12-06-2014, 02:50 PM
Future of Rural Banking
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Banking in Ancient India
Let me start by sharing with you some features of banking in India in ancient times since you
may still find traces of such ancient banking practices in isolated rural areas in our country.
Like in many other aspects, we have a long tradition of banking. Evidence regarding the
existence of money-lending operations in India is found in the literature of the Vedic times, i.e.,
2000 to 1400 B.C. The literature of the Buddhist period, e.g., the Jatakas, and recent
archaeological discoveries supply evidence of the existence of sresthis, or bankers. From the
laws of Manu, it appears that money-lending and allied problems had assumed considerable
importance in ancient India.
Approach to Rural Banking
The Reserve Bank of India has a mandate to be closely involved in matters relating to rural
credit and banking by virtue of the provisions of Section 54 of the RBI Act. The major initiative
in pursuance of this mandate was taken with sponsoring of All-India Rural Credit Survey in
1951-52. This study made agency-wise estimates of rural indebtedness and observed that
cooperation has failed but it must succeed. The Report of the Committee on Directions is still
considered a classic on the subject, and two of the four members were, incidentally, from Andhra
Pradesh. This is the origin of the policy of extending formal credit through institutions while
viewing local, traditional and informal agencies as usurious. In the first stage, therefore, efforts
were concentrated on developing and strengthening cooperative credit structures. The Reserve
Bank of India has also been making financial contributions to the cooperative institutions
through evolving institutional arrangements, especially for refinancing of credit to agriculture.
Dynamics of Rural Economy
Problems, prospects and solutions to many of the issues mentioned have been researched and
debated, primarily with a view to strengthening, revamping or re-orienting rural financial
institutions. However, there is merit in viewing the problems of rural credit and rural banking in
a wider context. In this regard, it will be useful to recognise some dynamics of rural economy.
First, services sector is getting increasing importance in the rural areas also -from coffee shops to
cable television operators. Assessing and meeting of credit needs of this sector is important.
Second, the integration between rural and urban areas has increased significantly, with the result,
mobility of labour, capital, products and even credit between the two is increasing.
Rural Credit Markets : New Realities
As mentioned earlier in the approach to rural banking, the basic thrust of our policy has been to
promote institutional credit and eliminate or ignore informal finance. However, in reality, while
formal credit has expanded its share, informal finance continues to be significant. The idea of
promotion of Self-Help Groups and micro financing is an indirect admission of necessity of
informal finance. The future of rural banking cannot be appreciated without fully understanding
both formal and informal rural credit markets, especially their linkages. Since in the earlier
sections, organisation and functioning of the formal credit system in the rural areas has been
explained, in this section nature of informal markets and the linkages will be explored.
Institutions
Among the institutions involved in rural credit, cooperatives have a special place in the RBI.
There is full appreciation of the problems and efforts are underway to workout a package for
revival and may be, rebirth of rural cooperative banks by a Committee headed by Deputy
Governor Shri Jagdish Capoor. The Committee would naturally address issues relating to legal
framework, and incurring costs of addressing problems related to overhang of the past. In
addition, the Committee, I trust, would consider desirability of cooperative banks' foray into
non-fund-based activities, such as fee-based financial services on behalf of mutual funds or
insurance-products. The cooperatives could, in fact help, retail Treasury Bills and Government
Securities in rural areas. Diversified financial products will be increasingly demanded and
supplied in the rural areas, and co-operatives should not be left out of this trend of providing
Enhancing Effective Supply
Some analysts argue that supply-led strategy in regard to rural credit has not been successful,
since institutional spread and directed-lending have not had the desired impact. While accepting
that demand has to play its role, and real-demand also implies negotiating strength of the
borrower in respect of financial institutions, it will be inappropriate to conclude that supply
should necessarily follow demand. Mere presence of rural credit institutions, does not amount to
availability of supply. Similarly, mere prescriptions of priority lending would not ensure supply.
For example, prescription of priority-sector lending relates to percentage of credit outstanding
rather than advances. Further, there is no reward for overshooting the target and undershooting is
not really penalised since amounts of shortfall need to be placed in a fund administered by
NABARD with a totally risk-free return of 11.5 percent for a five-year advance. These funds are
actually lent to State Governments, thus to an extent replacing rural credit to agriculture with
credit to State Government for rural development. While as a transient measure during a period
conspicuous for incomplete projects,
Related Policies
There is increasing recognition that, the spread of literacy and generation of growth impulses in
the rural sector would be very significant factors in enhancing effective supply and reducing true
cost of rural credit. More specifically, the desired spread of technology and trickledown of urban
financial products to rural areas would require concerted action in four areas. First and foremost,
insurance, especially of crops, should penetrate the rural areas to mitigate the risks to both
farmer and lender. The lack of penetration of insurance is perhaps an important reason for
lenders seeking tied and other risk-mitigation arrangements through informal markets. Second,