor peasants
and artisans by setting up cooperative societies which were classified as rural
and urban with the enactment of this Act, many credit societies started coming
up and by the end of 1909-10, there were 0.2 lac societies with about 1.60 lac
members and a working capital of Rs.6.80 million. There was, however, no
provision for the establishment of non-credit societies or central agencies,
such as central cooperative banks/federations. Moreover, registration as well
as cancellation of societies under the Act involved a lengthy procedure. In
order to rectify these shortcomings, the government passed a comprehensive
Cooperative Societies Act, 1912. It provided for registration of all types of
credit societies, non-credit and apex federations. In order to assess the
quantitative and qualitative progress of the movement, the Government of

12
India appointed a committee on cooperation in October, 1914 under the
chairmanship of Sir Edward Maclagon. The committee recommended the
establishment of central banks and district level and provincial banks and
federation of societies as apex banks/unions at the provincial level for the
purpose of supervision. Resultantly, a three-tier cooperative banking structure
emerged at the provincial level. In the post-Independence era, cooperation
has been assigned a notable role in bringing socio-economic changes through
the process of democratic planning with accent on assisting the weaker
section of the country. ^^

A cooperative bank has been defined by Divideas as a mutual society

formed, composed and governed by working people themselves for
encouraging regular savings and granting small loans on liberal terms of rate
of interest and repayment. According to a government publication,
cooperatives in the country's economy will not avoid excessive centralisation
and bureaucratic control likely to result from planning itself, but also curb the
acquisition instincts of the individual procedure or trader working for himself.

1.5.1 Financial Position of State Cooperative Banks

State Cooperative Banks are at the apex of three-tier cooperative

structure dispensing mainly short term and medium tenn credit. Table 1.1.
reveals that the owned funds of SCBs in India has risen up from Rs. 4535
crores in 1998-99 to Rs. 10718 crores in 2007-08, which indicates an increase
of 136.34 percent. During the period of study, the owned funds increased at
the rate of 10.22 percent compounded annually.

Borrowing of the SCBs has been increased to a great extent.

Borrowing which was Rs. 9739 crores in 1998-99, has increased up to Rs.
22164 crores in 2007-08. The average borrowing of SCBs had gone to the
tune of Rs. 14465 crores in this duration respectively. The compound growth
rate noted was 9.97 percent during the period under study.

Deposits in the Banks play an important role not only in making

disbursement possible but also in materializing various plans, policies and
other objectives of the banks. Proper deposits mobilization is a crucial factor

13
 for the overall development and performance of the bank. Table depicts the
deposits of SCBs which were recorded to the tune of Rs. 25788 crores in
1998-99 which has further gone to Rs. 52973 crores respectively during the
end of the study period (2007-08). During this period, the deposits have
shown increasing trends. The average deposits of SCBs have gone to the
tune of Rs. 39831 crores. The compound grovrth rate has been revealed to
the tune 8.66 percent.
Table 1.1
Financial Position of State Cooperative Banks in India
(Rs. in Crore)^

Year Owned Funds Deposits Borrowing Investments

4535 25788 9739 13011

1998-99
(-) (-) (-)
4911 29557 10859 15362
1999-00
(8.29) (14.62) (11.50) (19.92)
5839 32626 11693 16156
2000-01
(18.90) (10.38) (7.68) (5.17)
6712 36191 11673 16825
2001-02
(14.95) (10.93) (-.20) (4.14)
7978 39386 12209 19627
2002-03
(18.86) (8.83) (4.59) (16.65)
8473 43486 12457 22187
2003-04
(6.20) (10.4i) (2.03) (13.04)
9500 44335 14608 23303
2004-05
(12.12) (1.95) (17.27) (5.03
10545 45405 16989 27694
2005-06
(11.00) (4.78) (16.30) (18.84)

2006-07
10549 48560 22256 24140
(0.04) (6.95) (31.00) (-12.83)
10718 52973 22164 29060
2007-08
(1.60) (9.09) (-0.41) (20.38)

