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CHAPTER II
TRENDS AND PROGRESS OF
COMMERCIAL BANKING IN INDIA : WITH
SPECIAL REFERENCE TO SOCIAL
BANKING
48
CHAPTER – II
TRENDS AND PROGRESS OF COMMERCIAL BANKING IN INDIA :
WITH SPECIAL REFERENCE TO SOCIAL BANKING
Contents Page
No.
Part A: Historical Perspectives of Indian Banking
Introduction 23
Initial Phase (up to 1947) 24 – 25
Banking after Independence
Phase I (1947 – 67) 25 – 29
Phase II (1967 – 1991-92) 29 – 31
Phase III (1991-91 and beyond) 32 – 33
Post Reform Progress of the Commercial Banking
Deposits and Credit 33 – 35
Net Profit 35 – 36
Financial Soundness 36 – 39
Part B: Social Banking
Introduction 39
Concept of Social Banking 40
Social Banking in India 41
I. Priority Sector Lending
Introduction 42
Meaning 43 – 44
Classification 44 – 51
Action taken for non achievement of targets 52
Time Limit for disposal of applications 52
Rate of Interest for Loans 52
Historical Backdrop of Priority Sector Lending 52
Genesis of the Priority Sector Lending Policy 53
Committees on Priority sector Lending and their
Recommendations
Gadgil Committee (1969) 54
Sariya Committee (1972) 55
Krishnaswamy Committtee (1980) 55
Sivaram Committee (1981) 55
Ojha Committee (1991) 55
49
Khusro Committee (1991) 56
Narasimhan Committee (1991) 56
Naik Committee (1992) 57
Mehta Committee (1994) 58
R V Gupta Committee (1997) 58
Prominent Changes – Landmarks in the Priority Sector
Credit Policy
58 –59
Targets under Priority Sector Lending 60
Net Bank Credit 62
Comparison of Priority Sector Lending – Pre & Post
Reforms
62 – 64
Trends of Priority Sector Advances – Bank Group Wise
1997-2012
64
II. Bank Branch Expansion
Introduction 68
Objectives of the Statutory Provisions 69
Evaluation of the Policy over a period 70
Branch Expansion during 1980s and 1990s 71
Liberalised Branch Expansion Policy – September 2005 71
Revision of the Branch Expansion Policy, 2009 72
Major Components of the Extant Branch Authorisation
Policy
73
Opening of Off-Site ATMs
74
BF/BC Model 74
Door step Banking 75
Evaluation of Extant Policy 75
Branch Expansion of all Scheduled Commercial Banks 75
III. Financial Inclusion
Introduction 84
Extent of Financial Exclusion 85
Committee on Financial Inclusion 2006
Terms of Reference 86
Financial Inclusion – Definition 86
Major observations of the Committee 87 – 92
Initiatives taken by RBI 92
Broad approach to Financial Inclusion 92
Measures introduced by RBI 93 – 95
50
Progress of Financial Inclusion 95 – 96
Conclusion 97 – 98
References 99
51
CHAPTER II
TRENDS AND PROGRESS OF COMMERCIAL BANKING IN INDIA : WITH
SPECIAL REFERENCE TO SOCIAL BANKING
Introduction
Banking existed in India in one form or the other from times immemorial. We have got evidence
to suggest a few centuries before Christ, India had a system of banking which admirably suited
its needs.
Banks, as we recognize them as important financial intermediaries in the Indian financial system,
could be regarded as a contribution of the British rulers, blossoming as the culmination of their
trading interests. It was only in their interests that the banks were established, the first bank
being, The Bank of Hindustan in 1770, as an appendage of one of the British agency, M/S
Alexander & Co. The present era in Banking may be taken to have commenced with the
establishment of Bank of Bengal in 1809 under the Government Charter and with Government
participation in the share capital.
In this chapter, an attempt is made to discuss briefly the origin of commercial banks in India, its
progress before and after nationalization and post reform developments. It is also proposed to
present the concept of Social Banking and the progress of Commercial Banks in terms of Social
Banking.
For the purpose of convenience, this chapter is divided into two Sections – A and B. Section – A
discusses the historical perspectives, and Section – B discusses the Social Banking and progress
of Commercial Banking in India in terms of Social Banking, particularly the Public Sector
Commercial Banks.
PART – A
HISTORICAL PERSPECTIVES OF INDIAN BANKING
Globally, the story of banking has much in common, as it evolved with the moneylenders
accepting deposits and issuing receipts in their place. According to the Central Banking Enquiry
Committee (1931), money lending activity in India could be traced back to the Vedic period, i.e.,
52
2000 to 1400 BC. The existence of professional banking in India could be traced to the 500 BC.
