UNIT - 1

INTRODUCTION TO RURAL BANKING

INTRODUCTION
Thus, with the advent of freedom, the vast Indian masses were being served by two different
types of institutions, the Cooperative and the commercial banks. However, the commercial
banking institutions confined their activities mainly to the urban sector and catered to the
need of trade, industry and commerce. Extending banking operations to rural areas for them
was economically unsound. Financing agriculture or rural cottage industries was too risky a
proposition. Rural branches were considered unprofitable and a drag in the competitive
atmosphere. The commercial banks had no social obligation; they were merely profit earning
institutions. The cooperative banks, on the other hand, generally served the rural and semi-
urban areas with the limited funds and unsophisticated working. Their progress during the
first half of the century was rather slow and though they had cut into the domain of traditional
village money-lenders, their position nonetheless remained largely intact and their
contribution fairly significant. Even as late as 1951-52, the moneylender met 70 per cent of
credit needs of the rural households. With commercial banks catering to only 0.9 per cent of
their requirements.
A production-oriented lending system is a pre-requisite for rapid rural development which in
turn can ensure the desired growth rate of the Indian economy as a whole and economic well-
being of its teeming millions.
India inherited from the alien rule in 1947 a financia1 system which was largely conditioned
by the limited horizon of British Governments' economic policy, and which was certainly not
tuned into the problem of a developing economy like ours.
The Indian banking system was largely under the control of RBI, which was established as a
Central Bank of the country in 1935. The government participation in its share capital was
nominal and to begin with and it was primarily a share-holders bank. Thus, with a view to
make RBI, an effective agency for regulating country's banking institutions, the government
of India resorted to its nationalisation in 1949 with the avowed intention that as a central
bank, it should have the onerous duty of serving the economic and social objectives laid
down by the national government apart from effectively dealing with the commercial banking
institutions compelling them to cooperate in the developmental endeavour. The RBI was also
simultaneously given vast powers to strengthen and consolidate the banking system in India.
The commencement of the First-year plan in 1951 further highlighted the desirability of
socially purposive banking where institutionalized savings could be invested into desirable
channels for accelerated rural development and to wean away the poor peasantry from the
moneylenders. On the recommendations of the All-India Rural Credit Survey Committee
(1954), the government brought under public ownership and control the Imperial Bank of
India, which was by far the largest among private sector banks with a view to give it a
pioneer role in the massive expansion of rural branch network after rechristening it as State
Bank of India. This was justified, "for extension of banking facilities on a large scale, more
particularly, in the rural and semi-urban areas and for diverse other public purposes". But the
commercial banks, by and large, served only a small fringe of rural population. This neglect
continued till sixties. The Gadgil Study group revealed in 1967 that there were many districts,
each of the size of a small country without any branch of a commercial bank.
In July, 1969, the government acquired direct control over a large segment of banking system
when it decided to nationalise 14 commercial banks of the country. Signifying its
commitment to reshaped the banking system, "to meet progressively and, serve better, the
needs of the development of the economy in conformity with national policy and objectives".
Six more banks were nationalised in 1980 and thus 90% of the banking business was brought
under public ownership and control. Branch expansion thereafter received a tremendous fillip
in the Seventies and Eighties. The quantitative growth was quite impressive but more
impressive had been the innovations in policy organisation and strategies to meet the
aspirations of a developing country. The banking sector in India comprises the commercial
banks, cooperative banks and Regional rural banks.
Evolution of Rural Banking
Rural banking in India has evolved over several decades, shaped by the country's socio-
economic needs, agrarian economy, and the government's focus on financial inclusion. The
historical trajectory of rural banking is intertwined with the development of agriculture and
rural livelihoods.
1. Pre-Independence Period
Before India's independence in 1947, the rural credit system was largely informal and
unregulated. Rural communities primarily relied on moneylenders, landlords, and traders for
loans. These lenders charged exorbitant interest rates, often leading to the exploitation of
farmers and other rural borrowers.
 Cooperative Movement (1904): The Cooperative Societies Act of 1904 marked the
beginning of formal rural credit institutions in India. It aimed to organize farmers into
cooperative societies to provide affordable credit and protect them from
moneylenders. This movement laid the foundation for cooperative banks, which
became crucial players in rural finance.
2. Post-Independence Era
After independence, rural banking became a major focus of India's development strategy. The
Indian government recognized that access to formal credit was essential to support
agriculture, alleviate poverty, and promote rural development.
Key Milestones (1950s-1970s):
 All India Rural Credit Survey (1951): This survey revealed the inadequate reach of
formal credit in rural areas and recommended the creation of a more robust banking
infrastructure to serve rural communities. It led to several important initiatives aimed
at expanding rural banking.
 State Bank of India (SBI) Act, 1955: The establishment of SBI as the country’s
largest public sector bank was crucial in expanding rural banking. SBI was mandated
to extend banking services to rural and semi-urban areas.
  Nationalization of Banks (1969): A landmark moment in India's banking history, the
nationalization of 14 major commercial banks under Prime Minister Indira Gandhi’s
government was intended to extend banking services to neglected areas, especially in
rural regions. This step significantly increased the presence of formal banking in rural
India.
Cooperative Banking Expansion (1950s-1960s):
The government heavily promoted the cooperative banking model, designed to provide short-
term and long-term agricultural credit. Cooperatives operate at different levels:
 Primary Agricultural Credit Societies (PACS): At the village level.
 District Central Cooperative Banks (DCCBs): At the district level.
 State Cooperative Banks (SCBs): At the state level.
These cooperatives became a critical part of the rural credit ecosystem, offering agricultural
loans and supporting rural industries.
3. Regional Rural Banks (RRBs) and Priority Sector Lending
By the 1970s, despite the expansion of cooperative banks and the nationalization of
commercial banks, there were still gaps in rural credit access, particularly for small and
marginal farmers. This led to further policy reforms.
Establishment of Regional Rural Banks (1975):
 The Regional Rural Banks Act of 1976 established RRBs with the goal of bridging the
gap between commercial banks and cooperatives. RRBs were designed to provide
credit and other financial services specifically to the weaker sections of society, such
as small farmers, landless laborers, and rural artisans.
 RRBs were sponsored by large public sector banks, but they operated with a local
focus, ensuring they catered to rural areas.
Priority Sector Lending (PSL):
Introduced by the Reserve Bank of India (RBI) in the 1970s, PSL mandated that banks
dedicate a portion of their total lending to sectors that are considered priority for economic
development, such as agriculture, small-scale industries, and weaker sections of society. This
significantly enhanced credit flow to rural areas.
4. Formation of NABARD (1982)
The establishment of the National Bank for Agriculture and Rural Development
(NABARD) in 1982 marked a major step in rural banking reform. NABARD was created to
provide and regulate credit for the promotion of agriculture, small-scale industries, and rural
infrastructure. It became the apex institution for financing rural development and supporting
rural banks through refinancing, capacity building, and policy formulation.
5. Liberalization and Financial Inclusion (1990s-Present)
The economic reforms of the 1990s and the liberalization of India’s financial system brought
changes to rural banking, alongside an increased focus on financial inclusion.
Key Developments:
 Self-Help Groups (SHG) and Microfinance (1992): The SHG-Bank Linkage
Program, launched by NABARD, linked informal savings groups in rural areas with
formal banking institutions. This program aimed to promote savings and credit among
the rural poor, particularly women, and fostered the growth of microfinance in India.
 Kisan Credit Card (KCC) Scheme (1998): Launched by NABARD, the KCC
scheme made it easier for farmers to access short-term credit for their agricultural
needs, such as buying seeds, fertilizers, and equipment.
 Pradhan Mantri Jan Dhan Yojana (PMJDY) (2014): A major financial inclusion
initiative launched by the government aimed at providing every household with
access to a basic savings account. The scheme targeted the unbanked population,
especially in rural areas.
 Digital and Mobile Banking: In recent years, technology has played a vital role in
expanding rural banking services. Mobile banking, internet banking, and FinTech
solutions have made it easier for rural populations to access financial services,
overcoming the limitations of physical bank branches.
6. Challenges and Opportunities
Despite these historical developments, rural banking in India continues to face challenges,
such as:
 Low banking penetration in remote areas.
 High levels of non-performing assets (NPAs), especially in agricultural lending.
 Low financial literacy among rural populations.
However, the rise of digital banking, financial technology (FinTech), and government-backed
financial inclusion schemes offer significant opportunities for improving access to credit,
savings, and insurance in rural areas.
RURAL BANKING
Rural banking ensures the flow of credit to the rural economy through a multi- agency
approach. These multiple agencies are - Commercial Banks, Co-operative Banks and
Regional Rural Banks. These banks provide short term, medium term and long-term loan.
The short-term loans or crop loans are most prominent because it is availed by marginal and
small farmers who form the major portion of the farming community. One of the modes of
disbursal of crop loan is through Kisan credit Card which ensures that the credit is available
to the farmer immediately when he needs it. It is a fast mode of disbursing short term credit
to farmers so that they can purchase the agricultural inputs on time. Among the multiple
agencies, co-operatives are the most widespread channel for delivering rural credit, especially
the crop loans. The short-term co-operative credit structure comprises of three layers –
Primary Agricultural Co-operatives at village level, District co-operative Banks at district
level and State Co-operative banks at state level. Though co-operatives have a robust
outreach, they have not lived up to the expectation in terms of delivering agricultural credit
because of lack of professionalism, poor governance structure, restrictions on operational
area and limited choice of product. Credit is not the only aspect which drives agricultural
productivity. There are other requirements like access to quality inputs, access to market, and
access to technology which if provided along with credit, can bring prosperity to the farm
sector. Commercial Bank, Cooperative Banks and Regional Rural Bank are the pillars for
delivering credit to the remote areas but each of them has their own share of achievements
and pitfalls. Like every institution, they also possess some strengths and some weaknesses
but overall, each of them has immensely contributed to rural prosperity.
Rural banking in India plays a critical role in promoting financial inclusion and supporting
the economic development of the country’s vast rural population. Given that around 65% of
India's population resides in rural areas, ensuring that these communities have access to
banking services is essential for fostering agricultural growth, rural entrepreneurship, and
overall economic empowerment.
Structure of Rural Banking in India
1. Regional Rural Banks (RRBs):
o RRBs were established in 1975 to cater to the financial needs of the rural poor,
particularly small and marginal farmers, agricultural laborers, artisans, and
rural entrepreneurs.
o RRBs operate under a hybrid model, combining features of commercial banks
and cooperative banks. They are jointly owned by the Government of India,
respective state governments, and sponsor banks (public sector banks).
o The mandate of RRBs includes the provision of banking services in
underserved areas, particularly in rural regions, and the extension of credit to
the priority sector, including agriculture, micro-enterprises, and weaker
sections of society.
2. Cooperative Banks:
o Cooperative banks in India have a long history of serving rural populations
through a three-tier structure: State Cooperative Banks (SCBs), District
Central Cooperative Banks (DCCBs), and Primary Agricultural Credit
Societies (PACS).
o PACS are the foundation of the cooperative banking system at the village level
and offer short-term and medium-term loans to farmers and small-scale
businesses.
o Cooperative banks aim to provide affordable credit, particularly to farmers,
and help in the development of rural economies through self-help and mutual
cooperation.
3. Commercial Banks:
 o Public and private sector banks are required to extend their services to rural
areas, as part of the Reserve Bank of India's (RBI) Priority Sector Lending
(PSL) guidelines.
o Under this mandate, commercial banks allocate a certain percentage of their
total credit to priority sectors, including agriculture, micro and small
enterprises, education, and housing for economically weaker sections.
o Many commercial banks have established rural branches and use banking
correspondents (BCs) and mobile banking to reach the rural population.
4. Self Help Groups (SHGs) and Microfinance Institutions (MFIs):
o SHGs, usually composed of women in rural areas, are a key part of rural
financial inclusion in India. These groups provide their members with access
to small loans, savings mechanisms, and financial literacy programs.
o MFIs also play a crucial role in rural banking by offering small-scale loans to
low-income individuals, particularly those who do not have access to
traditional banking services.
5. Post Office Savings Bank (POSB):
o India Post operates a vast network of post offices, many of which are located
in rural areas. The Post Office Savings Bank provides basic banking services
like savings accounts, recurring deposits, and other small investment options.
o The India Post Payments Bank (IPPB), launched in 2018, aims to leverage the
postal network to provide banking services to unbanked and underbanked rural
populations.
Key Schemes and Initiatives Promoting Rural Banking
1. Pradhan Mantri Jan Dhan Yojana (PMJDY):
o Launched in 2014, this flagship financial inclusion program aims to ensure
that every Indian household, particularly in rural areas, has access to a basic
savings bank account.
o Under this scheme, beneficiaries can open zero-balance bank accounts, access
direct benefit transfers, insurance, and pension schemes.
2. Kisan Credit Card (KCC):
o Introduced in 1998, the KCC scheme provides farmers with credit for crop
production and other agricultural needs, including post-harvest expenses.
o KCC allows for the quick and flexible disbursement of funds, helping farmers
manage their finances more efficiently.
3. Micro Units Development and Refinance Agency (MUDRA) Scheme:
o The MUDRA scheme provides loans to small and micro-enterprises in rural
areas, with a particular focus on women and marginalized sections of society.
 o MUDRA loans are provided under three categories: Shishu (up to ₹50,000),
Kishore (₹50,000 to ₹5 lakh), and Tarun (₹5 lakh to ₹10 lakh).
4. National Bank for Agriculture and Rural Development (NABARD):
o NABARD is a crucial institution that focuses on promoting rural development
through financial and technical assistance.
o It supports agricultural and rural development projects, refinances loans, and
encourages innovations in rural banking.
5. Direct Benefit Transfer (DBT):
o Under the DBT scheme, government subsidies, pensions, and social welfare