Total 79760 398307 144647 207365

Mean 7976 39831 14465 20737

C.G.R. 10.22 8.66 9.97 10.04

I 1 _ I I I
Note: Figures in parentheses indicate the percentages increased and decreased over the previous year
Source: Reports on Trends and Progress of Banking in India, Reserve Bank of India, Supplement to
RBI Bulletin (1998-99 to 2007-08)

14
 Investments of SCBs were noted to the tune of Rs. 13011 crores
during 1998-99, which further touched the figure of Rs. 29060 crores during
2007-08. It is also revealed that a maximum increase in investment has
registered the figure of 20.38 percent during the year 2007-08. The average
investment of SCBs has gone to the tune of Rs. 20737 crores in the study
period. The compound growth rate was 10.04 percent.

1.5.2 Financial Position of Central Cooperative Banks

The Central Cooperative Banks form the middle tier in the short-term
credit structure of cooperative credit institution. Table 1.2 indicates that the
owned funds of CCBs have been recorded to the tune of Rs. 8708 crores
during 1998-99 and have touched the level of Rs. 24754 crores during 2007-
08. The maximum increase in the owned funds of CCBs has recorded a hike
of 20.93 percent during 2000-01. The average owned funds in terms of
money have been registered in CCBs to the tune of Rs. 17605 crores. The
compound growth rate has gone to 13.78 percent during the study period.

The deposits of CCBs have revealed increasing trends during the

period under study. It has touched the figure of Rs. 45536 crores during
1998-99 and increased to the figure of Rs. 102986 crores respectively during
2007-08. A maximum increase in the deposits of CCBs has noted a hike of
19.13 percent during 2000-01. The average deposit has been registered in
CCBs to the tune of Rs. 75003 crores. The compound growth rate has gone
to 9.57 percent during the study period.

The borrowing of the CCBs also has also been showing increasing
trends. It has been noted that the borrowing of CCBs has been noted to the
tune of Rs. 12773 crores during 1998-99 and it has increased to the figure of
Rs. 26096 crores during 2007-08. The maximum increase in the borrowing of
CCBs has been recorded to the level of 23.52 percent during 2006-07. The
average borrowing has been recorded in CCBs to the tune of Rs. 20588
crores. The compound growth rate has gone to 8.71 percent during the period
under study.

15
 Table 1.2
Financial Position of Central Cooperative Banks In India
(Rs. in Crore)
Year Owned Funds Deposits Borrowing Investments

8708 45536 12773 20285

1998-99
(-) (-) (-) (-)
10116 54248 14658 22594
1999-00
(16.17) (19.13) (14.76) (11.38)
12233 61813 16937 27616
2000-01
(20.93) (13.95) (15.55) (22.23)
14141 68181 18820 28958
2001-02
(15.61) (10.30) (11.12) (4.86)
16836 73919 19639 31114
2002-03
(19.06) (8.42) (4.35) (7.45)
19131 79153 20256 35180
2003-04
(13.63) (7.08) (3.14) (13.07)
20498 82128 22575 35937
2004-05
(7.15) (3.76) (11.45) (2.15)
23450 87532 24217 36628
2005-06
(14.40) (6.58) (7.27) (1.92)
26180 94529 29912 41006
2006-07
(11.64) (7.99) (23.52) (11.95)
24754 102986 26096 44419
2007-08
(5.45) (8.95) (-12.76) (8.32)

Total 176047 750025 205883 323737

Mean 17605 75003 20588 32374

C.G.R. 13.78 9.57 8.7! 9.26

Note: Figures in parentheses indicate the percentages increased and decreased over the previous year
Source: Reports on Trends and Progress of Banking in India, Reserve Bank of India, Supplement to
RBI Bulletin (1998-99 to 2007-08)

Table 1.2 depicts the investment of the CCBs which was recorded to
the tune of Rs. 20285 crores during 1998-99 and which has further gone to
Rs. 44419 crores respectively during the end of the study period (2007-08). It
is also revealed that the maximum increase in investment has been registered
to the figure of 22.23 percent respectively during the year 2000-01. The
average investment of CCBs has gone to the tune of Rs. 32374 crores during
the study period. The compound growth rate was 9.26 percent.