Kautilya’s Arthashastra, dating back to 400 BC contained references to creditors, lenders and
lending rates. Banking was fairly varied and catered to the credit needs of the trade, commerce,
agriculture as well as individuals in the economy. Mr. W.E. Preston, member, Royal
Commission on Indian Currency and Finance set up in 1926, observed “....it may be accepted
that a system of banking that was eminently suited to India’s then requirements was in force in
that country many centuries before the science of banking became an accomplished fact in
England.”1 An extensive network of Indian banking houses existed in the country connecting all
cities/towns that were of commercial importance. They had their own inland bills of exchange or
hundis whichwere the major forms of transactions between Indian bankers and their trans-
regional connections. 2
Banking practices in force in India were vastly different from the
European counterparts. The dishonoring of hundis was a rare occurrence. Most banking worked
on mutual trust, confidence and without securities and facilities that were considered essential by
British bankers. Northcote Cooke observed “....the fact that Europeans are not the originators of
banking in this country does not strike us with surprise.”3
Banking regulation also had a rich
tradition and evolved along with banking in India. In fact, the classic ‘Arthashastra’ also had
norms for banks going into liquidation. If anyone became bankrupt, debts owed to the State had
priority over other creditors.4
The Indian Banking Sector:
The Indian banking sector has been evolving continuously. The evolution of the Indian Banking
Sector can be classified as different phases based upon the major changes that have taken place.
The different phases are:
Initial phase (up to 1947)
Phase I (1947 – 1967)
Phase II (1967 to 1991-92)
Phase III (1991 – 92 and beyond
Initial Phase (up to 1947)
The initial phase (up to 1947) was a difficult period for the banking sector. A large number of
banks sprang up as there were no entry norms for banks. The Swadeshi Movement during this
53
phase saw the establishment of many Indian banks, most of which continue to operate even
now5. This phase was marked by the two World Wars and the Great Depression, many banks
failed. Most of the small banks were local in character and had low capital base. As a result, they
were not resilient enough. Apart from the global factors, one of the major reasons for failures of
small banks was fraudulent manipulation by directors and managers and inter-connected lending.
Also, several banks that failed had combined trading functions with banking functions. Partly, in
order to address the problem of bank failure, the Reserve Bank was set up in 19356. In fact,
central banks in several other countries, including the US, were also set up to address the
problem of bank failure. However, the Reserve Bank had a limited control over banks and lack
of an appropriate regulatory framework posed a problem of effective regulation of small banks.
By the end of this phase, the country’s financial requirements were still catered to, in a large
measure, by the unorganised sector. The focus of the banking sector was on urban areas and the
requirements of agriculture and the rural sector were neglected. Although the co-operative credit
movement had a very encouraging beginning, it did not spread as expected despite Government
patronage7.
The growth of banking Industry in the country from 1939 to 1948 is given in Table 2.1. The
table shows that there were 39 scheduled banks, 643 non scheduled banks operating in India
besides the Imperial Bank in the year 1939 while the corresponding numbers in the year 1948
were found to be 77 and 541. There was almost a continuous growth in the number of scheduled
banks during this period whereas there was declining trend in case of non-scheduled banks till
1941. Thereafter there had been a rapid growth till 1945 and again the number was reduced
during 1946 and 1948 in case of non-scheduled banks. The policy of RBI to promote scheduled
banks in the country and also the partition of the country in 1947 could be the reason for these
trends. The percentage share of scheduled banks in the total paid up capital and reserves,
deposits, loans and advances and investments is much higher than the percentage share of non-
scheduled banks during the period 1939 – 1948.
Banking After Independence
The period after independence could be categorised broadly in three phases: (i) 1947 to 1967; (ii)
1967 to 1991-92; and (iii) 1991-92 and beyond.