benefits are directly transferred into the beneficiaries’ bank accounts,
minimizing leakage and ensuring that funds reach rural populations efficiently.
Challenges in Rural Banking in India
 Low Financial Literacy: A large portion of rural populations in India still lacks
awareness of formal banking systems and services.
 Physical and Digital Infrastructure: Many rural areas suffer from inadequate
infrastructure, including poor connectivity, making it difficult to extend banking
services.
 Credit Risk: Agricultural income is subject to risks such as weather fluctuations,
making rural loans more prone to defaults.
 Limited Reach of Formal Institutions: While banking networks have expanded,
many remote areas still lack access to formal financial institutions.
Digital Transformation and the Future of Rural Banking
With the rapid growth of digital banking technologies, rural banking is poised for significant
transformation. Initiatives like the Unified Payments Interface (UPI), mobile banking, and
the Aadhaar-based payment systems are making financial services more accessible to rural
populations. The government’s focus on financial literacy and digital literacy, alongside
investments in rural infrastructure, will further strengthen rural banking in the coming years.
In conclusion, rural banking in India is a vital tool for empowering rural communities,
supporting agriculture, and enhancing the overall financial inclusion of the rural population.
By addressing existing challenges and leveraging technological advancements, rural banking
can continue to drive socio-economic growth across India’s diverse and often underserved
rural regions.
REGIONAL RURAL BANKS FORMATION
Rural banking is popular for very small towns and farmers who live far away from areas of
larger population and cannot make the drive to these locations even when they need to use
banking services. Typically, an agent of the bank will visit these rural locations and offer to
make transactions in an official capacity. The regional rural banks 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 faculties, particularly to small and marginal farmers, agricultural labourers artisans
and small entrepreneurs and for matters connected therewith and incidental thereto. 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
marginalised sections. In order to provide access to low-cost banking facilities to the poor, the
Narsimham Working Group 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 organisations 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 agricultural
strategy, that is, the green revolution, which by the mid-seventies was ready to spread more
widely throughout the Indian countryside. In addition, the potential and the need for
diversification of economic activities in the rural areas had begun to be recognised and this
was a sector where the Regular Rural Banks could play a meaningful role. The Regional
Rural Banks were established on 2nd October 1975. The main objectives of these banks are
to provide credit and other facilities particularly to small and marginal farmers and small
entrepreneurs so as to develop agriculture trade, commerce industry and other productive
activities in rural areas. The aim of rural banks is to bridge the credit gaps existing in the rural
areas and they are supposed to be effective instruments of economic development in rural
India. They will extend productive credit to the rural community, and they will have purely
rural orientation in their activity and in the manner of extending their activity. Regional rural
banks (RRBs) are Indian scheduled commercial banks operating at regional level in different
states of India. They have been created with a view of serving primarily the rural areas of
India with basic banking and financial services. The area of operation of Regional Rural
Banks is limited to the area as notified by Government of India covering one or more districts
in the state. Regional Rural Banking perform various functions.
These are as follows:
 Providing banking facilities to rural and semi-urban areas
 Carrying out government operations like disbursement of wages of MGNREGA workers,
distribution of pensions etc.
 Providing para-banking facilities like locker facilities debit and credit cards, mobile banking
internet banking etc.
Functions of Regional Rural Bank
 RRBs grant loan and advances to small farmers and agricultural labourers so that can start
their own farming activities including purchase of land seed and manure.
 RRBs provide banking services at the doorsteps of the rural people particularly in those
areas which are not served by any commercial bank.
 The RRBs charge a lower rate of interest and thus they reduce the cost of credit in the rural
areas.
 RRBs provide loan and other financial assistance to entrepreneurs in villages sub-urban
areas and small towns so that they become able to enlarge their business.
 Loans to artisans to encourage them for the production of artistic and related goods.
 Encourage the saving habit among the rural and semi-urban population.
A rural bank focuses on providing savings and credit services to people who live in rural
areas. The financial products offered respond to the needs of its clients. A rural bank is a
smaller size in assets than the very large banks. It is located generally in smaller cities and
concentrates in making loans and other services to those immediate locations.
Earlier commercial banks hesitated to open the rural branches due to profitability,
infrastructure etc. So, the government of India and Reserve Bank of India decided to open a
new banking channel i.e. regional rural banks. These banks were allowed to work within a
district. The focus of regional rural banks was to provide finance in the agricultural sector
only. They were not allowed to finance for vehicles, housing, business loan etc. The salary of
regional rural banks was less than the commercial bank. The capital sharing of this district
level was 50% of sponsored commercial bank. 35% of central Government and remaining
15% of the state Government. The competition in the banking sector changed all basic rules.
The regional rural banks were allowed to finance in every sector. The salary of the employees
of the RRBs is equal to commercial bank employees. The sponsored banks were allowed to
merge the different district regional rural banks within a state. Rural banking has become
integral to the Indian financial markets. With the majority of Indian population still living in
rural or semi urban area, the Government of India and Reserve Bank of India have been
continuously working to achieve complete financial inclusion, that is, timely and sufficient
access to financial services and credit at an affordable cost in the vast expanse of our country.
Pradhan Mantri Jan Dhan Yojana is one of the recent initiatives by the BJP Government
which has definitely contributed to bring banking to every household. This scheme with time
will significantly reduce the gap between rural and urban areas in terms of financial
inclusion. But the fact that about 70% of population of India is still rural and the penetration
of banking facilities is as low as only 24%, i.e., only this percentage of people in these areas
have formal bank accounts, cannot be ignored. Various Regional Rural Banks have been set
up under the Regional Rural Banks Act, 1976 to provide a continuous source of credit for
agriculture and other activities. These banks were set up with the aim of reaching every
corner of the country and cater to financial needs of rural society comprising small and
marginal farmer, agricultural labourers, self-help groups, artisans etc. The credit to weaker
sections was made haggle-free and given at cheap or concessional rates.
The bank has to keep in mind subtleties of the rural culture and understand that the rules of
rural economy are different from urban dynamics. However, with increased mobility and
connectivity the urban and rural integration has increased and many factors which made the
urban landscape have come to mark rural settings as well. This has led to diversification in
activates and people have started to look at other factors of employment too Agricultural
activities have also been significantly commercialised with increased role of cash crops.
Thus, banks are getting a strong demand for credit for both agricultural and non-agricultural
uses. Bankers, however, have to pay attention to these little cultural cues and customer profits
and accordingly carry their services. The staff has to identify with rural customers who are
not used to banking procedures and need extra assistance at every step. This will help
customers to avail full benefit of banking without any hesitation. The Pradhan Mantri Gram
Sadak Yojana or PMGSY is a nationwide plan in India to provide good all weather road
connectivity to unconnected villages. The centrally sponsored scheme was introduced in 2000
by then Prime Minister of India Shri Atal Bihari Vajpayee. The Assam Tribunal has reported
that the scheme has started to change the lifestyle of many villagers as it has resulted in new
roads and upgradation of certain inter-village routes in Manipur. The objective of the
Swarnjayanti Gram Swarozgar Yojana (SGSY) is to bring the assisted poor families above the
poverty line by ensuring appreciable sustained level of income over a period of time. The
objective is to be achieved by inter alia organising the rural poor into Self Help Groups
(SHGs) through the process of social mobilization, their training and capacity building and
provision of income generating assets. The SHG approach helps the poor to build their self-
confidence through community action interactions in group meetings and collective decision
making enables term in identification and prioritization of their needs and resources. This
process ultimately lead to the strengthening and socio-economic empowerment of the rural
poor as well as improve their collective bargaining power.
REGIONAL RURAL BANKS
On the birth anniversary of Mahatma Gandhi, October 2, 1975, Regional Rural Banks were
established with a view to increasing the availability of rural credit. Among the various
institutional agencies engaged in rural credit, Regional Rural Banks (RRBs) play a significant
role. These are specially designed financial institutions working under the guidance of
NABARD. They are spread across rural areas with a wide network of branches catering to
credit needs of the farmers and other segments of the rural economy.
Objectives
The main need and objective of the RRBs is to provide credit and related facilities to the
small and marginal farmers, agricultural labourers and artisans, who had, not been adequately
served by the existing credit institutions.
Organization
The RRBs are promoted by ‘Sponsor banks’, which are usually public sector banks. The
steering committee on RRBs identifies the districts requiring these banks. Later, the Central
Government sets up RRBs with the consultation of the state government and the sponsor
bank. Each RRB operates within local limits as specified by the Government. The bank can
establish its branches at any place within the notified area.
Capital
The authorized capital of an RRB is ₹5 crore, which may be increased or reduced by the
Government but not below its paid-up capital of ₹25 lakh. Of this, 50 % is subscribed by the
Central Government, 15 % by the State Government and 35 % by the sponsor bank.
Management resources
Each RRB is managed by a Board of Directors. It includes a general superintendent and nine
members as Board of Directors. The Central Government nominates three directors, the State
Government has two directors, and the sponsor bank nominates three directors. The
chairman, usually an officer of the sponsor bank, is appointed by the Central Government.
The Board of Directors is required to act on business principles and in accordance with the
directives and guidelines issued by the Reserve Bank. At the state level, State Level
Coordination Committees have also been formed to have uniformity of approach of different
RRBs.
Resources
RRBs generate their resources by way of following:
 Share capital
 Deposits from the public
 Borrowing from sponsor banks
 Re-finance from NABARD
Further, RRBs have also been granted the status of scheduled banks by the Reserve Bank of
India. They are allowed to maintain cash reserves at the rate of 3 per cent of their demand and
time liabilities till December, 2002. The RRBs are allowed to offer 1½ per cent additional
rate of interest on their deposits over the rate offered by commercial banks. The deposits of
the banks are also insured by Deposit Insurance and Credit Guarantee Corporation of India
Ltd. This is to protect the interest of the depositors.
Functions
Functions of RRBs are broadly categorized as follows:
1. Functions related to agricultural activities:
In the context of agricultural activities, RRBs performs the following functions: RRBs grant
loans and advances to small and marginal farmers and agricultural labourers. The loans and
advance are granted to individual farmers or groups of farmers or to co-operative societies. It
is done to ensure that the loans are invested in productive activities so that there is value
addition and generation of employment. The agricultural marketing societies (receiving such
loans) are expected to sell the farmers produce at the right time, right place and the right
price. By offering loans to the small and marginal farmers, RRBs play a crucial role in
eliminating the menace of moneylenders and land landlords who would desire to keep the
borrowers in a state of perceptual dependence and vulnerability.
Doorstep banking service:
RRBs provide banking services at the doorsteps of the rural people, particularly in those areas
that are not served by the commercial banks. The RRBs mobilize rural saving and accept
deposits. These are channelized into productive activities. This function of the RRBs
motivates rural people to save, avoiding conspicuous consumption.
2. Functions related to non-agricultural activities:
RRBs perform the following functions relating to non-agricultural activities: Loans to
artisans: RRBs provide loans to artisans to encourage the production of the artistic and related
goods. We know, artisans in the rural areas have extremely meagre resources and barely
manage to make a living by selling their handmade artistic goods. They do have an
enterprising spirit, but it remains dormant owing to the lack of funds. By offering easy and
cheap credit, the RRBs enable the artisans and skilled workers to make their both ends meet
by selling their artistic goods in the market. If these fellows get a financial help, they will be
able to buy raw material and other required material for the production of their goods and
thus they can improve the quality of their goods. The sale of the improved quality of goods
can provide them with good income and thus they can raise their standard of living.
Loans to small entrepreneurs:
There are a large number of small entrepreneurs in the villages, sub-urban areas and small
towns who are engaged in retail trade, commerce and other productive activities. These
entrepreneurs have insufficient means to carry on their business activities. The RRBs offer
loans to them at a very low rate of interest. It is to help them buy raw materials and spare
parts for the maintenance of their fixed assets. The RRBs also grant loans to self-employed
persons enabling them to enhance their income for a reasonable standard of living.
Consumer loans:
RRBs offer consumer loans to weaker sections including small and marginal farmers,
scheduled castes, scheduled tribes and other borrowers of small means. This is to ensure that
weaker sections of the society do not suffer deprivation in essentials of life. Poverty
alleviation programme: RRBs are expected to play a pivotal role in bringing people below
poverty line into the mainstream of national life. As a part of the national agenda on
economic reforms, RRBs are expected to launch such programmes that strive to lift the poor
out of the dark-hole of poverty. Generation of employment opportunities at the grass root
level is to be the central theme of the poverty alleviation programmes.
Over the time, banking functions of RRBs have tended to expand. They have also started
giving loans and advances for the purchase of consumer durables and other purposes, on the
security of gold ornaments. They have also been permitted to issue guarantees on behalf of
their clients. These banks can also issue travellers cheques as agents of their sponsoring bank
and also provide locker facilities. They can purchase drafts and cheques up to the value of
₹25,000 and ₹1,00,000, respectively per customer and per branch.
NEED OF RURAL BANKING

 Financial Inclusion: Rural banking helps in bringing financial services to underserved and
remote areas. Many rural communities lack access to traditional banking services, so rural
banks can provide essential financial products like savings accounts, loans, and insurance.

