Practical 03
An overview, Rural Lending Programmes of Commercial Banks,

Rural Credit
Agriculture is the primary source of income of individuals residing in the rural
regions across India. Every year, farmers and peasants need to invest a
considerable amount of funds to ensure a healthy harvest. Thus, they often resort
to borrowing money from moneylenders and financial institutions to fulfill their
basic needs before harvest season arrives, and they can earn money by selling
their crops.
Thus, any loan taken for agricultural purposes or small home businesses
across the rural areas in India is known as a Rural Credit.

Importance of Rural Credit in India
Rural Credit is Necessary for the Following Reasons –
1.The gestation period in agriculture is significant, which means that the period
from sowing the crop to selling the produce is vast. Therefore, Rural Credit helps
farmers with their livelihood until the crops are ready for sale in the market.
2.The credit can help farmers acquire seeds, tools, fertilizers, and more, which
are essential parts of their trade.
3.Another valid reason for availing of Rural Credit is to mitigate personal
expenses, such as marriage, religious functions, death, and more. Additionally,
such financial assistance can also aid in repaying outstanding debts.

A commercial bank is an entity whose economic activity is financial intermediation.
In other words, it takes deposits from the public and directs those resources to
grant credits to obtain a profit.
These banks can generate profits from the interest rate they charge for the
financing granted. Thus, they not only recover the borrowed money but also obtain
additional income.
Commercial banks are usually involved in the opening and maintenance of
savings accounts or current accounts.
Through these products, customers make deposits to keep their money safe and
achieve a small return.

Importance of Commercial Banks
Commercial banks are vital to a nation’s economy.
1.They offer essential banking services to end users and help create market capital
and liquidity by taking consumers’ funds and lending them to others.
2.Commercial banks play a role in credit creation, which increases production,
employment, and consumer spending, thereby boosting the economy.
3. These banks are heavily regulated by the central bank of that country, the RBI, in
India.
For example, central banks impose reserve requirements on commercial banks,
which means that the commercial banks would need to hold a certain percentage of
their consumer deposits at the central bank in case of a rush to withdraw funds from
the general public.
These entities help markets thrive and, if their influence is used well, can positively
foster development so that more people can access essential services and
consumer goods.

Types of Commercial Banks
Commercial banks are classified into two categories, i.e., scheduled commercial
banks and non-scheduled commercial banks.
Furthermore, scheduled commercial banks are classified into three types:
1.Private Banks
When individuals own more than 51% of the share capital, that banking company is
private. However, these banks are companies on the stock market on a recognized
stock exchange.
the private banks in India are Axis Bank, Bandhan Bank,City Union Bank,DCB
Bank,Dhanlaxmi Bank,Federal Bank, HDFC Bank,ICICI Bank,IDBI Bank,IDFC
Bank,IndusInd Bank,Jammu and Kashmir Bank,Karnataka Bank,Karur Vysya
Bank,Kotak Mahindra Bank,Lakshmi Vilas Bank, Nainital Bank,RBL Bank,South
Indian Bank,tamilnad Mercantile Bank and YES Bank.
2.Public Banks
When the Government owns more than 51% of the share capital of a listed banking
company, that bank is called a public sector bank. SBI is the largest public sector
bank in India and is ranked among the top 50 banks in the world. Listed below are the
public banks in India.
Bank of Baroda, Bank of India,Bank of Maharashtra,Canara Bank
Central Bank of India,Indian Bank,ndian Overseas Bank,Punjab & Sind Bank
Punjab National Bank,State Bank of India,UCO Bank,nion Bank of India

Foreign Banks-part of private sector banks
Banks established in foreign countries and branches in the home country are
called foreign banks.
Some of the top foreign banks operating in India are –
American Express Banking Corporation, Bank of America
Barclays Bank, BNP Paribas, Citibank, DBS Bank India Limited, Deutsche Bank
HSBC Bank,J.P. Morgan Chase Bank, Standard Chartered Bank, The Royal Bank
of Scotland and United Overseas Bank Ltd
Regional Rural Banks
Regional Rural Banks usually operate at regional levels in different states of India
and they provide credit to weaker sections of the society like agricultural laborers,
marginal farmers, and small enterprises.

Regional Rural Banks
Regional Rural Banks usually operate at regional levels in different states of
India and they provide credit to weaker sections of the society like agricultural
laborers, marginal farmers, and small enterprises.
The Regional Rural Banks (RRBs) were established in 1975 under the
provisions of the Ordinance promulgated on 26th September 1975 and
Regional Rural Banks Act, 1976.
RRBs are financial institutions which ensure adequate credit for agriculture
and other rural sectors.
The RRBs combine the characteristics of a cooperative in terms of the
familiarity of the rural problems and a commercial bank in terms of its
professionalism and ability to mobilise financial resources.
After the reforms in the 1990s, the government in 2005-06 initiated a
consolidation program that resulted in the number of RRBs declining from
196 in 2005 to 43 in FY21, and 30 of the 43 RRBs reported net profits.

Functions of RRB’s:
The basic functions of a bank can be summarized as follows:
To provide safety to the savings of customers
To create credit and increase the supply of money
To encourage public confidence in the financial system
To mobilize the savings of public
To increase its network so as to reach every segment of the society
To provide financial services to all customers irrespective of their level of income
To bring in social equity by providing financial services to every stratum of society.
What are the Issues Related to RRBs?
1.Rising Cost: The rising cost of operations of Regional Rural Banks (RRBs) as
compared to scheduled commercial banks.
The government wants them to work towards increasing their earnings.
2.Limited Activities: Due to the fact that many of these branches don't have enough
business, they are incurring losses.
In rural areas, they mainly offer government schemes like Direct Benefit ransfer.
3.Low Internet Banking: At present only 19 RRBs have internet banking facilities and
lower percent of having mobile banking licenses.
4.Existing regulations allow only those RRBs to offer internet banking which
maintains minimum statutory capital to risk-weighted assets ratio (CRAR) of more
than 10%.

