Goal of Social Banking: 5 Programmes

The following points highlight the five important programmes which try to fulfil the goal of social banking. The programmes are: 1. Branch Expansion 2. The Lead Bank Scheme 3. The Service Area Approach (SAA) 4. Local Area Banks (LABs) 5. Financing of Priority Sectors.

Programme # 1. Branch Expansion:

In the post-nationalisation period, commercial banks have made tremendous progress in the field of branch expansion. The branch expansion policy of banks has two main objectives: first, to narrow down regional imbalances; and second, to provide more banking facilities in rural and semi-urban areas.

The RBI formulates branch licensing and branch expansion policy for the commercial banks, generally for three years. In June 2003 there were 66,514 bank branches in the country of which 49 per cent were in rural areas as compared with 32.5 per cent in June 1969.

As a result of the rapid pace of branch expansion since 1969, the average population served per branch office was 65,000 at the time of bank nationalisation which came down to 16,000 as at end of June 2003. But there are still some inter-State disparities in the spread of banking, particularly in the Eastern, North-Eastern and Central Regions.

Programme # 2. The Lead Bank Scheme:

The Lead Bask Scheme was introduced by the Reserve Bank in December 1969 as an adjunct to the branch expansion programme of commercial banks. Its main objective was to ensure the flow of bank credit to priority sector and to coordinate the activities of the various agencies, such as banks and developmental agencies of Government at various levels. It was the first attempt towards ‘Area Approach’.

Initially, a Study Group of the National Credit Council under Prof. D.R. Gadgil recommended in October 1969 the adoption of an Area Approach by commercial banks to identify and study local problems and evolve an integrated credit plan in rural areas of the country’s districts.

The Nariman Committee appointed by the RBI also recommended in November 1969 that banks should be allotted specific districts where they should take ‘the lead’ in surveying the potential of banking development, in extending branch expansion and expanding credit facilities. The RBI accepted its recommendations and introduced the Lead Bank Scheme in December 1969.

Under the Scheme, the major public sector banks were allotted all the 388 districts at that time in the country. A particular bank was made responsible for a particular district to develop banking and credit in that district. AU other agencies operating in the district were also to be involved.

The bank so selected was designated as the Lead Bank for that district. It was expected to act as a consortium leader for coordinating the efforts of all credit institutions in the allotted district for branch expansion and for meeting the credit needs of the rural economy.

Functions of a Lead Bank:

A Lead Bank is expected to perform the following functions:

(1) To survey the resources and potential for banking development in its district

(2) To identify unbanked growth centres for branch opening on the basis of a phased programme.

(3) To survey the number of commercial units and other establishments not having banking accounts or which were dependent primarily on moneylenders.

(4) To examine the facilities for the marketing of agricultural produce and industrial production, storage and warehousing space and the linking of credit with marketing in the district.

(5) To survey the facilities for the stocking of fertilizers and other agricultural inputs and for the repair and servicing of equipment.

(6) To recruit and train staff for offering advice to small borrowers and farmers and for the follow-up and the inspection of end-use loans.

(7) To assist other primary lending agencies.

(8) To maintain contacts and liaison residually with Government and semi-Government agencies.

Working of Lead Bank Scheme:

The Lead Bank Scheme initially consisted of two phases. The first was the survey of districts to identify institutional and credit gaps, and the second was the preparation and implementation of District Credit Plans (DCPs). Both the phases were completed by July 1978. But there was no uniformity in the DCPs.

So the RBI advised the lead banks to terminate them. Instead, it issues fresh guidelines from time to time for the preparation of new DCPs, accompanied by separate Annual Action Plans (AAPs).

The DCP is the perspective plan and the A AP is its yearly phasing. The RBI constituted the High Power Committee on Lead Bank Scheme which issues guidelines for the preparation of DCPs for specified periods, the last being for the period January 1988 to December 1990.

The Lead Bank Scheme has been successful in bringing about a phenomenal growth in branch expansion and providing larger credit facilities in rural areas. It extended banking facilities to the under-banked and unbanked rural and semi-urban areas from 5,175 branches in June 1969 to 47,216 in June 2003 and increased the share of public sector banks’ priority sector advances from 14.6 per cent to 42.5 per cent over the period.

Up to the end of June 2003, it covered 575 districts in the country. Despite these merits, the Lead Bank Scheme suffers from certain weaknesses.

First, there has been the lack of coordination and cooperation among various agencies such as commercial banks, cooperatives, State Governments and others.

Second, the designation of a particular bank as the lead bank does not make it a leader automatically. But it dilutes the enthusiasm of other banks for the scheme. The scheme is considered to be the scheme of the lead bank and the other agencies feel like being only spectators.

Third, the attitude of Government agencies at the block level in the preparation of DCPs has been one of indifference. There has been absence of block-wise monitoring. There has been no awareness of targets and no conscious implementation of these targets.