16
1.6 Cooperative Credit System and Rural Development

The cooperative credit system in the country is structured into separate

arms for short-term credit (production Credit) structure and long-term credit
(Investment Credit) structure.^^

Cooperative Credit System In India

Cooperative Credil Inslitutions

kJtoTiUP'i-rViUiXi-J'^-T*!

al Cooperative Credit Urban Cooperative Banks

Institutions
'ssf^asB^sz^

Figure 1.2
Source: Yojana, April 2004, Vol. 48. No. 4, p. 24

17
1.6.1 Short Term Credit Structure and Rural Development
The short term credit structure of the cooperative is a three tier-
structure; Primary Agricultural Credit Societies (PACs) being at the bottom and
State Cooperative Banks (SCBs) at the top with District Central Cooperative
Banks (DCCBs) lying in between. The SCBs form the apex of the cooperative
credit structure in respective states and finance and control the working of the
DCCBs.
Table 1.3
Outstanding Loans and Advances of Short-Term Cooperative Credit
Institutions
(Rs. in Crore)
Loans and Loans and
Loans and Advances
Year Advances Advances Total
SCBs DCCBs PACs
21909 37272 21808 80989
1998-99
(-) (-) (-)
25709 44538 26278 96525
1999-00
(17.34) (19.49) (20.50) (19.18)

29861 52512 34522 116895

2000-01
(16.15) (17.90) (31.37) (21.10)

32678 59316 40799 132793

2001-02
(9.43) (12.96) (18.18) (13.60)

34761 64214 424 JI I4I386

2002-03
(6.37) (8.26) (3.95) (6.47)

35105 67152 43873 146130

2003-04
(.99) (4.58) (3.45) (3.36)

37353 73125 48785 159263

2004-05
(6.40) (8.89) (11.20) (8.99)

39684 79202 51779 170665

2005-06
(6.24) (8.31) (6.14) (7.16)

47354 89038 58620 195012

2006-07
(19.33) (12.42) (13.21) (14.27)

48228 r 91374 65666 205268

2007-08
(1.85) (2.62) (12.02) (5.26)

Total 352642 657743 434541 1444926

Mean 35264 65774 43454 144493

C.G.R. 9.34 10.60 13.34 11.04

Note: Figures in parentheses indicate the percentages increased and decreased over the previous year
Source: Reports on Trends and Progress of Banking in India, Reserve Bank of India, Supplement to
RBI Bulletin (1998-99 to 2007-08)

18
 The SCBs also serve as a link between National Bank for Agriculture
and Rural Development (NABARD), DCCBs and PACs. The function of the
DCCBs is to lend to village primary societies and to attract deposits from the
public and also serve as a link between SCBs and PACs. The purpose of
advancing of the short term credit to the people are to make them
economically self reliant. ^^

Table 1.3 shows that outstanding advances in SCBs have increased

significantly during the period under study. The total loans outstanding in
SCBs increased from Rs. 21909 crores in 1998-99 to Rs. 48228 crores in
2007-08, registering a highly significant compound growth of 9.34 percent per
annum. The maximum increase in the outstanding loans in the SCBs has
noted the hike of 19.33 percent during 2006-07. The average outstanding
advances have been registered in the SCBs to the tune of Rs. 35264 crores.

The loans outstanding in the DCCBs have increased from Rs. 37272
crores in 1998-99 to Rs. 91374 crores in 2007-08, depicting a highly
significant growth at the rate of 10.60 percent compounded annually. The
maximum increase in outstanding loans has been recorded during the year
1999-00 as Rs. 44538 crores (19.49 percent) over the previous year. The
average outstanding advances have been registered in the DCCBs to the
tune of Rs. 65774 crores.

Table 1.3 also reveals that outstanding loans of PACs have been
increased to a great extent. The outstanding advances outstanding of PACs
have been noted to the tune of Rs. 21808 crores during in 1998-99, which
have further touched the figure of Rs. 65666 crores during 2007-08. It is also
revealed that the maximum increase in loans outstanding has been registered
to the figure of 31.37 percent respectively during the year 2000-01. The
average outstanding advances of PACs have gone to the tune of Rs. 43454
crores. The compound growth rate was 13.34 percent during period the under
study.