 Economic Development: By providing credit and financial services to farmers, small

businesses, and rural entrepreneurs, rural banks can stimulate economic activity and growth
in these areas. Access to loans and credit helps in expanding agricultural activities, investing
in small enterprises, and improving local infrastructure.

 Poverty Alleviation: Access to banking services can help reduce poverty by providing
individuals with the means to save, invest, and manage their finances more effectively. This
can lead to improved living standards and economic stability.

 Agricultural Support: Rural banking often supports agricultural activities by offering

tailored financial products such as crop loans, agricultural insurance, and investment in
farming equipment. This support is vital for increasing productivity and ensuring food
security.
 Infrastructure Development: Rural banks can facilitate investments in local
infrastructure projects such as roads, schools, and healthcare facilities, which are crucial for
improving quality of life and economic opportunities in rural areas.

 Financial Education: Rural banks can play a role in educating people about financial
management, savings, and investment. Financial literacy programs can help rural residents
make informed financial decisions and avoid exploitation.

 Social Stability: Access to financial services can contribute to social stability by providing
a safety net and reducing economic inequalities. It can also help in building a more resilient
rural economy that can better withstand external shocks.

 Government Schemes and Subsidies: Rural banks often act as intermediaries for
government schemes and subsidies aimed at rural development. They help in disbursing
benefits and ensuring that support reaches the intended beneficiaries.

PROVISIONS OF RRB ACT 1976

The Regional Rural Banks (RRB) Act of 1976 is structured into several chapters, each
detailing different aspects of the establishment, operation, and regulation of RRBs. Here is a
short explanation of each chapter along with important points:
Chapter I: Preliminary
Purpose: This chapter provides the definitions and interpretations of key terms used in the
Act.
Defines terms like "Regional Rural Bank," "Board of Directors," "Central Government," and
others.
Key Terms:
 "Regional Rural Bank": A bank established to provide financial services in rural
areas.
 "Central Government": The Government of India.
Sets the stage for understanding the scope and application of the Act.
Chapter II: Establishment and Incorporation of Regional Rural Banks
Purpose: Outlines the formation and incorporation of RRBs.
o Authorizes the creation of RRBs with the approval of the central government.
o Specifies the regional area each RRB will serve.
o Details the initial capital contributions from the central government, state
governments, and sponsoring banks.
 Capital Structure:

 Initial capital is contributed by:

o Central Government: 50%
 o State Government: 15%
o Sponsoring Bank: 35%

 Number of Banks: Initially, 22 RRBs were established in different regions.

Chapter III: Management of Regional Rural Banks
Purpose: Defines the management structure and governance of RRBs.
o Describes the composition of the Board of Directors, including representatives
from the central government, state governments, and the sponsoring bank.
o Provides for the appointment of the Chairman and Managing Director.
o Specifies the powers and responsibilities of the Board in managing the bank’s
affairs.
 Board of Directors:

 Chairman: Appointed by the central government.

 Managing Director: Appointed by the central government.
 Board Composition:
o Central Government: Nominee Directors.
o State Government: Nominee Directors.
o Sponsoring Bank: Nominee Directors.

 Management Structure: Aimed at ensuring effective governance and management.

Chapter IV: Functions of Regional Rural Banks
Purpose: Details the operational functions and services provided by RRBs.
o Empowers RRBs to accept deposits, provide loans, and offer other banking
services to rural customers.
o Emphasizes the focus on meeting the financial needs of small farmers,
artisans, and rural enterprises.
o Allows RRBs to participate in government schemes aimed at rural
development.
 Services Provided:

 Deposit Mobilization: Accept savings and fixed deposits from rural clients.
 Credit Disbursement: Provide loans for agriculture, small businesses, and rural
development.
 Government Schemes: Implement schemes like the National Bank for Agriculture
and Rural Development (NABARD) schemes.

 Focus: Small farmers, artisans, and rural enterprises.

Chapter V: Regulation and Supervision
Purpose: Covers the regulatory framework and supervision of RRBs.
 o States that RRBs are regulated by the Reserve Bank of India (RBI) and
National Bank for Agriculture and Rural Development (NABARD).
o Outlines the role of these bodies in ensuring compliance with banking norms
and maintaining financial stability.
o Details the reporting requirements and audits to ensure transparency and
accountability.
 Regulatory Bodies:

 Reserve Bank of India (RBI): Oversees banking operations and compliance.

 National Bank for Agriculture and Rural Development (NABARD): Supervises
development and performance.

 Reporting:

 RRBs are required to submit quarterly and annual reports on financial performance to
regulatory bodies.

Chapter VI: Financial Provisions

Purpose: Addresses the financial aspects related to the functioning of RRBs.
o Provides for the initial and subsequent capital contributions from the central
government, state governments, and sponsoring banks.
o Includes provisions for financial support and subsidies from the government
for specific projects.
o Specifies the management of funds and financial operations within the bank.
 Initial Capital:

 Initial capital set at ₹5 crore per bank (subject to revision).

 Financial Support:

 Government may provide subsidies and financial support for specific schemes.

 Operational Funding:

 Fund management involves contributions from central and state governments and
sponsoring banks.

Chapter VII: Offenses and Penalties

Purpose: Defines the offenses related to the functioning of RRBs and the penalties for
violations.
o Lists offenses such as fraudulent activities, mismanagement, and non-
compliance with regulations.
 o Specifies the penalties and legal consequences for individuals or entities found
guilty of such offenses.
 Offenses:
o Includes fraud, mismanagement, and non-compliance with regulations.
 Penalties:
o Penalties can include fines and imprisonment, depending on the severity of the
offense.

Chapter VIII: Miscellaneous

 Purpose: Covers various other provisions related to the operation of RRBs.
o Includes provisions for the amendment of the Act.
o Addresses issues related to the interpretation of the Act and resolution of
disputes.
o Provides for the powers to make rules and regulations to support the effective
implementation of the Act.
 Amendments:

 The Act allows for amendments to address evolving needs and regulatory changes.

 Rulemaking:

 Central government has the power to make rules to implement the provisions of the
Act effectively.

ROLE OF COMMERCIAL BANKS IN RURAL CREDIT

The funds offered by our banks in financing agriculture is not sufficient. In a country where
approximately 16-18% of its GNP is provided by farming, the funds pumped in for this
activity by the commercial banks are barely 13 to 14 per cent of their total resources. It is true
that the commercial banks finance to a certain extent the movement of crops. But the benefit
out of this is largely derived by big traders. In the USA, credit to farms is given in a big way
by commercial banks. In India, on the other hand, by and large, direct assistance to
agriculture is not considered by the commercial banks as their business. A variety of reasons
may be pointed out which discourage the banks from devoting their attention to agricultural
finance. Among the reasons pointed out by the Central Banking Enquiry Committee, the
uneconomic nature of land holdings, the poor resources of the agriculturists and lack of
securities acceptable to the banks are the important ones. Further, lack of adequate
warehousing facilities and lack of standardization and grading of agricultural produce are
problems confronting the banks in actively participating in agricultural finance. Certain other
difficulties may briefly be stated as follows:

1. In many rural parts, especially in the former zamindari areas, land records are still in no
shape. In tribal areas, non-transferability of land, absence of cadastral survey and variations
in tribal rights from one tribe to another create many difficulties.

2. Agriculturists are often discouraged by the heavy financial burden which they have to bear
as a result of high stamp duties. Although the farmer needs and certainly deserves timely
credit facilities, the procedural delays associated with the cumbersome and time-consuming
process involved in the creation of mortgage makes the farmer even lose a crop. It may be
pointed out in this connection that the Talwar Committee had gone into the legal aspects of
these issues and had suggested certain remedial legislative and administrative measures. But
some of the state governments have not yet implemented these suggestions.

3. There is lack of precise demarcation of the areas within which the different financial
institutions catering to the rural sector are to operate. This leads to overlapping of operational
areas, double financing, etc.

4. Although many of our commercial banks have already established separate agricultural
departments to help the agriculturists, they have yet to chalk out appropriate policies with
vision and enthusiasm.

5. The average amount of advance per agricultural borrower is not very high. This increases
the cost of providing agricultural credit as compared to other sectors.