Fourth, under broad sectoral heads, agriculture and small industries lag far behind the targets whereas the service sector exceeds the target to a considerable extent. This phenomenon is almost common for all the districts.

Fifth, the degree of cohesion at the block and village level where the AAPs are implemented has been much wanting, reflecting the failure to realise the consortium approach.

Sixth, the scheme is based on the principle of voluntary team work which is lacking, and therefore fails to produce the desired results. This is because the lead bank staff and officers do not take interest.

In order to have a certain uniformity and homogeneity in the operations of commercial banks, the Service Area Approach under the overall lead bank scheme has been started since April 1989.

Programme # 3. The Service Area Approach (SAA):

The Lead Bank Scheme introduced by the Reserve Bank in December 1969 fulfilled only the quantitative aspects of branch expansion and priority sector advances. But it failed to touch the qualitative aspects like identification of needy people and extension of timely credit to them.

To assess the impact of credit from banks on the overall economic development of the rural sector in general and agricultural productivity and production in particular, the RBI asked the Chief Executives of the public sector banks to carry out field visits in rural areas of different districts all over the country. They visited 88 districts in 21 States in November 1987.

They discussed the findings of these visits in a seminar convened by the RBI in January 1988 and recommended that the time was opportune to adopt a system in which each bank could concentrate in a specified area to develop productive lending. Therefore, the RBI set up a Committee under the chairmanship of its Deputy Governor, Dr. P.D. Ojha, to examine the operational aspects involved in implementing this approach.

The RBI accepted the Ojha Committee recommendations. Subsequently, the 1988-89 Budget announced the ‘Service Area Approach’. The RBI instructed all commercial banks including the Regional Rural Banks to start implementation of SAA under the overall Lead Bank Scheme with effect from 1 April, 1989.

The SAA involves five distinct stages in its implementation which are discussed as under:

1. Allocation of Service Area:

There is the allocation of specific villages to all the rural and semi-urban bank branches including RRB branches for providing credit for all-round development. Each branch on an average is allocated 15 to 25 villages under the area of its operation known as Service Area.

There are at least five States, viz., Himachal Pradesh, Arunachal Pradesh, Manipur, Meghalaya, Orissa and one Union Territory Andaman where the average number of villages allocated per branch exceeds 25 villages. Similarly, the average number of kms to be covered by each branch is more than 100 sq kms for at least nine States and one Union Territory.

2. Survey of Villages:

After fixation of the service area, each branch is to undertake village-wise surveys in respect of their allotted villages and prepare village profiles in a proforma prescribed by the RBI. The village profile has to be updated periodically taking into account the development changes which may have taken place in the intervening period. The branch managers are expected to periodically visit the villages in their service area to have a continuous contact with extension and developmental agencies.

3. Preparation of Credit Plans:

Each branch is required to prepare an annual credit plan for its service area on an ongoing basis. First, the credit plan is prepared for each village and then the village credit plans are aggregated into service area credit plan. The annual credit plan should reflect the potentialities, and needs of the people of the area on the basis of survey reports.

The Lead Bank Officer plays a crucial role in this regard and is expected to provide necessary support to all the branch managers in the district. The RRB branches prepare credit plans for the target group only and for the non-target group the designated bank prepares the credit plan.

4. Coordination:

A Block Level Bankers’ Committee (BLBC) has to be formed to coordinate the activity of the banks and Government agencies. The Lead Bank Officer is the convener-chairman of BLBC and all the bank branch managers located in the block, including cooperative banks, BDO and his extension officers in the block are its members.

The officers of the RBI and NABARD can also attend the BLBC meetings. The BLBC finalises the branch credit plans and these plans are aggregated to block credit plans.

5. Monitoring:

The BLBC holds periodical meetings at least once in a quarter to review the progress of implementation of the branch credit plans and sort out operational problems.

Working of SAA:

The SAA was introduced as part of the Lead Bank Scheme for improving the quality of rural lending by commercial banks including RRBs. It came into operation from 1 April, 1989 covering 6,18,216 villages which had been allocated to 42,158 branches of the various banks. The survey of villages and preparation of credit plans had been completed by March 1989.

The RBI asked the public sector banks to conduct a second round of field studies in December 1989 with a view to ascertaining the manner of implementation of the SAA in rural branches, the problems encountered in effective implementation and steps needed for improving the operational aspects of the Scheme.

Following these studies, it was felt that the Scheme held the promise of improving the productivity of rural credit and efforts should be made towards stabilising it at the earliest.

It was also decided that the relaxations already granted to bank branches to lend to their old clients residing in the service area of other bank branches may continue for some time more, so that the credit flow does not get disrupted. Further, cooperative banks were advised to prepare credit plans and their staff would be given training in this direction.