The total outstanding loans in short term cooperative credit institutions

have increased from Rs. 80989 crores in 1998-99 to Rs. 205206 crores in

19
2007-08, registering a highly significant compound growth of 11 04 percent
per annum The maximum increase m outstanding loans has been recorded
during the year 2000-01 Rs 116895 crores (21 10 percent) over the previous
year The average advances outstanding of short term cooperative credit
institutions have been registered to the tune of Rs 144493 crores

1.6.2 Long Term Credit Structure and Rural Development

In order to meet the long-term requirement of small and marginal

formers, it v\/as thought that credit through an institution specially designed to
cater to the long term credit needs of the agncultunsts should be set up to
mobilize funds for release at the time of their need In this case also the rate
of interest charged has to be \O\N and the loanee may be asked to repay the
loan amount through easy installments The long term funding institution,
originally set up, has undergone changes in its nomenclature from Land
Mortgage Banks to Land Development Banks (LDBs) and now Agncultural
and Rural Development Banks ^^

The long term cooperative credit structure, comprising state

cooperative agnculture and rural development banks (SCARDBs) at the state
level and primary cooperative agriculture and rural development banks
(PCARDBs) at the district or block level, has been providing typically medium
and long term loans for making investment in agnculture, rural industnes and
in the recent period, housing ^^

The loans of the SCARDBs have revealed increasing trends during the
penod under study The table 1 4 shows that the outstanding advances of
SCARDBs recorded to the tune of Rs 10,444 crores in the year 1998-99,
which have reached Rs 18217 crores in the year 2007-08 The maximum
increase in loans has been recorded during the year 2001-02 at Rs 14147
crores (14 32 percent) over the previous year The average outstanding
advances have been registered in the SCADBs to the tune of Rs 15226
crores The compound growth rate has gone up 6 48 percent dunng the
penod under study

20
 The outstanding advances of the PCARDBs have been registered to
the tune of Rs. 6594 crores during 1998-99, w/hich have further gone to Rs.
9529 crores respectively during 2007-08. The maximum increase in the loans
of the PCARDBs has noted a hike of 23.69 percent during 2001-02. The
average advances of PCARDBs have gone to the tune of Rs. 10104 crores in
this duration. The compound growth rate has been 4.91 percent during the
study period.
Table 1.4
Outstanding Loans and Advances of Long-Term Cooperative Credit
Institutions
(Rs. in Crore)
Loans and Advances of LoaDs and Advances
Year Total
SCARDBs of P C A R D B s
10444 6594 17038
1998-99
(-) (-) (-)
11699 7273 18972
1999-00
(12.02) (10.30) (11.35)
12375 8070 20445
2000-01
(5.78) (10.96) (7.76)
14147 9982 24129
2001-02
(14.32) (23.69) (18.02)
15354 10809 26163
2002-03
(8.53) (8.28) (8.43)
16263 11311 27574
2003-04
(5.92) (4.64) (5.39)
17403 12622 30025
2004-05
(7.01) (11.59) (8.89)
17713 12740 30453
2005-06
(1.78) (-93) (1.43)
18644 12144 30758
2006-07
(5.26) (-4.91) (1.00)
18217 9529 27746
2007-08
(-2.29) (-21.34) (-9.79)

Total 152259 101044 253303

Mean 15226 10104 25330

C.G.R. 6.48 4.91 5.83

Note: Figures in parentheses indicate the percentages increased and decreased over the previous year
Source: Reports on Trends and Progress of Banking in India, Reserve Bank of India, Supplement to
RBI Bulletin (1998-99 to 2007-08)

The total loans and advances of the long-term credit institutions have
revealed increasing trends. Table 1.4 depicts that the total advances of long
term credit institutions have been noted to the tune of Rs. 17038 crores during
1998-99 and have increased to the figure of Rs. 27746 crores during 2007-08
respectively. The maximum total advances noted during 2001-02 have been
Rs. 24129 crores (18.02 percent) of the previous year. The average
advances of both (SCARDBs and PCARDBs) have gone to the tune of Rs.
25330 crores during the period under study. The compound growth rate has
been 5.83 percent.