6. The loan application forms are often complicated which do not conform to the level of
literacy of the agricultural borrower. The processing of loan application forms aggravates the
problem. The processing delays in many cases can be attributed to the hesitance/indecision on
the part of the branch manager. The observations made by Shri L.K. Jha, the former
Governor of the RBI, are pertinent in this connection. According to him: ‘…Let us not forget
that if banks are unaccustomed to deal with agriculturists, agriculturists are even less familiar
with the ways of the banks. The agriculturists as a class have to be made aware of the fact
that the banking system is not merely willing but anxious to help them. They will have to be
encouraged to apply for loans. If the applications reveal some defects, if what they want to do
is not economically sound, it will not be enough to say no to them; they will have to be told
and helped to improve their scheme in order to make it creditworthy in every sense of the
term… .’ To encourage the commercial banks in taking a more effective and active role in the
field of agricultural financing, the Rural Banking Enquiry Committee made certain
recommendations such as the establishment of a network of warehouses throughout the
country; the provision of facilities for standardization and grading of agricultural produce; the
widening and cheapening of remittance facilities from one rural centre to another; the
removal of impediments in the way of extension of modern banking facilities to the rural
areas, etc. Proposals have also been made regarding the grant of cash subsidies to cover
wholly or partly deficits which the banks are likely to experience for some years in the initial
period of spreading themselves into the rural areas and the placing of interest free deposits by
the government during the initial period with a view to encouraging the opening of rural
branches by commercial banks. The RBI, to encourage the commercial banks to participate
actively in rural finance, is extending credit facilities to scheduled banks in the form of
rediscount of bills drawn for the purpose of financing seasonal agricultural operations or the
marketing of crops. In this connection, the establishment of the National Bank of Agricultural
and Rural Development (NABARD) in 1982 deserves special mention. NABARD has taken
over the developmental and refinancing functions of the erstwhile Agricultural Refinance and
Development Corporation on the one hand and the RBI on the other. With the nationalization
of major commercial banks and under the impact of the initiatives taken by the RBI, there has
been a greater involvement of banks in the agricultural sector. As explained subsequently, the
public sector banks were advised to formulate Special Agricultural Credit Plans since 1994–
95 and fix self-set targets for achievement during the year (April–March). Since the
introduction of these plans, there has been a substantial flow of credit to agriculture. It is not
encouraging to note that the recovery performance of the banks in respect of their agricultural
advances is not very satisfactory. Improved recoveries of earlier advances are of paramount
importance for effective recycling of credit in the rural sector. Of course, a number of steps
have been taken to improve the recovery performance of banks. The guidelines issued to
banks in this regard include taking effective measures like strengthening and gearing up
organizational structure, both at controlling offices and field level, adopting schematic
approach to lending, toning up pre-lending appraisal system and post-lending supervision
techniques, involving, inter alia, constant contact with the beneficiaries to ensure that the
defaults are brought down to minimum, launching of recovery drives with the help of the
state government machinery at the block level, etc. Banks have also been advised to create
separate ‘Recovery Cells’ for a cluster of nearby branches for continuous and effective
supervision and recovery where overdues exceed 50 per cent of demand and agricultural
advances are sizeable. Lead Banks have been advised to effectively utilize the forums of
State Level Bankers’ Committee, etc., for discussing problems of recovery and elicit proper
support from state government machinery in dealing with wilful defaults. During 1973-74, in
pursuance of the recommendation of the National Commission on Agriculture, a scheme for
financing farmers through Farmers’ Service Societies came into operation. Such societies are
organized and financed by commercial banks, central cooperative banks and regional rural
banks for providing agricultural credit in rural areas. The societies which are multi-purpose in
character are expected to function as the single contact point for providing credit, as also
guidance for adoption of improved agricultural practices, etc. Other services cover supply of
inputs and consumer goods, marketing of produce, customer service for the maintenance of
agricultural equipment. Further, commercial banks participate in projects sanctioned with the
assistance of IBRD/IDA for financing programmes in various states. The involvement of
commercial banks in the implementation of projects assisted by IBRD/IDA through the
NABARD is steadily deepening. With all this, the fact remains that it is difficult to promote a
direct contact between agriculturists and commercial banks to any appreciable extent. The
majority of rural population consist of small farmers spread over nearly six lakh villages with
different topography and climatic conditions. To reach them all with 61,132 branches (as at
March-end 2008) is certainly a difficult task. At the same time, we have to admit the fact that
even the opening of these branches, though impressive at the first sight, has been partially a
‘numbers game’ than appreciating their true role. Most of the banks have not the right type of
machinery to handle rural credit for the continuous monitoring of the funds deployed and to
provide the correct technical advice to the borrowers so that the borrower and the lender
benefit to the full. The banks on their part try to defend themselves about their unsatisfactory
performance by pointing out that too many agencies are handling rural credit. Banks provide
credit to the cooperative banking organizations. How far can the banks keep a check over the
funds deployed is a moot point especially since many of the cooperatives are cesspool of
politics and the farm lobby is powerful enough to keep the banks at bay for any length of
time. At the same time, the fact has to be admitted that the commercial banks have
necessarily to depend on the base level credit outlets already existing in the cooperative
structure in order to contribute effectively to the regeneration of rural economy. Financing of
Primary Agricultural Credit Societies (PACSs) by Commercial Banks The RBI, in
consultation with the Government of India, had formulated in 1969 a scheme of Financing
Agricultural Credit Societies with a view to filling up the credit gaps existed in the areas of
some of the District Central Cooperative Banks which were financially and administratively
weak. The scheme provided a network of retail outlets to commercial banks in the form of
viable/potentially viable PACSs for extending credit facilities to cultivators spread out in the
remote villages. Under the scheme, a branch of a commercial bank would, in identified areas,
take over about ten PACSs within a radius of 20 kms of the branch with a potential loan
business of ` 20 lakh. The commercial banks would charge to the PACSs the rate of interest
as decided by the RBI from time to time. In providing the credit facilities, the commercial
banks would generally follow the production-oriented system of lending. The main objectives
of the scheme were that commercial banks should: (a) Meet the production and investment
credit needs of agriculturists; (b) Finance small farmers by encouraging them to become
members of PACSs; (c) Revitalize the PACSs so that they become efficient business
organizations at the village level and (d) Help in the process of speedy rehabilitation of weak
District Central Cooperative Banks by taking over their affiliated societies for financing.

Action Taken on Gupta Committee Report

The one-man committee under the Chairmanship of Shri R.V. Gupta, which examined the
problems faced by the borrowers in agricultural sector, had made several recommendations
for ameliorating the problems in the flow of agricultural credit. The recommendations
relating to several procedural modifications on agricultural credit have been advised to banks
for implementation. These recommendations cover greater flexibility and discretion to the
lending banks in matters of collateral, margin, security, dispensing with no dues certificates;
introduction of a composite cash credit limits to cover farmers’ production, postharvest and
household requirements, etc. Besides, IBA has been requested to work out simplifying
application forms for agricultural loans and banks have been advised to delegate sufficient
powers to their branch managers. Similarly, the recommendations, which are to be considered
by the government like abolition of stamp duty for agricultural loans, assistance from state
governments for recovery of banks dues, matters relating to mortgage of land, banks finance
to tenant farmers and also matters pertaining to subsidy-linked credit, have been forwarded to
the government for necessary action. The action taken by banks was reviewed at a meeting of
select bankers on 26 September 1998. Bankers reported that they have initiated action for
implementing the recommendations of the committee.

Integrated Rural Development Programme (IRDP)

Commercial banks used to take an active role in providing finance under the erstwhile IRDP,
which was a major poverty-alleviation programme, to provide assistance to families below
the poverty line so as to enable them to improve their income level and cross above poverty
line. The two-pronged strategy adopted under the IRDP was:

(i) Consolidation of the progress made earlier and provision of supplementary

assistance to those who had not been able to cross the poverty line for no
fault of theirs and
(ii) Selection of new beneficiaries to be assisted in such a way that they are
able to cross the poverty line with a single dose of assistance.

Swarnajayanti Gram Swarozgar Yojana (SGSY)

The government had launched a restructured poverty alleviation programme, the

Swarnajayanti Gram Swarozgar Yojana in April 1999, which subsumed the erstwhile IRDP
and its allied programmes, viz., Training of Rural Youth for Self-Employment (TRYSEM),
Development of Women and Children in Rural Areas (DWCRA), Supply of Improved
Toolkits to Rural Artisans (SITRA), Ganga Kalyan Yojana (GKY) and Million Wells
Scheme (MWS).

SGSY is a holistic programme covering all aspects of self-employment such as organization

of the poor into self-help groups (SHGs), training, credit, technology, infrastructure and
marketing. Subsidy will be uniform at 30 per cent of the project cost subject to a maximum of
` 7,500. In respect of SCs/STs, it will be 50 per cent with a maximum of ` 10,000. The
subsidy for group loans will be 50 per cent of the project cost subject to a maximum ceiling
of ` 1.25 lakh. There will be no monetary limit on subsidy for irrigation projects. The sub-
targets have been stipulated for borrowers under various categories, viz., SCs/STs (at least 50
per cent), women (40 per cent), and physically challenged (3 per cent).

Micro Credit by Banks

Provision of micro-credit by banks has emerged as an important instrument for alleviating

poverty, particularly in rural areas, as this raises the productive capacity of the beneficiaries.
Banks were accordingly advised in February 2000 to make micro-credit an integral part of
their corporate credit plan. Micro-credit is reckoned as part of banks’ priority sector lending
since February 2000. Further, with a view to providing an additional avenue for bank’s
lending to agriculture and increasing the outreach of banks in rural areas, lending by banks to
non-banking financial companies (NBFCs) for on-lending to agriculture is reckoned for the
purpose of priority sector lending as indirect finance to agriculture since April 2000. In a
significant move, micro-credit/rural credit has been included in the list of eligible NBFC
activity for being considered for FDI/OCB/NRI investment. This would cover extension of
credit facilities at the micro level to small producers and small enterprises in the rural and
urban areas.

Recent Developments

The scope of priority sector lending was expanded during 2001-02 to include financing of
activities relating to setting up of agri-clinics and agri-business centres and purchase for
agricultural purposes by small and marginal farmers. Further, the limit for financing of
distribution of inputs for allied activities such as cattle feed, poultry feed, etc., was increased
from ` 5 lakh to ` 25 lakh. In order to help the farmers in marketing their products, credit limit
for marketing of crops was increased to ` 5 lakh from ` 1 lakh and the repayment period for
such credit was enhanced to 12 months from 6 months. To avoid double counting, it was
decided that sponsor banks of regional rural banks, while computing their performance under
priority sector lending, should exclude funds provided to the regional rural banks for
onlending to priority sector

Role of Commercial Banks in Rural Credit: A Historical Perspective to Present

Commercial banks in India have been instrumental in providing rural credit and driving the
financial inclusion of the rural population, including farmers, small-scale industries, and
artisans. Their role has evolved over the years, from limited engagement in the rural economy
during the pre-independence period to becoming key players in rural credit distribution after
nationalization and subsequent reforms.

1. Pre-Independence and Early Post-Independence Era (Before 1969)

 Limited Role of Commercial Banks: Before independence and in the early years
after independence, commercial banks largely focused on urban areas and industrial
 financing. Rural credit was primarily provided by informal lenders like moneylenders,
traders, and landlords, often at exorbitant interest rates.
 Dominance of Cooperative Banks: The cooperative banking system, established in
the early 20th century, was the primary formal institution providing rural credit, but
its reach and impact were limited. Commercial banks contributed minimally to the
rural credit market.

2. Nationalization of Banks (1969 and 1980)

 First Wave of Bank Nationalization in 1969: In 1969, 14 major commercial banks

were nationalized, and their mandate was expanded to include rural areas. This was a
major shift in the role of commercial banks in rural credit, as the government directed
them to open branches in rural areas and extend agricultural and rural credit.
 Second Wave of Nationalization in 1980: Six more banks were nationalized, further
intensifying the drive toward rural credit.
 Lead Bank Scheme (1969): Under this scheme, each district was assigned to a
specific commercial bank, called the "lead bank," which would oversee the
implementation of rural credit programs and ensure that banking services reached
underserved rural areas.
 Priority Sector Lending (PSL): The Priority Sector Lending norms, introduced in
the early 1970s, mandated commercial banks to allocate a specific percentage of their
credit to priority sectors, including agriculture and rural activities. Initially, the target
for agriculture was set at 15%, which has since evolved.

3. Post-Reforms Era (1990s Onwards)

 Economic Reforms of 1991: Liberalization, privatization, and globalization led to

increased competition in the banking sector, but rural credit remained a focus for
public sector banks. The government continued to encourage rural lending despite
commercial pressures to focus on more profitable urban markets.
  RRBs and SHGs: The establishment of Regional Rural Banks (RRBs) in 1975
further helped supplement commercial banks in providing rural credit. In the 1990s,
banks also began promoting Self-Help Groups (SHGs) and microfinance initiatives,
which became crucial in extending credit to the rural poor.

4. Recent Developments in Rural Credit (2000s to Present)

 Financial Inclusion Initiatives: The 2000s witnessed the launch of several initiatives
to improve financial inclusion. Commercial banks were mandated to open more
branches in rural areas, and digital banking services began reaching rural populations.
 Increase in Rural Credit Target: The government, through the Reserve Bank of
India (RBI), has consistently increased the share of commercial banks’ credit directed
toward agriculture and rural development.
o In 2022-23, the agriculture credit target was set at ₹18 lakh crore (₹18
trillion).
o For the fiscal year 2023-24, this target has been raised to ₹20 lakh crore (₹20
trillion), primarily channeled through commercial banks.
 Kisan Credit Card (KCC) Scheme: Introduced in 1998, the KCC Scheme is one of
the most successful initiatives for rural credit. It allows farmers to access short-term
loans for crop production at concessional interest rates. As of 2023, around ₹7-8 lakh
crore is disbursed annually through KCCs, with a significant portion coming from
commercial banks.
 Priority Sector Lending (PSL) Evolution:
o As of 2020, commercial banks are required to allocate 40% of their total
credit to priority sectors, with 18% specifically mandated for agriculture.
o 8% of this 18% must go to small and marginal farmers. Commercial banks
have been instrumental in meeting these PSL targets by extending crop loans,
investment credit, and working capital loans to rural businesses.
 Digital Banking and Financial Inclusion: Over the past decade, commercial banks
have increasingly adopted digital banking to serve rural customers. Initiatives like
Pradhan Mantri Jan Dhan Yojana (PMJDY), launched in 2014, have provided
 access to formal banking services for millions of rural households. As of 2023, more
than 50 crore PMJDY accounts have been opened, many through commercial banks.
 Direct Benefit Transfer (DBT) Schemes: Commercial banks have played a key role
in implementing the government’s DBT schemes, ensuring that subsidies and
financial support are directly transferred to the bank accounts of rural beneficiaries,
including farmers.