The RBI issues fresh guidelines for the preparation of branch credit plans for each year keeping in view the deficiencies observed in the credit plans prepared for the previous years in order to remove their shortcomings.

To plan, co-ordinate and effectively monitor the credit plans prepared by bank branches and improve upon them, the NABARD has been setting up district level offices in a phased manner so as to cover all the districts in the country within the next 3 or 4 years.

These offices also transmit potential linked credit plans to rural and semi-urban branches of banks to help them prepare their credit plans. The RBI issues revised guidelines on credit planning and monitoring from time to time to make the SAA more effective.

The following modifications have been introduced recently:

(i) SA branches may be grouped block-wise without disturbing their SA identities or their obligation to prepare village level/service area plans so that the borrowers have the flexibility to approach other branches within the block to meet their credit requirement adequately;

(ii) Satellite/mobile offices be opened in Service Areas which are very large and are located in tribal/hilly and inaccessible areas;

(iii) The area of operations of the specialised branches such as agricultural development branches, agricultural banking division and gram vikas kendras may be enlarged to use their infrastructure to the maximum;

(iv) Realigning the sacred service areas; and

(v) Exemptions from the SAA in respect of large projects covering several districts/ States.

Under the SAA, Annual Credit Plan is prepared by the concerned commercial bank under the Lead Bank Scheme. During 1999-2000, the all-India sector-wise targets were: Rs.39,168 crores for agriculture and allied activities; Rs.12,773 crores for SSIs and Rs.12,945 crores for services.

These figures reveal that the quality of delivery system in rural lending has definitely improved under the SAA. These figures reveal that the quality of delivery system in rural banking has definitely improved under the SAA.

Programme # 4. Local Area Banks (LABs):

The Finance Minister in his budget speech for 1996-97 announced the Local Area Banks scheme. The LAB scheme owes its origin to the complaints of many State governments that public sector banks were extorting the rural areas of all their money. States like Punjab, Haryana, Uttar Pradesh, Kerala are much below the national average in their credit-deposit ratios.

They have been complaining that the public sector banks are taking away their resources to lend them in other States. These banks are expected to remedy these defects by concentrating their operations in rural areas. Unlike the RRBs, these banks will be set up in the private sector and registered and licensed as scheduled banks. The RBI issued the following guidelines on setting up of the LABs on 24 August, 1996.

Object:

The aim is to set up LABs in the private sector in district towns to cater to the credit needs of the local people and to provide efficient and competitive financial intermediation services in their area of operation. These banks will promote rural savings and provide credit to viable economic activities in local areas. They are expected to bridge the gaps in credit availability and enhance the institutional credit framework in rural and semi-urban areas.

Functions:

Since the LABs will be located in district towns, their activities will be focused on the local customers. They will promote and mobilise savings. They will lend to agriculture and allied activities, SSI, agro-industrial units, trading units and the non-farm sector in their area of operation.

These will observe the priority sector lending target of 40 per cent of net bank credit, as applicable to other commercial banks. Within this target, they will lend at least 25 per cent or 10 per cent of net bank credit to the weaker sections.

Capital:

The minimum paid-up capital for starting an LAB shall be Rs.5 crores. The promoters’ contribution shall be at least Rs.2 crores. The promoters may comprise individuals, corporations, trusts or societies.

Area of Operation:

The area of operation of such a bank shall be a maximum of three geographically contiguous districts. Its Head/Registered Office will be located at a centre within its area of operation. The Bank shall be allowed to open branches only in its area of operation. In regard to branch licensing, it shall be governed by the existing policy.

Prudential Norms:

Such a bank shall be subject to prudential norms, accounting policies and other policies as are laid down by the RBI. The SLR and CRR to these banks will be the same as that for RRBs. So will be the deposit rates and lending rates. The bank will have to achieve capital adequacy ratio of 8 per cent from the very beginning. Similarly, norms for income recognition, asset classification and provisioning will be applicable from day one.

Critical Appraisal:

Academicians and bankers have questioned the wisdom of the Government and RBI in adding another institution to the plethora of financial institutions and agencies for providing credit to the rural areas. If the existing large number of institutions have failed to deliver the goods, the introduction of one more may be a futile exercise.

What is the guarantee that the LABs will be a success, given the attitudes and approaches of the people and the banking staff? However, it is hoped that the LABs will be successful where the RRBs have failed. Presently, eight ‘in-principle’ approvals have been given for setting up Local Area Banks, of which three have been registered.

Programme # 5. Financing of Priority Sectors:

The concept of ‘Priority Sector Advances’ was formulated in 1968 with the introduction of social control over banks. The National Credit Council pointed out that those sectors of the economy which did not have adequate access to bank finance but which due to their economic importance deserved due recognition from the banking system should be treated as ‘Priority Sectors’.