1.7 Role of Banks in Economic Development vis-a-vis Rural

Development
Finance is the life blood of rural development. It helps in capital
formation and capital accumulation, w/hich is very necessary for building
infrastructure and setting up of basic and key industries which are essential
for long-term development. For ensuring capital formation, the financial
resources of the country should be mobilized in such as way that they are put
in productive channels. The resources of the individual savers are meagre
and scattered. Banks play an important role in mobilizing the savings of
economically surplus units which are widely scattered. The savings of
economically surplus units when pooled together in banks results in a large
reservoir of social capital.^

The Banking industry plays an important role in the development of a

country. A sound, progressive and dynamic banking system is a fundamental
requirement for rural development.^^ The banks render vital services to the
masses belonging to various sectors of the economy like agriculture, Industry
whether small scale or large scale and to the tertiary sector.^^ The banking
system is one of the few institutions that impinge on the economy and affect
its performance for better or worse. They act as a development agency and
are the source of hope and aspirations of the masses.^^

As a type of business, banks are middlemen between depositors and

borrowers.^° They play a significant role through their function of financial
mediation. They mobilize the resources of those who have excess of these
resources and due to some reasons cannot make a more profitable and
productive use of these resources and lend these to those who have
additional opportunities of investment due to entrepreneurial abilities. They in

22
this way guide the flow of resources in most productive channels.^^ Apart from
these activities, banks also perform a number of other allied functions, such
as providing remittance facilities inland as well as foreign to their customers,
undertaking agency functions, buying and selling securities, collecting
dividend and interest and acting as underwriters of security issue.^^

A developing economy faces many problems like poverty, scarcity of

capital, lack of entrepreneurship etc. There is dependence on agriculture and
at the same time agriculture is not modernized. The means of transport are
underdeveloped.^^ There are inter-regional and inter-sectoral disparities.
There is an unequal distribution of wealth. Banks can work as catalytic
agents of growth by following the right kind of policies in their working,
depending upon the socio-economic conditions prevailing in a country.^'' It Is
realized that since the banks have stupendous investment potentiality they
can make a significant contribution in eradicating poverty, unemployment and
they can bring about progressive reduction of inter-regional, inter-state and
inter- sectoral disparities through rapid expansion of banking industry
services.^^

Savings and investments are the most important ingredients of capital

formation, for an economy. Therefore, the promotion of domestic savings is
must to boost the process of capital formation and development. In fact,
capital formation is a function of generation and mobilization of savings into
productive activities/investment. Thus, the banks have the nature of a
catalyst, converting saving into capital for productive investment.^^

All the underdeveloped countries have primarily agricultural

economies, with low level of income, low standard of living and high
propensity to consume. The low level of income and high propensity to
consume lead to low savings, which in turn, results in low capital formation.
These economies, therefore, suffer from a vicious circle of poverty. Moreover,
with the existence of a large non-monetised sector in the economy and the
prevalence of widespread illiteracy conservatism among the masses, the
savings remain either unutilized or hoarded in the form of cash, gold and
silver or invested in land or real estate. Thus, savers' peculiar preferences are

23
also responsible, among other factors, for the meagre capital formation.^^
Therefore, any efforts to develop the economy requires an action to increase,
mobiles and appropriately channelise the domestic financial resources
towards productive investment in economy. This calls for not merely the
presence, but also an active role of the banking industry and other financial
institutions to meet the emerging needs of the economy.^^

Lewis has emphasized the key role of the bank credit in bringing about
a structural transformation of an underdeveloped economy. In the expansion
of the capitalist sector, the bank credit becomes a factor of fundamental
importance. Keynes and Schumpeter too have emphasized the role of credit
in rural development. It is more important that the hindrances and rigidities,
which operate in the underdeveloped countries, should not be strengthened
by the paucity of credit. David Rockfeller, Chairman of Chase Manhatta Bank,
has pointed out, the innovator looked to the bank for credit he needed to carry
out this plans. Ultimately, it was the banker, who provided the basic fuel
(credit) for rural as well as economic growth.®^