Functions of Commercial Banks
1. Mobilize savings for capital creation
Commercial banks help mobilize savings through a banking network. People in
developing economies have low incomes, but banks can induce them to save by
introducing a variety of deposit schemes to suit individual needs. Banks also
mobilize the savings of the wealthy few. By mobilizing these people’s savings,
banks can channel them to carry out productive and investment activities. Therefore,
commercial banks are crucial to help capital formation in a developing country,
creating jobs and markets, and boosting capitalism.
2. Finance the industry
Commercial banks finance the industrial sector in multiple ways. They provide
short-term, medium-term, and long-term loans and three-year or even multi-year
loans to help the industry, which is very rudimentary, particularly in the case of
some developing nations, and help them grow and flourish. Commercial banks
provide manufacturing activities and entrepreneurs with the confidence they need to
grow their businesses on a large scale. In the same way, commercial banks can
finance the actions and ventures of large companies that go public.

3. Finance trade
Commercial banks help in the financing of both internal and external trade. Banks
provide loans to retailers and superstores to store the goods they trade. They also
help the movement of goods from one place to another by providing all kinds of
facilities such as discounts and accepting letters or promissory notes to provide
resources. However, they finance exports and imports of developing countries by
providing currency exchange facilities to exporters and importers of goods.
4. Finance agriculture
Commercial banks help finance the agricultural sector in developing countries in
multiple ways. They provide loans to traders in agricultural commodities. They
also open a network of branches in rural areas by providing agricultural credit.
Commercial banks provide direct financing to farmers for the commercialization of
their products, modernization, and technification of their farms, by providing
irrigation technologies, resources for land development, etc.
These banks also provide financial assistance for industrial-scale animal
husbandry, cattle raising, sheep farming, chicken farming, fish farming, and
horticulture. In some cases, small farmers are also reached by microcredit tools
from commercial institutions or microfinance institutions. Commercial banks, in
theory, are prepared to provide financial assistance for all economic activities in
rural areas.

5. Financing of consumer goods
In developing countries, commercial banks help buyers to invest in durable
consumer goods like home appliances, cars, etc. These banks can give consumers
credit to buy movable and immovable goods. They also help people improve their
living standards by providing them with the necessary resources.
6. Finance activities that generate employment
Commercial banks help finance employment-generating activities in developing
and developed countries in multiple ways. They provide loans for young people to
pursue higher education in engineering, medicine, and other high-skilled vocational
pursuits. They also grant credits for young entrepreneurs, engineering and medical
students, and others seeking technical training to establish their businesses. All
commercial banks provide such credit facilities. Thus, help form human capital for
start-ups and foreign companies that establish themselves in a country. Still, they
also help finance entrepreneurial activities and new talents, brands, inventions, etc.

7. Help the government and central banks in monetary policy
Commercial banks help the economic development of a country by faithfully
following the central bank’s monetary policy. Central banks depend on commercial
banks to successfully implement monetary policy by following their dictates to drive
the development of the economy.
These banks contribute so much to the growth of economies by granting loans for
agriculture, for industry, helping the formation of physical and human capital, and
by following the monetary policy of the monetary authorities of a country.

Table 01: Agency-wise ground level credit (agriculture) targets for FY2022 (` lakh crore)
Despite the COVID-19 pandemic, trends in GLC disbursement show that overall
expected GLC achievement will exceed the target fixed for the year (Table 01).

Policies and Performance of Commercial Banks
i) Branch Expansion
The branch expansion policy for 1982-83 aimed at achieving a coverage of one bank
office, on an average, for a population of 17000 in the rural and semi-urban areas (as per 1981 census) in each block and
also to eliminate spatial gaps in the availability of banking facilities so that a rural branch was available within a distance of 10
km and would serve an area of about 200 square kilometres.
The population norm has been relaxed from March 31, 1990 to 10,000
with regard to tribal / hilly areas and sparsely populated regions.
Bangalore-based Canara Bank set up 723 branches in 2013, while State Bank of India, the largest lender, opened 627.
Among private lenders, ICICI opened the highest number, 587.
The majority of branches were opened in non-metropolitan locations, as lenders focused on expanding the reach in
unbanked and under-banked regions. HDFC Bank, the second largest private lender, opened 333 of its 339 new branches in
rural and semi-urban centres. About 80 per cent of Canara Bank's new branches were outside metro and urban locations.

ii) Sectoral allocation
Lending to Priority Sector
At a meeting of the National Credit Council held in July 1968, it was emphasized that
commercial banks should increase their involvement in the financing of priority
sectors, viz., agriculture and small-scale industries. The description of the priority
sectors was later formalized in 1972 on the basis of the report submitted by the
Informal Study Group on Statistics relating to advances to the Priority Sectors
constituted by the Reserve Bank in May 1971.
On the basis of this report, the Reserve Bank prescribed a modified return for
reporting priority sector advances and certain guidelines were issued in this
connection indicating the scope of the items to be included under the various
categories of priority sector.
Although initially there was no specific target fixed in respect of priority sector lending,
in November 1974 the banks were advised to raise the share of these sectors in their
aggregate advances to the level of 33 1/3 per cent by March 1979.