Therefore, there should be a conscious and deliberate effort to ensure that these sectors obtained adequate credit from the banking system. At that time, the priority sectors consisted of agriculture, small scale industry and exports.

With the nationalisation of 14 commercial banks in 1969, the term ‘Priority Sectors’ was enlarged to include ‘hitherto neglected sectors’ comprising of small road and water transport operators, retail trade including petty shopkeepers and self-employed persons such as artisans, craftsmen, etc. and indigent students receiving education.

A Working Group set up by the RBI under the Chairmanship of Dr K.S. Krishnaswamy introduced the concept of ‘weaker sections’ within the priority sectors. Consequently, at present the priority sector advances as redefined on 13 June 1995 include:

1. Agriculture, both direct and indirect

2. Small scale industries.

3. Other priority sectors which comprise of:

(a) Road and water transport operators;

(b) Retail trade and small business:

(c) Setting of industrial estate;

(d) Professional and self-employed persons;

(e) Education;

(f) Financial assistance to ex-servicemen; and

(g) SUME—Scheme of Urban Micro Enterprises.

4. Weaker sections consisting of:

(i) Small and marginal farmers with land holdings up to 5 acres, landless labourers, tenant fanners and share croppers;

(ii) Artisans, village and cottage industries enjoying credit limits up to Rs. 25,000;

(iii) IRDP beneficiaries;

(iv) Beneficiaries belonging to scheduled castes/scheduled tribes;

(v) Beneficiaries under the DRI and SUME schemes, as also those under the Scheme for Liberation and Rehabilitation of Scavengers (SLRS); and

(vi) Self Help Groups under NABARD’s Pilot Projects.

Both the Government and the RBI have laid down the fallowing targets for lending to priority sectors. The banks are expected to ensure that 40 per cent of the total credit is extended to priority sectors. With the overall target of 40 per cent, the following sub-targets have been laid down:

(i) 18 per cent of the bank credit to the agricultural sector;

(ii) 50 per cent of the direct lending to agriculture for small and marginal farmers and agricultural labourers;

(iii) 12.5 per cent of the total credit advanced to small scale industries reserved for artisans, village craftsmen and cottage industries;

(iv) Advances to the weaker sections to the level of 25 per cent of priority sector advances or 10 per cent of the total bank credit outstanding’s; and

(v) 1 per cent of aggregate advances under DRI scheme.

During 1993-94, the RBI made certain changes in the composition of priority sector targets within its overall 40 per cent target for commercial banks. Banks have been allowed to combine direct and indirect advances to agriculture within the 18 per cent target.

Their indirect lending to agriculture has been limited to one-fourth of the total agricultural lending. Within the SSI credit limit, 40 per cent has been earmarked for khadi, village, cottage and tiny units. Effective 1 July, 1993, the priority sector target for foreign banks has been raised to 32 per cent.

They have been allowed to include credit of 10 per cent for loans to the export sector and SSI units each in the overall target of 32 per cent. If they fall to achieve the targets, they are required to deposit the deficit with the SIDBI. The SIDBI pays the foreign banks 10 per cent interest on the deposited amount.

In the case of other banks, the shortfall in lending to agriculture (18 per cent) is required to be deposited with the NABARD for making funds available to the Rural Infrastructure Development Fund (RIDF) from 1996. These deposits with the NABARD are subject to a maximum of 1.5 per cent of the bank’s net credit. The NABARD pays such a bank 0.5 per cent above the ceiling rate of interest on deposits.

Effective 6 July, 1996, the private sector banks which fail to reach the required target of 40 per cent are directed to deposit 50 per cent of the shortfall for one year either with the NABARD or SIDBI. The rate of interest on such deposits is 8 per cent.

The priority sector advances under major categories are discussed briefly as under:

1. Priority sector advances of public sector banks increased from 14.6 per cent as at the end of June 1969 to 42.5 per cent as at the end of March 2003. Within the priority sectors, the share of advances to agriculture increased from 5.4 per cent in June 1969 to 15.3 per cent in March 2003.

Of this, direct finance to agriculture increased from 1.3 per cent to 10.8 per cent. The share of SSI increased from 8.5 per cent in June 1969 to 11.1 per cent in March 2003, and other priority sector advances increased from 0.7 per cent to 15.0 per cent.

2. The proportion of priority sector advances by foreign banks to their net bank credit was well above the target of 32 per cent as at the end of March 2003. It was 33.9 per cent with credit to export constituting 18.7 per cent and SSI 8.7 per cent.

3. Priority sector advances by private sector commercial banks were 44.4 per cent as at the end of March 2003 against the target of 40 per cent.

4. The advances to weaker sections within the priority Sectors constituted 6.76 per cent of the net bank credit of public sector banks ending March, 2003 as against the target of 10 per cent.