The Banking industry helps the large agricultural sector in a number of

ways. They open a network of branches in rural areas to provide agricultural
credit.^° They provide finance directly to agriculturists for the marketing of their
produce, for the modernization and mechanization of farms, for providing
irrigation facilities, for developing land, etc. They also provide financial
assistance for animal husbandry, dairy farming, sheep breeding, poverty
farming and horticulture. In India, for financing agriculture, various schemes
have been undertaken.''^ The small and marginal farmers, landless agricultural
workers, artisans and petty shopkeepers in rural areas are provided with
financial assistance through Regional Rural Banks (RRBs) in India. These
RRBs operate under commercial banks.^^ Thus, the banks meet the credit
requirements of all types of rural people.

The Banking industry helps the development of the industrial sector.

The banks finance the industrial sector in many ways. They provide short-
term, medium-term and long-term loans to industry.^^ In India, the banks
grant loans to small scale industrial units for expansion, modernization and

24
renovation and also provide them the v\^ith the working capital finance. In
addition to the industrial units, loans are also granted to technocrats,
technologists, technicians and entrepreneurs to set-up small scale industrial
units. Banks also give finance for promotion of industrial estates-for purchase
of land and construction of sheds. ^^ Besides, they underwrite the shares and
debentures of the large scale industries. Thus, they not only provide finance
for industry but also help in activating the capital market which is undeveloped
in growing economics.

The modern Indian banking industry has diversified their activities with
its entry into new non-traditional areas of business. These new areas include
mutual fund, merchant banking activities, management of capital issue, port
folio management, corporate counseling, project counseling, unden/vriting of
capital issue, hire-purchase finance, equipment leasing, venture capital and
factoring services.^^ These new activities by banks and their subsidiaries
result in the development of industry and trade in the country.

The Banking industry helps in developing both the internal and external
trade of a country. The banks provide loans to retailers and wholesalers for
their inventory. They also help in the movement of goods from one place to
another by providing all types of faculties, such as discounting and accepting
bills of exchange, providing overdraft facilities, issuing drafts etc. Moreover,
they finance both exports and imports of developing countries by providing
foreign exchange facilities to importers and exporters of goods.^^ In India,
financing of export credit has been given priority. Banks have refinance
facility against loans granted to this sector. Besides, in order to make credit
available at cheaper rates to this sector the Reserve Bank of India has fixed
ceiling on interest rates to be charged from exporters.^^

The Banking industry advances credit for the development of

employment generating activities in developing countries. They provide loans
for the education of young persons studying in engineering, medical and other
vocational institutions of higher learning. They advance loans to young
entrepreneurs, medical and engineering graduates and other technically
trained persons in establishing their own business. Such loan facilities are

25
provided by a number of banks in India. Tlius, the banks not only help in
human capital formation but also in increasing entrepreneurial activities in the
developing countries.

Further, the banks can break up the dualistic nature of economy by

bringing w/ithin their fold the non-monetized sector, the saving of which have
hitherto remained withheld from circulation, to make them a part of the
monetized sector. This breaking up of the non-monetized sector is by no
means a small job. It is rather a revolutionary endeavour in so far as it
impinges upon the centuries old habits and taboos of the people/^

By opening more branches in backward areas, the banks make credit

facilities available there. Also the funds collected in advanced regions through
deposits may be channelized for investment in the underdeveloped regions of
the country. In this way, they bring about more balanced regional
development.^^

The banking industry provides a range of services to the community.

