After liberalisation, the banking industry in India is undergoing rapid changes as a consequence of the measures introduced for structural reorganisation. After the implementation of the structural adjustment programme, the rural credit delivery system is not being given due importance by the banking sector. This has resulted in inadequate credit for agricultural and rural development. The number of bank branches in rural areas has increased from 1833in 1969 to 35,403 as at the end of December'93 constituting 57.3 per cent of total branches, but in terms of outstanding credit these rural bank branches account for only 13.8 per cent of the total credit. It should not be forgotten that the rural areas generate substantial demand for goods & services and unless the rural credit delivery system is improved, there may be a recessionary tendency in the economy.

The success of the rural banking system will largely depend on its ability to innovate the processes, technologies and structures that reduce the transaction and risk costs and increase the effectiveness of development banking activities. It has been observed that private money lenders are doing a roaring business in rural areas whereas the rural branches of banks are not able to find credit worthy borrowers. The innovation and faster decision making process will pay a key role in effectiveness of rural banking system. The way banks in development countries like India perform the credit delivery function will largely determine the degree of success of the developmental effort in the country.

Macro Level Issues in Rural Banking

The macro level issues in rural banking relate to viability, functional autonomy, institutional innovations, freeing the lending rates, etc. The viability of the rural banking schemes and their success largely depend upon backward, forward linkages & infrastructural facilities. The different issues of functional autonomy and innovations are detailed below.

Regional Rural Banks and Co-operative Banks have not been able to achieve functional autonomy and this has become the reason for their low profitability. The promoter banks has always appointed their nominees as Chief Executive of the RRBs. The nominee from the promoter bank lacked commitment to the bank and caused mismanagement of many rural banks. The RRB managers should be given more autonomy in managerial and administrative decisions. Autonomy has to be given to branch managers of RRBs in selection of beneficiaries, which are presently done by block development officers. An efficient and healthy rural banking can be built up in participatory arrangements with Government institutions assuming mutual respect between the parties and also respect for their respective roles.

Credit to Priority Sector of Scheduled Commercial Banks

 The formalities & procedures in rural banks need to be streamlined for smooth flow of credit to the productive sector in rural areas. There are banks in developing countries which have successfully designed innovative schemes for rural areas and have been highly successful.

Management & Institutional Issues

The management systems of rural bank branches has to be different from conventional management practices followed in urban bank branches. The success of rural banking will depend largely on the quality of manpower in rural branches. The rural banking system has to adopt suitable HRD policies which should be conductive to the efficient management of rural branches.

The issue of liberation lending rates has been considered by various committees. Studies have indicated that it is the timely availability of credit that is more important to rural borrowers than a preferential rate of interest. It is also a myth that rural banking can't be run on a commercially sustainable basis. If the rural banks are properly managed they can come up with substantial profits which is shown by the growing prosperity of the private moneylenders. Retail lending in rural areas will not only be socially useful but also commercially profitable for banks. By financing in rural areas they can also diversify their credit portfolio and leverage risks. However, considering the changing scenario of banking, market rates of interest should be allowed to prevail. Increasing the interest rates may improve the viability of the rural financial institutions. However, the bad borrowers should not be subsidised by the good borrowers. Forming Self Help Groups will not substantially enhance the incremental income of the rural people. In states like West Bengal where the land reforms programme of the Govt. has substantially benefitted the income level of the rural poor, the SHG concept will not be very successful. In West Bengal the rural poor who have risen above the poverty line need substantial injection of credit for economically viable activities like small scale industries, dry land farming and agro-based industries. NABARD, SIDBI and Commercial Banks have to play a leading role in this rural development and financing effort.

Regulation of RRBs - Role of NABARD

Regulation of Regional Banks is presently done by RBI, NABARD and the promoter lead bank of the district. The prudential norms are set by Reserve Bank of India and norms for the system as a whole including deposit mobilisation is also decided by RBI guidelines. NABARD being the refinancing agency monitors the recovery position and advises on various practices regarding credit management. The promoter bank appoints the key officials in the rural bank thereby controlling the managerial decision making.

Activity-wise Disbursements of Regional Rural Banks - 1996 &1997

RRBs credit products & systems are obsolete and experience from success stories in other countries have not been considered while designing credit products. The systems should be flexible and procedures of disbursement simple so as to play a catalytic role in rural development. To achieve these objectives NABARD should play a more proactive role in regulation of RRBs. The monitoring of the management, lending policies, design of credit products should be done by NABARD.

Building up a Viable Rural Credit Delivery System - Self Help Groups :

Studies have revealed that wherever SHGs are active, ably supported by NGOs and banks, there is a perceptible improvement in the economic status and quality of life of the members. In India, the Mysore resettlement and Agricultural Development Association (MYRADA), an NGO has successfully evolved many SHGs. The intermediation of SHGs has considerably reduced the time spent by bank personnel on identification of borrowers, documentation, follow up and recoveries. The estimated average trancsaction cost of lending per borrower can be cut down by 40-60% in case of lending through SHGs.

However if should not be neglected that SHGs have got some major draw backs as has been experienced in Bangladesh. The SHGs in some cases have increased rural indebtedness of the rural poor due to payment of instalments on the due date was enforced by the group members. It is clear that such a scheme can not be replicated in India without modifying the procedural systems and recovery schedule of the SHGs scheme. The strict stipulation that as SHG group members has to repay the instalment on a particular date is not feasible in the present economic structure of India. This stipulation has forced many SHG members to borrow from private money lenders at exorbitant rates of interest which has ultimately affected adversely the financial condition of the poor rural borrower. It will be unjustified to impose strict penalties on rural borrowers when large corporates in India are getting away with heavy concessions in lending rates and moratorium on repayment of loans. The cost of finance has to be comparable to commercial rates prevailing in the rural areas and the Rural Banks should be able to achieve high recovery rates and enhance its profitability so that a part of the profits can be used for setting up the guarantee fund.

Structural Weaknesses and other Issues in Rural Banking :

The year 1997-98 has witnessed a negative growth rate in agriculture. One of the important reasons for the declining agricultural growth has been lack of a strategy for financing rural infrastructure projects like dryland irrigation projects, setting up of cold chains, warehouses and rural roads. A sustained agricultural growth will have to be key determinant of a high GDP growth but also as a strong anti-inflationary measure. This may not be possible without provision of adequate for rural infrastructure projects.

NABARD has set up the Rural Infrastructure Development Fund (RIDF) for financing large projects in rural areas. The performance of the scheme has been dismal due to non-achievement of targets.