5. Recent Statistics on Commercial Banks’ Role in Rural Credit (2023)

 Agricultural Credit Target: For 2023-24, the Indian government has set an
agricultural credit target of ₹20 lakh crore, with commercial banks responsible for
the bulk of this funding.
 KCC Coverage: As of 2023, commercial banks have issued over 7 crore Kisan
Credit Cards (KCCs), providing farmers access to concessional loans. Around ₹7-8
lakh crore is disbursed annually under the KCC scheme by commercial banks.
 Priority Sector Lending: As per recent RBI data, commercial banks have been
meeting their PSL targets, allocating 18% of their Adjusted Net Bank Credit
(ANBC) to agriculture and allied sectors. Out of this, 8% is directed toward small and
marginal farmers.
 Rural Branch Network: By 2023, commercial banks have expanded their rural
footprint significantly, with approximately 35-40% of their branches located in
rural and semi-urban areas. This ensures broader access to credit and other financial
services for the rural population.
 Credit to Small and Marginal Farmers: Commercial banks disburse a significant
portion of their agricultural credit to small and marginal farmers, aligning with the
government’s rural development goals.

Key Programs and Schemes Facilitated by Commercial Banks

1. Kisan Credit Card (KCC): Provides crop loans at concessional rates.

 2. Pradhan Mantri Fasal Bima Yojana (PMFBY): Crop insurance scheme
implemented by commercial banks.
3. Self-Help Groups (SHGs) and Microfinance: Empowering rural women and small
entrepreneurs.
4. Rural Infrastructure Development: Long-term loans for farm mechanization,
irrigation, and allied activities.

Schemes for Rural Development

The Government of India has designed and implemented a large number of schemes for
creation of employment, eradication of poverty and for ensuring overall development in rural
areas. Commercial Banks are the main players in the implementation of these schemes.

Integrated Rural Development Programme (IRDP)

IRDP was implemented in 1980 for increasing production and productivity in agriculture and
other sectors in rural areas, creation of substantial employment opportunities and making the
rural families viable and self-sufficient. The programme seeks in particular to improve the lot
of poorest of the poor – small and marginal farmers, sharecroppers, agricultural labourers,
rural artisans, scheduled caste/ tribes and other weaker section. The government provided
subsidy ranging from 25 percent to 50 percent of the total capital investment depending upon
the category of beneficiaries.

Service Area Approach (SAA)

The RBI started SAA for rural lending in 1988. It refers to a system of assigning special areas
to each bank branch in which it can concentrate for productive lending and thus contribute to
the development of the area. The SAA is intended to bring about a major change in the
quality and productivity of rural lending. It aims at making available adequate and timely
credit for meaningful activities and ensuring effective recycling of bank funds.

Lead Bank Scheme (LBS)

The LBS was introduced by the RBI in 1969 with the objective of enabling the commercial
banks to assume the role of leadership for the development of banking and credit facilities
throughout the country on the basis of area approach. Under this scheme, all the districts in
the country have been allotted to different banks. A lead bank is assigned the role of a
catalytic agent of economic development through the expansion of bank branches
and diversification of credit facilities in the district allotted to it. It is made responsible for
surveying the resources and potential for banking development in the district.

Differential Interest Rate (DIR)

The DIR scheme was introduced in 1972 with a view to provide bank credit to the weaker
sections of the society at a concessional rate by PSBs. The banks identify beneficiaries who
will be eligible for loans under the scheme and conditions under which loans should be given.
Different interest rates are charged by CBs on advances to different categories of borrowers
on the basis of income and repayment capacity.

Small Farmers Development Agency (SFDA)

The SFDAs have been established to help those cultivators who have small, yet potentially
economically viable holdings. The small farmers have always been neglected by both the
organized and unorganized sectors of banking. Therefore, the establishment SFDA is a
significant development in the field of rural finance, for it forms an important link in the
chain of organized financial institutions through which money flows into the rural sector of
the economy.

Marginal Farmers and Agricultural Labourers Development Agencies (MFAL)

The MFALs have been established to help sub-marginal farmers and agricultural labourers.
Marginal farmers with holdings up to one hectare and agricultural labourers who earn more
than 50 percent of their income from agriculture receive subsidised credit support for
agriculture and subsidiary occupations under this scheme. The subsidised credit support is
given for dairy farming, poultry, fishery, piggery, sheep rearing, horticulture etc.

Farmers Service Societies (FSS)

On the basis of the recommendations of the National Commission on Agriculture, Farmers

societies have been organized by CBs in SFDA and MFAL areas from 1973-74. The basic
objectives of the scheme of FSS have been to offer to small farmers a full package of services
and technical guidance instead of just credit project cost. There is no monetary ceiling on
subsidy for minor irrigation projects.

Swarnajayanthi Gram Swarozgar Yojana (SGSY)

The SGSY has been launched as an integrated programme for self-employment of the rural
poor on 1st April 1999 by merging hither to self-employment programme of DWCRA,
TRYSEM, SITRA, GKY and MWS. The objective of the scheme is to bring the assisted poor
families above the poverty line by organizing them into self-help groups (SHGs), through the
process of social mobilization, training, capacity building and provision of income generating
assets through a mix of bank credit and government subsidy. The SGSY will be funded by
the central and state governments in the ratio of 75:25. The focus of the programme is on
establishing a large number of micro enterprises in rural areas based on the ability of the poor
and potential of each area for a sustainable income generation. Due emphasis is being laid on
different components such as capacity building of the poor, skill development, training,
technology transfer, marketing and infrastructure. The subsidy allowed is 30 percent of
project cost; subject to maximum of Rs.7500/-. For SC / ST and disabled persons subsidy
limit is 50 percent of project cost or maximum of Rs.10,000/-. For SHGs subsidy is
maximum 1.25 lakhs or 50 percent of project cost. There is no monetary ceiling on subsidy
for minor irrigation projects.

Indira Awas Yojana (IAY)

IAY is a rural housing programme launched by the Government of India. Under this scheme
nearly 114.78 lakh houses have been constructed at a cost of Rs.20,022.89 crores by March
2004.

Prime Minister’s Rozgar Yojana (PMRY)

This scheme was introduced in 1993-94 in selected centres of the country and later to all
areas. It is an important credit linked employment generation scheme for the youth which is
implemented by District Industries Centres (DICs) and CBs. The scheme provide assistance
to educated unemployed youth in the age group of 18-35, with upper age relaxation provided
to women, SC/ST and physically handicapped persons whose annual income is below
Rs.40,000/. Subsidy assistance is at the rate of 50 percent subject to maximum of Rs.7500/-.
Margin will range between 5 to 16.25 percent such that the subsidy together with margin
money will be equal to 20 percent of the project cost. For project with cost up to Rs.1 lakh no
collateral security is to be insisted in the case of business and service sectors whereas Rs. 2
lakhs in the case of SSIs.

Pradhan Manthri’s Gram Sadak Yojana (PMGSY)

The PMGSY, 100 percent centrally sponsored scheme was launched on 25 th December 2000.
The main objective of PMGSY is to develop rural roads connectivity. This scheme seeks to
provide connectivity to about 1.70 lakh unconnected habitations besides upgradation of some
existing rural roads, to prescribed standards by the end of the 10th plan. A cumulative
expenditure of Rs.6,559 crore was incurred till March 2004.

Central Rural Sanitation Programme (CRSP)

Rural sanitation is a state subject. The efforts of the state are supplemented by the Central
Government through technical assistance under the CRSP. It was launched in 1986 with the
objective of improving the quality of life of rural people and providing privacy and dignity to
women. The concept of sanitation was expanded in 1993 to include personal hygiene, home
sanitation, safe water, disposal of garbage and wastewater.

Sampoorna Grameen Rozgar Yojana (SGRY)

It was launched on 25th September 2001 by merging the ongoing scheme of Employment
Assurance Scheme (EAS) and the Jawahar Grama Samridhi Yojana (JGSY) with the
objective of providing additional wage employment in the rural areas as also food security,
along with the creation of durable community assets in the rural areas. An amount of Rs.
9,825 crores were provided for rural infrastructure development in 2003-04 as budgetary
support and 19,637 number of roadworks have been completed. In addition, 8419 number of
road works has been completed during 2003-04.

Swajal Dhara Scheme (SDS)

It was flagged off in December 2002 as a new initiative empowering Panchayaths to

formulate, implement, operate and maintain drinking water projects.
Watershed Development Programme

The Department of Land Resource is implementing three area-based watershed programs for
development of wastelands / degraded lands namely Drought Prone Areas Programs (DPAP),
Desert Development Programme (DDP) and Integrated Wastelands Development Programme
(IWDP). DPAP was launched in 1973, DDP was launched in 1977 and IWDP was launched
in 1989. Since 1st April 1995, the three programs are being implemented on the basis of
common guidelines for watershed development.

Hariyali Programme

The Department of Land Resources launched a new initiative called Hariyali in 2003 with the
objective of empowering Panchayath Raj Institutions (PRIs) both financially and
administratively in implementation of watershed development programme. Under this
initiative all the ongoing programs like DPAP, DDP and IWDP would be implemented
through the PRIs.

People’s Planning Programme (PPP)

It was introduced on 17th August 1996. ‘Janakeeyasoothranam’ contemplates full

participation of people in both formulating, planning and implementation of the so planned
activities on a time bound basis. Out of the states annual action plan, 35 to 40 percent are
deployed for implementation through Janakeeyasoothranam, for which people from different
categories are involved. In this, projects are prepared by giving due weightage to local needs
etc; and they are subject to scrutiny and discussion before finalization.

Self Help Groups (SHGs)

The SHG linkage programme initiated by NABARD during 1991-92 as a pilot project has
taken the shape of a movement and has size pitched up the desired movement. Under this
concept, the poor, particularly women are organized into small homogenous groups for taking
their own decisions about the saving and credit operations. External lending like bank credit
is infused into the groups only after proper evaluation of the functioning of the groups and
ascertaining their maturity. The concept has been found to be an effective and successful
approach in reaching the unreached and for empowerment of women and poverty alleviation.
On cumulative basis, the number of SHGs receiving financial support from commercial
banks increased to 538,422 in 2003-04 from 361,061in 2002-03 with an increase of 49
percent.

Vikas Volunteer Vahini Clubs (VVVs)

The VVV programme introduced by NABARD in the year 1982, offers a forum in the rural
areas for banks and borrowers / rural poor to come together, to have a continuous and
positive dialogue for initiating appropriate measures to achieve the desired development. The
core objective of the programme is propagation of revival of repayment ethics. Promotion of
people’s participation is the essence of the programme.

Kisan Credit Card (KCC)

Ensuring timeliness and adequacy of credit to farmers is the most serious challenge faced by
the banks while financing this sector. The Financial Sector Reforms (FSRs) ushered in as part
of the liberalization of the Indian economy have infused a spirit of competitiveness among
the banks in their endeavour for sharpening customer orientation. KCC is an innovative key
product designed and introduced to expand and simplify the credit delivery system of banks
by the NABARD. As the pioneering credit delivery innovation, the KCC scheme aims at
provision of adequate and timely credit support from the banking system to the farmers for
their cultivation needs. It was introduced in 1998, and it was revised in October 2004 to cover
term loans for agriculture and allied activities. As on 31st March 2004, CBs, RRBs and Co-
operative banks issued KCCs at the tune of 132.43 lakhs, 38.99 lakhs and 242.68 lakhs
respectively. So total KCCs issued up to 31st March 2004 came to 414 lakhs.

Role of Commercial Banks in Rural Credit

Commercial banks play a crucial role in rural credit, providing financial assistance to
farmers, rural entrepreneurs, and small businesses in rural areas.

1. Agricultural Loans:

 Short-term loans: For purchasing seeds, fertilizers, pesticides, and other inputs for
agriculture.
 Medium-term loans: For purchasing livestock, farm machinery, and constructing
irrigation systems.
  Long-term loans: For land development, building farmhouses, and investing in
agricultural infrastructure.

2. Rural Entrepreneurship:

 Business loans: To support small-scale industries, cottage industries, and rural

enterprises.
 Working capital loans: To meet the day-to-day operational expenses of businesses.
 Term loans: For purchasing machinery, equipment, and expanding business
operations.

3. Rural Development:

 Infrastructure development: Funding for rural roads, bridges, schools, and

healthcare facilities.
 Community development: Supporting local initiatives for poverty alleviation,
education, and healthcare.
 Microfinance: Providing small loans to individuals and groups, especially women, to
start or expand their businesses.

4. Financial Inclusion:

 Expanding branch networks: Increasing access to banking services in rural areas.

 Digital banking: Offering mobile banking, ATMs, and internet banking to reach
remote areas.
 Financial literacy: Educating rural communities about financial products and
services.

5. Mobilizing Rural Savings:

 Deposit accounts: Encouraging rural people to save their money in banks.

 Investment products: Offering various investment options to cater to different
savings needs.