They act as bankers for the issue of new capital. The marketing of securities
is done with the help of banks. The customers can arrange for the dividends
to be sent to their bank and paid directly into their bank accounts. Banks
undertake the payment of subscriptions, premia, rents and collection of
cheques, bills, promissory notes, etc. on behalf of their customers. Banks
undertake the issue of credit instruments like letters of credit and travelers
cheques, the acceptance of bills of exchange, the safe custody of valuables
and documents, the transactions of foreign exchange business, acting as a
referee as to the respectability and financial standing of customers, and
providing specialized advisory service to customers. Among the services
introduced by modern commercial banks during the last quarter of the 20*^
century the bank credit cards deserve special mention. The bank credit card
is a system by which a bank customer with many payments to make, instead
of drawing a cheque for each item, may simply instruct this bank to transfer to
the bank accounts of his creditors the sum due from him and he writes one
cheque debiting his account with the total amount. The credit cards are
introduced for use of credit - worthy customers. On the production of the card

26
by the user, the signature of the user is accepted on bills in shops and
establishments participating in the scheme. By providing these routine
services banks help in the growth of trade and industry to a great extent.^"

The role of the banking industry in the direction of establishing an

egalitarian society is also important. Banks can help in this direction by
suitably amending their lending policies. Too much insistence on the safety of
their advances will motivate them to lend to the people who can furnish good
security. Generally, such people have better resources. In these
circumstances, people of low means will not be in a position to avail
themselves of the facility of credit. Banks can design their lending policies in
such a way as may ensure sufficient credit to neglected sectors of the
economy and to those who do not have easy access to credit. The banking
industries can help in the process of development based upon social justice
by following the lending policies based upon the principle 'ability of the
enterprise to pay for itself and not on the principle of 'security of advance'. ^^

The importance of the Banking industry and its role in national

development have found to be of great significance in the history of economic
as well as rural development of different countries, including U.S.A., U.K.,
Japan and Germany. A major part of industrial loans floated in Germany were
placed in the capital markets with the assistance of credit banks. Accordingly,
these banks have always been deeply interested in the capital market. Their
interest has extended not only to capital floatation but also protection against
price fluctuations and current servicing (payment of interest, issue of new
coupon sheets, and soon).^^ Without the evolution of the banking industry,
particularly commercial banking, in the eighteenth and nineteenth centuries,
industrial revolution would not have taken place in England. Similarly, the role
played by the banking system during Japan's industrialization was extremely
important in providing necessary industrial capital, and often, entrepreneurial
guidance to rapidly growing industrial firms during the Meiji Years.^^

In nutshell, it may be concluded that the rural sector plays a significant

role in Indian economy. It affects directly or indirectly almost all the economic
activities in the country and provides employment to a maximum number of

27
people. It is the most important source of national income in India and also
supplies food for the survival of the entire population of India. The rural and
cooperative banking has a crucial role to play in the Indian financial system
and also for the rural development of India. The banks render vital services to
the masses belonging to the various sectors of the economy like agriculture,
industry whether small scale or large scale. The banks are expected to help
the government in Its pursuit of building up an egalitarian society with a rising
standard of living by designing their lending policies accordingly. Taking into
consideration the socio-economic environment of India the banks are not
expected to be inclined towards the already developed sector but towards the
underdeveloped and neglected sector of the economy. The banking industry
in India is supposed to help in the removal of poverty, creation of more
employment opportunities and in overcoming the disparities in the distribution
of income and wealth, minimizing the gap between the rich and the poor and
also in rural and urban areas. The procedure of advancing credit should be
made more simplified, and at the same time, efforts must be made to ensure
prompt recovery of the loan.

28
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30
35. Ibid.

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50. K.S. Pathania, Management of Cooperative Finance in India, Anmol

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51. Ibid., p. 45.

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53. K.K. Tripathy, "Cooperative Credit in Rural India", Yojana, Vol. 48., No. 4,
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31
54. Ibid, p. 25.

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58. Avtar Krishan Vashist, Public Sector Banks in India^ H.K. Publishers and
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61. W.M. Decay, The British Banking Mechanism, London, 1960, p. 16.

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66. C.L. Dhawan, "Role of Banks a Vehicle of Economic Progress and Instrument
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68. RBI, "Banking and Development", Report of an International seminar, 1970,

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69. David Rockfeller, "Creative Management in Banking", in J.K. Sharma (ed.).

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32
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33