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Rural banking in India Research Team | Posted On Tuesday, April 07,2009, 12:46 PM

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Rural banking in India



Rural banking in India

Rural banking in India started since the founding of banking sector in India. Rural bank in those days mainly focused upon the agriculture sector. Today, business banks and local rural banks in India are penetrating every corner of the country are extending a helping hand in the growth process of the rural sector in the country.

The Co-operative bank has a history of almost 100 years. The Co-operative banks are an important constituent of the Indian monetary System. Their role in rural financing continues to be important even today, and their business in the urban areas also has increased extraordinarily in recent years mainly due to the sharp increase in the number of primary co-operative banks. They are governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1965.

Banks which are helping for the development of rural areas

The area of function of a majority of the RRBs is limited to a notify area comprising a few districts in a State. SBI has 30 Regional Rural Banks in India known as RRBs. The rural banks of SBI are reaching in 13 states extending from Kashmir to Karnataka and Himachal Pradesh to North East. Apart from SBI, there are other few banks which functions for the growth of the rural areas in India. The following are some of the other banks which are working for the rural areas.

  • United bank of India
  • Syndicate bank
  • Co-operative Bank

The following are the finance is available in rural areas by Co-operative banks in India are :

  • Farming
  • Cattle
  • Milk
  • Hatchery
  • Personal finance.

Institutional Arrangements for Rural Credit Co-operatives

  • Short Term Co-operatives
  • Long Term Co-operatives


Short Term Co-operatives

District Central Co-operative Banks

State Co-operative Banks

Primary Agriculture Credit Co-operative Societies


Long Term Cooperatives

State Agriculture & Rural Development Banks

Primary Agriculture & Rural Development Banks



Primary Agricultural Credit Societies (PACSs)

An agricultural credit society can begin with 10 or more persons normally belonging to a rural community or a group of villages. The value of each share is generally nominal so as to allow even the poorest farmer to become a member. The members have unlimited liability, that is each member is fully responsible for the entire loss of the society, in the event of failure. Loans are given for short periods, generally for the harvest season, for carrying on agricultural operation, and the rate of interest is fixed. There are now over 92,000 primary agricultural credit societies in the country with a membership of over 100 million.

The primary agricultural credit society was likely to attract deposits from among the well – to-do members and non-members of the village and thus promote thrift and self-help. It should give loans and advances to needy members mainly out of these deposits.

Central Co-operative Banks (CCBs)

The central co-operative banks are located at the district headquarters or some famous town of the district. These banks have a few private individuals also who provide both finance and management. The central co-operative banks have three sources of funds and they are follows :

  • Their own share capital and reserves
  • Deposits from the public and
  • Loans from the state co-operative banks

Their main purpose is to lend to primary credit society apart from that, central co-operative banks have been undertaking normal commercial banking business also, such as attracting deposits from the general public and lending to the needy against proper securities. There are now 367 central co-operative banks.

State Co-operative Banks (SCBs)

The state Co-operative Banks, now 29 in number, they finance, co-ordinate and control the working of the central Co-operative Banks in each state. They serve as the link between the Reserve bank and the general money market on the one side and the central co-operative and primary societies on the other. They obtain their funds mainly from the general public by way of deposits, loans and advances from the Reserve Bank and they have share capital and reserves.

Commercial banks and rural credit

The commercial banks at present provide short term crop loans account for nearly 45 to 47% of the total loans given and disburse by the commercial banks. Term loans for varying periods are given for purchasing pump sets, tractors and other agricultural machinery, for construction of wells and tube well, for development of fruit and garden crops, for leveling and growth of land, for purchase of ploughs, animals, etc. commercial banks also extend loans for related activities viz., for dairying, poultry, piggery, bee keeping, fisheries and others.

Commercial banks and small farmers

The commercial banks identify the small farmers through Small Farmers Development Agencies (SFDA) set up in different districts and group them into various categories for credit support so as to enable them to become bible cultivators. As regard small cultivators near urban areas and irrigation facilities, commercial banks can help them to go in for vegetable cultivation or combine it with small poultry farming and maintain of one or two milch cattle.

Regional rural banks and rural credit

The Narasimham committee on rural credit recommended the establishment of Regional Rural Banks (RRBs) on the ground that they would be much better suited than the commercial banks or co-operative banks in meeting the needs of rural areas. Accepting the recommendations of the Narasimham committee, the government passed the Regional Rural Banks Act, 1976. The main objective of RRBs is to provide credit and other facilities particularly to the small and marginal farmers, agricultural laborers, artisans and small entrepreneurs and develop agriculture, trade, commerce, industry and other productive activities in the rural areas. Now there are 196 RRBs in 23 states of the country with 14,200 branches.

Structure of regional rural bank

The establishment of the Regional Rural Banks (RRBs) was initiated in 1975 under after Section 3(1) of the RRB Act, 1976. The issued capital of RRBs is shared by Central Government, sponsor bank and the State Government in the proportion of 50%, 35% and 15% respectively.

The objectives if regional rural bank

  • Bridging the credit gap in rural areas.
  • Check the outpouring of rural deposits to urban area.
  • Reduce regional imbalances and increase rural employment generation

Role of RBI in rural credit

  • RBI has been taking wholehearted interest in expanding credit to the rural sector. RBI has been taking a series of steps for providing timely and adequate credit through NABARD.
  • Listed commercial banks excluding foreign banks have been forced to supplement NABARDs efforts-through the stipulation that 40percent of net bank credit should go to the priority sector, out of which at least 18 percent of net bank credit should flow to agriculture. RBI has also taken steps in recent years to strengthen institutional mechanisms such as recapitalization of Regional Rural Banks (RRBs) and setting up of local area banks (LABs).

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