6. Risk Management:
  Insurance products: Providing agricultural insurance to protect farmers from crop
losses.
 Credit risk assessment: Evaluating the creditworthiness of borrowers to minimize
default risk.
 Risk mitigation strategies: Implementing measures to manage risks associated with
rural lending.

STRUCTURE AND ORGANISATION OF THE RRBs

Authorized Capital:

 Previous limit: Rs. 5 crore

 Current limit: Rs. 2,000 crore (amended by the Regional Rural Banks (Amendment)
Act, 2014)
 Minimum limit: Rs. 1 crore
 Shareholding: Central government (50%), State government (15%), Sponsor bank
(35%)

Issued Capital:

 The minimum issued capital is Rs. 25 lakh.

 The maximum issued capital is Rs. 1 crore.
 The central government decides the exact amount of issued capital for each RRB,
based on various factors such as its financial health, operational requirements, and the
specific needs of the rural areas it serves.

Paid-up Capital:

 Minimum requirement: Rs. 1 crore

 Flexibility: The central government can specify the issued capital between Rs. 25
lakh and Rs. 1 crore.

The working and affairs of the RRBs are directed and managed by a Board of Directors
consists of a Chairman, three directors to be nominated by the Central Government, and not
more than two directors to be nominated by the State Government concerned, and not more
than 3 directors to be nominated by the sponsoring bank. The chairman is appointed by the
Central Government and his term of office does not exceed five years.
Management resources

Each RRB is managed by a Board of Directors. It includes a general superintendent and nine
members as Board of Directors. The Central Government nominates three directors, the State
Government has two directors, and the sponsor bank nominates three directors. The
chairman, usually an officer of the sponsor bank, is appointed by the Central Government.
The Board of Directors is required to act on business principles and in accordance with the
directives and guidelines issued by the Reserve Bank. At the state level, State Level
Coordination Committees have also been formed to have uniformity of approach of different
RRBs.

Resources

RRBs generate their resources by way of following:

 Share capital
 Deposits from the public
 Borrowing from sponsor banks
 Re-finance from NABARD

The Reserve Bank of India puts RRB at par with the co-operative banks, offering refinance at
2 per cent below the bank rate. Like commercial banks, the RRBs, have been made eligible
for accommodation against a mere declaration of eligible loans and advances by them.
Further, RRBs have also been granted the status of scheduled banks by the Reserve Bank of
India. They are allowed to maintain cash reserves at the rate of 3 per cent of their demand and
time liabilities till December, 2002. The RRBs are allowed to offer 1½ per cent additional
rate of interest on their deposits over the rate offered by commercial banks. The deposits of
the banks are also insured by Deposit Insurance and Credit Guarantee Corporation of India
Ltd. This is to protect the interest of the depositors.

PERFORMANCE OF RRBs

The Gross NPAs of RRBs were rising over the years and by late eighties it reached a level
were the bank needed recapitalization to continue operation. In 1991, Government of India
decided on banking sector reforms as a part of economic liberalization. RBI introduced the
rules for classification of assets and recognition of income for RRBs to instil financial
discipline and transparent reporting. The lending rates for these institutions were deregulated
to usher competition. The RRBs were permitted to finance the non-target group and promote
non fund business to increase revenues. They were permitted to open Non-Resident rupee
account. They were also allowed to provide loans for housing and education and loan against
gold and other non-priority loans. Between 1994 and 2005 many committees were appointed
to suggest remedies to make the RBs profitable and sustainable. Government deliberated on
various measures recommended by these committees from time to time like merger of RRBs
with sponsor banks, creation of National Rural Bank of India, horizontal merger amongst
RRBs functioning in adjacent areas, change in sponsor banks, liquidation of RRBs etc, but
finally it decided on recapitalization and consolidation of the RRBs based on the fact that
these banks are deeply spread in rural areas and have played a very crucial role in not only in
last mile credit delivery but also in mobilizing rural deposits. The process of consolidation
started from 2005 onwards as a result of which the number of RRBs reduced drastically from
196 in 2005 to only 56 as on April 1, 2018. Further consolidation is in process. Rs 235 crores
were allocated in the union budget of financial year 2019-20, for recapitalization of RRBs in
order to empower them to fulfil regulatory conditions. In Financial Year 2017-18, 11 out of
56 RRBs incurred losses amounting to Rs 1,005 Crores. The number of RRBs incurring
losses and the amount of losses, both have increased in recent years.

Financial Inclusion:

 RRBs have played a crucial role in expanding financial inclusion in rural areas,
providing access to credit, savings, and other banking services.
 However, challenges remain in reaching the most marginalized sections of rural
society, such as small and marginal farmers, women, and tribal communities.

Profitability:

 RRBs have shown improved profitability in recent years, with many reporting profits.
This is partly due to government support and regulatory reforms.
 However, profitability remains a concern for some RRBs, especially those operating
in regions with low economic activity or high default rates.

Asset Quality:
  The asset quality of RRBs has varied. While some have managed to maintain good
asset quality, others have faced challenges with non-performing assets (NPAs),
particularly in sectors like agriculture and microfinance.
 The government and Reserve Bank of India (RBI) have implemented measures to
address NPAs, such as restructuring loans and providing recapitalization.

Technology Adoption:

 RRBs have been increasingly adopting technology to improve efficiency and reach
more customers. Digital banking, mobile banking, and ATMs have become more
common.
 However, challenges remain in terms of infrastructure, digital literacy, and
cybersecurity.

Governance and Management:

 Governance and management practices have improved in many RRBs. However,

there is still room for further strengthening.
 Issues such as lack of qualified personnel, political interference, and corruption
continue to be challenges in some cases.

Recent Statistics on Rural Banking Performance in India

As of March 2023:

 Consolidated Net Profit: RRBs recorded the highest-ever consolidated net profit of
₹4,974 crore.
 Capital to Risk Weighted Assets Ratio (CRAR): The consolidated CRAR reached
an all-time high of 13.43%.
 Asset Quality: The Gross Non-Performing Assets (GNPA) stood at 7.28%, the
lowest in the previous seven years.
 Credit Expansion: The consolidated Current Deposit (CD) ratio increased to
67.50%, the highest in over 15 years.
 Digital Adoption: The pace of technology adoption has increased, with more RRBs
implementing digital services.
  Financial Inclusion: RRBs' share in implementing flagship financial inclusion
schemes has increased.

o The RRBs were established in 1975 under the provisions of the Ordinance
promulgated on September 26, 1975, and the Regional Rural Banks Act, 1976.
o As of March 31, 2023, there were 43 RRBs sponsored by 12 scheduled commercial
banks, with 21,995 branches and operations. There were 305.3 million deposit
accounts and 29 million loan accounts in 26 states and three Union Territories
(Puducherry, Jammu & Kashmir, and Ladakh).
o The states of Goa and Sikkim do not have RRBs.
o All PSBs, except Punjab & Sind Bank, sponsor one or more RRBs. J&K Bank is the
only private sector bank to sponsor an RRB. About 92 per cent of the RRB branches
are in rural/semi-urban areas.
o The total business of RRBs crossed the milestone of Rs 10 trillion during FY23,
growing at 10.1 per cent year-on-year (Y-o-Y).
o The asset quality position of RRBs during FY23 showed an improvement, with gross
non-performing assets (gross NPAs) reducing to 7.28 per cent as of March 31, 2023,
the lowest in seven years.
o 34 of the 43 RRBs reported a reduction in absolute gross NPA (amount), and 37 of
them reported a reduction in the percentage of gross NPAs.
o Net NPA and provisioning coverage ratio (PCR) also improved during FY23,
standing at 3.2 per cent and 59.2 per cent, respectively, as of March 31, 2023.

The performance of Regional Rural Banks (RRBs) has been improving in recent years, as
shown by the following statistics:

 Consolidated Capital to Risk (Weighted) Assets Ratio (CRAR): Increased from 7.8%
in 2021 to 13.7% in 2024
 Profitability: Improved from losses of Rs. 41 crore in 2021 to a net profit of Rs. 2,018
crore in 2024
 Gross Non-Performing Assets (GNPA): Ratio of 3.9%
 Consolidated net profit: Highest ever at ₹7,571 crore in 2023-24
 GNPA ratio: Lowest in the previous 10 years at 6.1
ROLE OF GOVERNMENT, RBI & NABARD IN MONITORING

Role of NABARD

National Bank for Agriculture and Rural Development was set up in 1982 as a new
organisation with the objective of giving undivided attention, assertive guidance and sharp
emphasis to problems related to delivery of rural credit and issues linked to development in
rural areas. The functions of RBI which were related to agricultural credit and the refinance
functions of erstwhile Agricultural Refinance and Development Corporation (ARDC) were
handed over to the newly formed organisation. The broad functions of NABARD includes
refinancing and delivering them short term and long term finance, refinance support to rural
infrastructure building institutions, preparing credit programme and operating banks and
regional rural banks and supporting their capacity enhancement efforts, designing innovative
development schemes and implementing Government sponsored schemes.

The formation of NABARD was ratified by passing the Act 61, 1981 of Parliament
responsible for conducting research and framing policies related to agriculture credit and
supervise the two credit delivery agencies operating in rural areas namely the Co-operatives
and Regional Rural Bank. The functions may be broadly segregated into three broad
categories-Financial, Developmental and Supervision and they together empower NABARD
to be present in almost every facet of economy of rural India.

Financial Function

The financial function of NABARD may be classified as:

Direct Finance and Refinance:

The direct finance component includes loans to institutions involved in food parks and food
processing units and marketing of agricultural commodities (Federations). Specific funds are
allocated to NABARD by the Government for onward credit disbursement, based on
priorities and guidelines spelt out by the Government in the annual budget e.g. Warehouse
Infrastructure Fund, Food Processing Fund etc. Similarly, there are other purpose specific
funds like Rural Infrastructure Development Fund, Long Term irrigation fund, Micro
Irrigation Fund, Grameen Swachh Bharat Mission, Pradhan Mantri Awas Yojana-Grameen
etc. which are financed by the Government and the loan is sanctioned and disbursed through
NABARD. NABARD acts as an implementing agency on behalf of the Government. The
refinance function may be further classified as :

i) Short term loan refinance function includes refinancing of short term loans or working
capital loan to Regional Rural Banks and Co-operative Banks at concessional rate of interest.
These loans are given by RRBs and Co-operative banks for agriculture and allied activities as
well as for non- farm activities like artisan work, weaving etc.

ii) Medium and Long Term Refinance- NABARD also provides Long Term and Medium-
Term Refinance to banks for providing adequate credit for helping farmers, rural artisans,
rural entrepreneur to take up investment activities.

Supervision

The supervising function encompasses monitoring and inspection of the Regional Rural
Banks and Co-operative Banks for implementing sound banking processes and on-boarding
them on the Core Banking platform. It also recommends about licensing of Regional Rural
banks and Co-operative Banks. It manages the talent acquisition of RRBs and Co-operative
Banks through Institute of Banking Personal Selection- Common Written Exam conducted
throughout the country.

Developmental

The developmental function involves designing new development schemes as well as

implementing various Government schemes. Some of the noteworthy and successful
development schemes designed by NABARD are the Kisan Credit Card Scheme and the
SHG Bank linkage programme. The SHG bank linkage programme has grown into the
world’s largest microfinance programme. NABARD is also involved in development of
institutions delivering rural credit. Co-operatives and Regional Rural Bank cumulatively
contribute to more than 50% of the rural credit portfolio. The performance monitoring of Co-
operative Banks and RRBs comes under the regulation and supervision of NABARD.
NABARD, in collaboration with Government of India and RBI has been implementing
various measures to ameliorate the financial condition of Co-operative banks and Regional
Rural Banks through continuous training and competency enhancement programmes.
NABARD tracks the progress of Co-operative Banks and publishes MIS regularly to
highlight their performances and suggest improvement. NABARD also attempts to bring the
RRBs within the core banking network to improve efficiency of customer service. Other than
development of rural funding institutions it also supports development programmes initiated
by the Government like the Tribal Development Programme, Water Shed Development
Programme, Financial Inclusion, Micro-Finance Initiatives, skill development and capacity
building programme etc.

NABARD

On the recommendation of the Shivaraman Committee, appointed by the Reserve Bank of

India in March, 1979, to study the problems related to the agricultural credit, National Bank
for Agriculture and Rural Development (NABARD) was established on July 12, 1982. It was
established as an apex bank for the agricultural credit. This was expected to play an important
role in the agricultural and rural development. This apex development bank was established
for the promotion of agriculture, small scale industries, cottage and village industries and
other allied economic activities in rural areas. Rural areas cover all villages, irrespective of
the size of population and also towns, with a population not exceeding 10,000. NABARD
took over the functions of the following departments of the Reserve Bank of India:

 Agriculture Credit Department

 Rural Planning and Credit Cell
 Agricultural Re-finance and Development Corporation

Principal activities of NABARD

NABARD focuses on the following activities:

 It plays the role of an apex institution in respect of all matters relating to policy and
planning and operational aspects relating to promotion of credit for agriculture, small
scale industries, cottage and village industries, handicrafts and other allied economic
activities in the rural areas.
 It serves as a re-financing institution for providing long-term and short-term credit for
promotion of activities in rural areas.

Management of NABARD
The Government of India has entrusted the management of the NABARD to a Board of
Directors. This Board consists of the following:

 A Chairman
 A Managing Director
 Three directors from among the directors of the RBI
 Three directors from the officials of the Government of India
 Two directors from among the experts in rural economics and rural development
 Two directors from among the officials of State Governments
 Three directors with the experience in the working of co-operative and commercial
banking

Functions of NABARD

NABARD performs the following functions:

I. Credit functions:

Following are the principal credit functions of NABARD:

1. Re-finance facility:

NABARD offers re-finance facility (by way of short-term credit) to co-operative banks,
sectoral banks and other financial institutions. By doing it, NABARD seeks to promote the
following:

(i) Marketing of agricultural produce

(ii) Distribution of agricultural inputs to the farmers

(iii) Production and marketing activities of cottage and small-scale industries

2. Medium-terms credit:

NABARD offers medium-term credit (for a period ranging between 1½–7 years) to the
following:

(i) State co-operative banks

(ii) Regional rural banks

3. Long-term credit:

NABARD offers long period credit (for a period not exceeding 25 years) to the following:

(i) State co-operative banks

(ii) RRBs

(iii) Land development banks

(iv) Commercial banks

4. Conversion facilities:

It offers conversion facility to state cooperative banks and RRBs for period not exceeding 7
years under conditions of drought, famine or other natural calamities.

5. Credit to state governments:

It provides credit to state governments for periods not exceeding 20 years to enable them to
subscribe directly or indirectly to the share capital of co-operative credit societies.

6. Share capital:

NABARD subscribes to share capital or invests in securities of any institution concerned with
agricultural and rural development.

II. Regulatory functions:

Following are the principal regulatory functions of NABARD:

(i) The Banking Regulation Act, 1949 empowers NABARD to undertake the inspection of
co-operative societies other than primary co-operative societies and RRBs

(ii) Any RRB or a co-operative society seeking permission to open a branch will have to
forward its application to the Reserve Bank through NABARD
(iii) The RRBs and the co-operative banks submitting their returns to the Reserve Bank are
expected to furnish copies of such returns to NABARD

(iv) The NABARD has been granted powers to call for any information or statement from the
co-operative banks and the RRBs.

III. Development functions:

NABARD undertakes various development functions. It formulates the following:

(i) Credit plans

(ii) Builds institutions

(iii) Promotes research and technology

(iv) Introduces innovations in credit delivery mechanisms

(v) Focusses on skill-upgradation of beneficiaries and client banks

NABARD co-ordinates the operations of the following:

(i) Rural credit agencies

(ii) Develops expertise to deal with agricultural and rural problems

(iii) Assists government, Reserve Bank and other institutions in their rural development
efforts It provides facilities for training and research, assists the state governments to enable
them to contribute to the share capital of the eligible institutions. In order to upgrade the
technical skill and competence of the personnel engaged in agricultural and rural
development, NABARD undertakes various training programmes as well.

Capital and resources of NABARD

Initially, the paid-up capital of NABARD was ` 100 crore and authorized capital was ` 500
crore. The paid-up capital was initially contributed by the RBI and the Central Government.
The paid-up capital of NABARD was raised from ` 100 crore to ` 500 crore. In 1999, it was
raised to ` 2,000 crore. NABARD draws funds from the Government of India, the World
Bank and other agencies, and also raises fund from the market. With these contributions the
effective capital base of NABARD at the end of March 2000, rose to ` 6,882 crore and now
stands close to ` 14,080 crore as of 2020. Major resources of NABARD are as follows:

Share capital:

As mentioned above, the paid-up capital of NABARD has been gradually raised from ` 100
crore to ` 1000 crore and has been further enhanced to ` 2000 crore and now to ` 14,080 core
in 2020.

National Rural Credit Fund:

This fund has been set up under Section 42 of the NABARD and is credited with the
contributions made by RBI and the Government of India from time to time. The amount in
this fund is applied by NABARD to provide financial assistance by way of loans and
advances for various purposes.

National Rural Credit (Stabilization) Fund:

This fund is also credited with contributions from the RBI and the Central Government. The
money credited to this fund is utilized for granting assistance to state co-operative banks,
RRBs or other financial institutions when they require assistance by way of loans and
advances up to 7 years, due to drought, famine or other calamities, military operations or
enemy action.

Rural Infrastructure Development Fund:

This fund was created for facilitating quicker completion of on-going rural-infrastructure
projects and commercial banks, which fail to meet the target for agricultural lending under
the priority sectors.

Borrowing from Reserve Bank:

The Reserve Bank of India provides General Lines of Credit (GLC) to NABARD to facilitate
the re-finance of seasonal agricultural operations and off-farm credit.

Bonds and Debentures:

NABARD raises funds through market borrowings by issue of bounds and debentures.

Deposits:

Most of the deposits have been made by private banks on account of priority sector lending.

Government of India and World Bank:

As mentioned above, the NABARD draws fund from the Government of India and the World
Bank and IDA.

Performance and achievements of NABARD

One may make following observations in this regard:

Resource mobilization:

NABARD mobilized resources with contribution of National Rural Credit and the Rural
Infrastructure Development Fund (RIDF).

Re-finance:

It provides re-finance facilities to state governments and regional rural banks. The
disbursement can be split in two parts:

(i) Purpose-wise disbursement:

The NABARD disburses credit mainly for the following purposes:

 Minor irrigation
 Land development
 Farm mechanization
 Plantation
 Horticulture
 Poultry farming
 Sheep breeding
 Fisheries
 Dairy development
  Storage
 Market yards

(ii)Region-wise disbursement:

NABARD has divided the country in six regions, namely, northern, north-eastern, eastern,
central, western and southern.

Rural Infrastructure Development Fund (RIDF):

The Rural Infrastructure Development Fund (RIDF) was initially set up with an amount of `
2,000 crore in 1995–1996. Now total corpus of the fund has increased to ` 18,000 crore. The
main objective of this fund is to help completion of various types of rural infrastructure
projects (like irrigation, roads and bridges) undertaken by the state governments and state
corporations. Disbursement of ` 13,042 crore had been made by the end of 2002. The
Government of India setup a new RIDF Fund with every budget since 1995–1996.

Micro finance:

This focusses on access of rural poor to formal banking services through self-help groups
(SHGs). A Micro Finance Development Fund in NABARD with a start-up capital of ` 100
crore was first announced through Union Budget in 2000–2001.

Kisan Credit Card Scheme:

This scheme was introduced in 1998– 1999 to facilitate short-term credit to farmers. It is
popular among both the farmers and the bankers. Farmers have the flexibility of availability
production credit avoiding procedural delays. For bankers, the need for repeated processing
of credit application is avoided.

Agricultural Development Finance Companies:

The NABARD took the initiative in establishing state level agricultural development finance
companies. The objective of these companies is to strengthen the flow of credit to
hi-tech/high value agricultural operations and associated infrastructure. These companies are
being set up in Andhra Pradesh, Tamil Nadu and Karnataka. The equity participation between
public and private sectors is to be in the ratio of 45: 55.
Promotional and developmental measures:

NABARD also undertakes several promotional and developmental measures for qualitative
improvement of lending in the non-farm sector. The promotional schemes so far
introduced/supported with grant/ assistance includes training cum production centres, artisan
guilds, rural entrepreneurship development programmes and other training programmes.
NABARD also has a scheme to link self-help groups (SHGs) with banks with 100 per cent
re-finance facility.

Credit Monitoring Arrangement:

NABARD (in consultation with RBI) has replaced Credit Authorization Scheme (CAS) with
Credit Monitoring Arrangement (CMA). It has been done with a view to provide cooperative
banks greater freedom and discretion. The idea is to create a liberalized and competitive
banking environment. However, banks are required to adhere to the exposure norms. They
must satisfy themselves about the technical feasibility and financial viability of the credit
proposals. Re-finance under SGSY:

NABARD has engaged itself in the implementation of Swarnajayanti Gram SwarozgarYojna

(SGSY). It has issued operational instructions to RBIs and Cooperative Banks. Banks have
been advised to evolve suitable norms for grading SGSY groups at different stages of
financing on the illustrative parameters indicated by NABARD.

National Bank for Agriculture and Rural Development (NABARD) is an apex development
bank in India having headquarters based in Mumbai (Maharashtra) and other branches are all
over the country. The committee to Review Arrangements for Institutional Credit for
Agriculture and Rural Development (CRAFICARD), set up the Reserve Bank of India (RBI)
under the chairmanship of Shri B Sivaraman conceived and recommended the establishment
of the National Bank for Agriculture and rural Development (NABARD). It was established
on 12 July, 1982 by a special act of the parliament and its main focus was to uplift rural India
by increasing the credit flow for elevation of agriculture and rural non-farm sector and
completed its 25 years in 12 July, 2007. It has been accredited with matter concerning policy,
planning and operations in the field of credit for agriculture and other economic activities in
rural areas in India. RBI sold its stake in NABARD to the Government of India, which now
holds 99% stake. NABARD is active in developing financial inclusion policy and is a
member of the Alliance for Financial Inclusion. The main purpose of the National Bank for
Agriculture and Rural Development is to provide credit for the development and publicity of
small-scale industries, handicrafts, rural crafts, village industries, cottage industries,
agriculture etc. The NABARD also supports all other related economic operations in the rural
economic operations in the rural sector promotion of sustainable growth in the rural sector.
The NABARD also plays the role of a contributor to the rural development by the means of
promoting institutional development, facilitating reference to loan providers in the rural
sector inspection, monitoring and evaluation of client financial corporations. National Bank
for Agriculture and Rural Development (NABARD) was established as the premiere rural
development bank.

Role of Government and the Reserve Bank in Developing the Rural Banking Structure
in India

Reserve Bank of India has always been a partner in Government’s endeavour towards
bringing banking to the masses, especially to the rural areas of the country. Under section 54
of the RBI act, 1934, the Reserve Bank of India has the authority to be involve itself in issues
pertaining to rural credit and development. It can employ expert staff to provide guidance or
carry out research studies for integrated rural development. The first major effort towards
step towards fulfilment of this responsibility was taken when RBI sponsored the All-India
Rural Credit Survey in 1951-52. This survey studied the indebtedness in rural areas and
institutional support available for meeting the debt requirement. The study observed that
though cooperation has not been successful in extending the credit outreach to the weaker
sections, it is imperative that it must succeed in the interest of rural development. This was
the first step towards formulating a policy of extending institutional credit to the rural areas to
protect the masses from the usurious rates charged by the informal sector. In the initial phase,
efforts were confined towards strengthening and reinforcing cooperative credit institutions.
The Reserve Bank of India, through a mechanism of refinancing the credit delivered to farm
sector, has been providing financial support to the cooperative credit entities to remain viable.
The credit survey committee also advised that the erstwhile Imperial Bank of India along
with its ten associate banks be converted to a single large entity, State Bank of India, with
ownership of Government of India and with exclusive target to open branches in rural
locations. Establishing the State Bank of India in 1955 was the first step towards diverting
commercial banking system towards rural credit. It was also the beginning of the multi -
agency approach towards delivery of rural credit. In 1969, Government took a landmark
decision to nationalise 14 major commercial banks to fulfil the growing need of agricultural
credit resulting from the capital intensive agricultural powered by the Green Revolution. The
nationalised banks supplemented the efforts of Co-operative Banks and State Bank of India in
enhancing the delivery of credit to rural areas. For more focussed lending and to exclusively
meet the credit needs of rural poor the Regional Rural Banks were established in 1975. They
augmented the endeavour of the co-operative banks and commercial banks towards
development of rural banking network. The RBI adopted the supply driven directed credit
lending policy through targeted ground level credit to fulfil the objective of social banking
and inclusive financing. The priority sector lending policy came into force in 1969. Under
this policy the banks were directed to lend 40 percent of their net bank credit to designated
sectors which were hitherto starved for credit. Further, out of the 40 percent priority sector
lending target, 18 percent was specifically directed to agriculture and allied industries only. It
further stipulated that 13.5 percent out of the sub category of 18 per cent PSL for agriculture
should be in the form of direct lending to agriculture and only 4.5 percent as indirect loans.
Another landmark policy was the lead bank scheme which initiated the bottom-up approach
in agriculture credit planning. In this scheme, the district became the smallest unit of
agriculture credit disbursement planning and one of the banks which had the prominent
presence in the district was designated as the lead bank. The lead bank was responsible to
plan and co-ordinate the disbursement of agricultural credit with other banks in district so that
a focussed lending approach could be followed, and the results could be monitored, planning
by the RBI.

Another policy which contributed to the rapid spread of commercial banks was the one is to
four branch licencing policy. According to this rule a bank which desires to open a branch in
an already banked location has to open four branches in unbanked location to get the branch
opening licence. The policy continued till 1990. This policy was the prime contributor to the
spread of rural bank branches during seventies and eighties. There are banks which fail to
meet the annual PSL targets and sub target. In such cases the bank could compensate by
contributing to Rural Infrastructure Development Fund managed (RIDF) by NABARD.
Support from RIDF is provided to State Governments and state-owned entities to enable them
to execute infrastructure projects in rural areas. The banks which are unable to meet the PSL
target in any category can also purchase a Priority Sector Lending Certificate from another
bank which has overachieved its PSL target in that category. In 1982, NABARD was
established as an apex bank responsible for rural credit planning and regulating and
supervising the institutions involved in the delivery of credit in rural areas. NABARD took
over the Agricultural Credit functions of the RBI. It reinforced the Government's conviction
towards development of the rural sector. In 1989, RBI initiated an improved version of lead
bank scheme which was known as service area approach. Under SAA plan each branch of a
commercial bank or regional rural bank located in rural area is allotted approximately 20-25
villages for all around development. The designated branch would fulfil the financial
intermediation need of the villages located its service area and build up linkage in bank credit
and production to enhance the income levels.

GOVERNMENT

The government plays a crucial role in monitoring rural banking in India.

Policy Framework:

 The government sets the policy framework for rural banking, including regulations,
guidelines, and initiatives.
 This framework ensures that RRBs operate within a defined regulatory environment
and prioritize lending to agriculture, microfinance, and small and medium enterprises
(SMEs).

Financial Support:

 The government provides financial support to RRBs through recapitalization and

other measures.
 This support helps RRBs maintain financial stability and continue to serve the rural
population.

Supervision:

 The government oversees the overall performance of RRBs and ensures compliance
with regulatory requirements.
 This includes monitoring their financial health, asset quality, and adherence to lending
guidelines.
Priority Sector Lending:

 The government mandates RRBs to prioritize lending to agriculture, microfinance,

and small and medium enterprises (SMEs).
 This ensures that RRBs contribute to the development of rural areas and support the
most vulnerable sections of society.

Financial Inclusion:

 The government promotes financial inclusion through various initiatives, including

the Pradhan Mantri Jan Dhan Yojana (PMJDY) and the National Electronic Funds
Transfer (NEFT) system.
 RRBs play a crucial role in implementing these initiatives and expanding access to
banking services in rural areas.

Coordination with RBI and NABARD:

 The government coordinates with the Reserve Bank of India (RBI) and the National
Bank for Agriculture and Rural Development (NABARD) to ensure effective
monitoring and regulation of rural banking.
 This coordination helps to avoid duplication of efforts and ensure a consistent
approach to rural banking.

Financial Inclusion:

 Pradhan Mantri Jan Dhan Yojana (PMJDY): This flagship financial inclusion
scheme aims to provide basic banking facilities to all households in India. RRBs have
played a significant role in implementing PMJDY, opening millions of bank accounts
in rural areas.
 National Electronic Funds Transfer (NEFT): The government has promoted the
use of NEFT to facilitate digital transactions in rural areas. RRBs have been
encouraged to adopt NEFT and provide their customers with access to this convenient
and secure payment system.

Credit Facilitation:
  Kisan Credit Card (KCC): KCC is a scheme that provides credit facilities to
farmers for agricultural activities. RRBs play a crucial role in issuing KCC cards to
farmers and providing them with timely credit.
 Pradhan Mantri Kisan Samman Nidhi (PM-KISAN): This scheme provides
income support to small and marginal farmers. RRBs are involved in disbursing the
benefits under PM-KISAN to eligible farmers.

Digital Transformation:

 Digital Banking: The government has encouraged RRBs to adopt digital banking
solutions to improve efficiency and reach more customers. This includes initiatives
like mobile banking, internet banking, and ATMs.
 Financial Literacy: The government has launched financial literacy programs to
educate rural communities about the benefits of banking and financial products. RRBs
play a key role in conducting these programs and promoting financial literacy among
their customers.

Regulatory Reforms:

 Relaxation of Norms: The government has relaxed certain regulatory norms for
RRBs to enable them to operate more efficiently and effectively. This includes
measures like reduction in capital adequacy requirements and relaxation of branch
licensing norms.
 Mergers and Acquisitions: The government has encouraged mergers and
acquisitions among RRBs to create larger and more viable entities. This can help
RRBs achieve economies of scale and improve their financial performance.

Government entered the field of agricultural credit primarily to provide relief from distress
caused by droughts, floods and other natural calamities. The loans were called as Takavi.
Advancing of loans by the government to finance the emergent needs of agriculturists on a
regular basis began towards the end of' the 19th century. Starting as loans to provide relief to
the agriculturists who were adversely affected by famine, floods and other natural calamities
and to assist them to tide over emergencies, takavi loans (Government loans) subsequently
became regular loans for productive purposes. The Government departments namely revenue
and community development which handled Takavi loans are burdened with multifarious
duties resulting in too much delay in the disbursement of loans and inadequate supervision or
lack of coordination to ensure proper use of loans. The committee on Takavi loan and
cooperative credit appointed by The Government of India in 1961 recommended the
discontinuance of Takavi loans for normal production and land improvement purposes to
agriculturists direct and suggested that, barring certain exceptional cases, funds available with
the government for granting loans to agriculturists should be utilised to supplement the
resources of cooperatives. Therefore, the governmental efforts since then have been directed
towards strengthening of institutional credit framework by way of financial and legislative
support rather that coming up as an agency for direct lending to farmers. With a view to
ensuring increased flow of credit for the agricultural development programmes and to
improve the income opportunities of the rural poor, both central and the State Governments
have been taking several measures, important among thein are summarized as follows:

1) Cooperative laws have been amended to provide for universal membership to enable small
and marginal farmers, tenant cultivators, agricultural labourers, rural artisans etc. to become
members without facing procedural problems.

2) Some state governments provide long term loans to persons belonging to weaker sections
to enable them to purchase shares and become members of cooperatives.

3) Cooperative loans provide for reservation of seats on the managing committee of credit
cooperatives for the representatives of the weaker sections.

4) Government subsidies are provided for the poorest of weaker sections such as tribals and
scheduled castes to relieve their interest burden on institutional loans.

5) In appropriate cases, managerial subsidies *are also provided to cooperatives in the initial
stages of their organisation.

6) The Central Government provides assistance to institutional credit agencies through plan
schemes in the banking sector and cooperative sector. In the banking sector, loans are given
to NABARD to meet its refinance obligations and for share capital to RRBs. In the
cooperative sector the Central Government and State Government provides resources to the
LDBs on a matching basis by investment in debentures floated by them.
7) In order to correct the regional imbalance in the cooperative development, Central
Government provides assistance to CCBs, located in the identified weak areas to cover the
deficit in their interest resources to enable there in to borrow from NABARD for their
loaning programmes. A term loan at concessional rate is released to the State Governments
who, in turn, together with their matching contribution utilize it for augmenting the internal
resources of CCBs.

8) In order to give relief to cultivators whose capacity to repay the production loans is
impaired due to natural calamities leading to crop failure, agricultural credit stabilization
funds have been constituted at various levels of the cooperative credit structure and at the
national level in the NABARD. The short-term dues of the cultivators are converted into
medium term loans by recourse to the agricultural credit stabilization funds at a prescribed
proportion. The CCBs and the SCBs meet 25 percent of the conversion, the NABARD, 60
per cent and the State Government, 15 per cent. Under the Central Scheme, the Central
Government provides financial assistance by way of subsidy (75%) and long-term loans
(25%) for building up the stabilization funds of the SCBs. The loan is payable in 25 years of
which for the first 10 years only the interest is payable. Government subsidy ranging between
25 per cent and 33 per cent of the cost of investment is provided to the selected beneficiaries
under the comprehensive Integrated Rural Development Programme (IRDP) which envisages
a package of assistance to the rural population living below poverty line.

Thus, the strategy of government is to provide assistance to institutional credit agencies

through plan schemes to improve the economy of the rural areas through a package of
infrastructure on farm development activities with the objectives of optimum utilisation of
land, water, human and livestock resources.

RBI

The Reserve Bank of India (RBI) is India’s central bank and regulatory body functional under
the ambit of Ministry of Finance, Government of India. Its origin dates back to 1926, with the
recommendation of the royal commission on Indian currency and finance also known as the
Hilton-Young Commission. The Commission’s recommendation paved the way to for the
creation of a central bank to separate the central of currency and credit from the government
to augment banking facilities throughout the country. The 1934 Act of the Reserve Bank of
India established it as the central bank which started operations in 1935. The primary
function of the Reserve Bank of India is the issue and supply of the Indian rupee and the
regulation of the Indian banking system. Since the inception of the central bank, its roles and
functions have undergone numerous changes and today the RBI performs the following
functions. These are as follows:

 Financial supervision
 Regulator and supervisor of the financial system
 Regulator and supervisor of the payment and settlement systems
 Banker and debt manager to government
 Managing foreign exchange
 Issue of currency
 Bankers’ bank
 Regulator of the banking system
 Detection of fake currency
 Custodian to foreign exchange

In addition to the above-mentioned functions, the Reserve Bank of India performs various
development functions also. One of the development roles that RBI performs is that of
providing finance for development projects especially those of agriculture and rural
development. The funding requirements of the rural and agricultural projects are enormous.
The list of funding requirements for various projects is endless and so is the amount required.
A review of the history of Central Banks around the world reveals that they showed little
interest in financing rural and agriculture development. Several factors contributed to their
reluctance in funding the rural and agriculture projects including the small amount of
individual loans, negligible value of the securities, problems of the collaterals, higher risk,
etc. The central and commercial banks around the world, therefore, did not actively
participate in the provision of rural finance. India felt the need for rural finance long time
before Independence and the creation of the Reserve Bank of India focused on increasing the
volume of credit available for trade, industry and agriculture and to mitigate the evils of
fluctuating and high charges for the use of such credit. Today, as we can see, the Reserve
Bank of India provides assistance in the area of agriculture credit, financing for rural credit
programs, consultation to government and ministries, alongside the regular supervision and
monitoring of banking and other financial institutions. The Reserve Bank of India (RBI) was
a pioneer in the area of rural credit. The founding legislation and several amendments of the
country’s central bank paved way to take over the responsibility for enlarging the availability
of rural credit. The bank predominantly performs three major functions within the sphere of
provision of rural credit, namely

a) financing function,

b) promotional advisory and coordinating function and

c) regulatory functions.

Financing Functions of RBI

The major function of the RBI in relation to rural and agricultural development is to pump
rural credit in the various schemes of the Government of India (GoI). Under the ambit of
financing functions, the RBI creates provision of long- and medium-term loans for various
projects. For instance, the bank provides long-term loans to state governments from the
National Agricultural Credit Fund with an objective of contributing towards the share capital
of the cooperative credit institutions. The medium-term loans are provided to the State
Commercial Banks (SCBs) to refinance the seasonal crop loans of credit cooperatives. It also
grants medium-term loans to SCBs from the National Agricultural Stabilization Fund for the
repayment of their short-term loans under the conditions of drought and famine. The bank
also provides long, medium- and short-term loans to National Bank for Agriculture and Rural
Development (NABARD).

Promotional, Advisory and Coordinating Function

The promotional advisory and coordinating functions of the RBI are planning and
formulation of programs for cooperative credit under the Five-Year Plans, review of the
annual progress of various credit schemes and providing support to the central and state
governments, and cooperative credit institutions in tackling their problems in implementing
various credit schemes.

Regulatory Functions

The RBI is an apex bank that is entrusted with the important responsibility of monitoring
various banking and financial institutions. The regulatory functions, therefore, include
devising and putting in place the operational guidelines for the institutes operational in the
domain of rural credit and finance and specifically include establishment of credit limits and
norms for credit cooperatives and commercial banks.