54
Tab
le 2
.1
B
AN
KIN
G IN
DU
STR
Y IN
IND
IA D
UR
ING
193
9 -
194
8 In
vest
men
ts
Tota
l
7676
100
9654
100
12943
100
22736
100
30845
100
39879
100
46519
100
45888
100
47535
100
46533
100
Sou
rce:
Com
pil
ed
from
vario
us
issu
es
of
the S
tati
stic
al
Tab
les
rela
tin
g t
o B
an
ks
in I
nd
ia b
y R
BI
Non
-Sch
Ban
ks
523
6
552
6
652
5
918
4
1123
4
1808
5
3199
7
3416
7
2631
7
2455
5
Sch
Ban
ks
3651
46
4245
44
5852
45
10177
45
16702
54
23208
58
27902
60
27019
59
28485
59
27953
60
Imper
ial
Ban
k
3802
48
4857
50
6439
50
11641
51
13020
42
14863
37
15418
33
15453
34
16419
34
16125
35
Loan
s &
Ad
van
ces T
ota
l
12050
100
9980
100
12014
100
11611
100
17731
100
26787
100
35184
100
45765
100
42595
100
42378
100
Non
-Sch
Ban
ks
19
64
16
18
54
19
18
50
16
21
65
19
27
78
16
39
76
15
57
32
16
58
71
12
55
37
13
52
86
13
Sch
Ban
ks
5258
44
4895
49
6276
52
6067
52
10893
61
15788
59
22155
63
30467
67
28143
66
27292
64
Imp
4828
40
3231
32
3888
32
3379
29
4060
23
7023
26
7297
21
9427
21
8915
21
9800
23
Dep
osi
ts
tota
l
20345
100
22663
100
26290
100
38751
100
58706
100
76995
100
91292
100
98701
100
99978
100
95067
100
Non
-Sch
Ban
ks
2187
11
2450
11
2464
9
3471
9
4803
8
7560
10
11075
12
10413
11
8332
8
7655
8
Sch
Ban
ks
9374
46
10610
47
12904
49
18934
49
32450
55
45657
59
54280
60
61121
62
61987
63
59383
63
Imp
8784
43
9603
42
10892
42
16346
42
21453
37
23778
31
25937
28
27167
27
29659
29
28029
29
Pai
d u
p C
apit
al to
tal
2865
100
100
100
3116
100
4245
100
5308
100
6258
100
6699
100
7014
100
7455
100
7455
100
Non
-Sch
Ban
ks
548
19
587
20
631
20
667
19
725
17
939
18
1211
20
1182
18
1209
17
1261
17
Sch
Ban
ks
1194
42
1267
42
1360
44
1625
48
2372
56
3206
60
3877
62
4337
65
4617
66
5004
67
Imp
1123
39
1125
38
1125
36
1138
33
1148
27
1163
22
1170
18
1180
17
1188
17
1190
16
N
um
ber
of
Ban
ks T
ota
l
683
634
460
476
547
629
722
620
635
619
non-S
ch
Ban
ks
643
592
415
431
489
559
646
542
554
541
Sch
Ban
ks
39
41
44
44
57
69
75
77
80
77
Imp
eria
l
Ban
k
1
1
1
1
1
1
1
1
1
1
1939
%
1940
%
1941
%
1942
%
1943
%
1944
%
1945
%
1946
%
1947
%
1948
%
55
Phase I (1947 – 1967)
The banking scenario that prevailed in the early independence phase faced three main issues.
First, bank failures had raised the concerns regarding the soundness and stability of the banking
system. Second, there was large concentration of resources from deposits mobilization in a few
hands of business families or groups. Banks raised funds and on-lent them largely to their
controlling entities. Third, agriculture was neglected insofar as bank credit was concerned. In
order to address the issue of bank failures, the Banking Companies Act (renamed as Banking
Regulation Act in March 1966) was enacted in 1949 empowering the Reserve Bank to regulate
and supervise the banking sector. Banks continued to fail even after the Independence and with
the enactment of the Banking Companies Act the number of banks that failed declined. It was
therefore, felt that it would be better to wind up insolvent banks. The Reserve Bank, therefore,
was granted powers in the early 1960s for consolidation, compulsory amalgamation and
liquidation of small banks. Although some banks had amalgamated before 1960s, the number of
banks amalgamating rose sharply between 1960 and 1966. Several other small banks otherwise
also ceased to function. The Reserve Bank was fairly successful in improving the safety and
soundness of the banking sector as several weak banks (most of which were non-scheduled) were
weeded out through amalgamations/liquidations. The deposit insurance was also introduced,
which increased the trust of the depositors in the banking system and encouraged deposit
mobilisation. In early years of banking in India there were thus several instances which suggest
that the small and weak banks struggled to survive. Even in recent years, it is several small banks
that have merged with the large banks. Another feature that emerges from the evolution of
banking till the end of this phase was that despite the existence of small banks, a large segment
of the population remained outside the banking system. In other words, the existence of small
banks did not necessarily promote financial inclusion8.
On the eve of independence, the banking system was concentrated primarily in the urban and
metropolitan areas. Efforts, therefore, were made to spread banking to rural and unbanked areas,
especially through the State Bank of India and through the branch licensing policy. The number
of bank branches rose significantly between 1951 and 1967, as a result of which the average
population per branch fell from 1,36,000 in 1951 to 65,000 in 19699. However, the pattern of
bank branches in rural and urban areas remained broadly the same.
56
TABLE 2.2
BANKING INDUSTRY IN INDIA DURING 1951-1969
(Rs. In Lakhs) ITEMS 1951 % 1956 % 1961 % 1966 % 1967 % 1968 % 1969 %
Number of
Reporting
Banks
State Bank of
India
1 1 1 1 1 1 1
Scheduled
Banks
75 71 66 59 57 56 57
Non Scheduled
Banks
469 333 210 27 20 73 14
TOTAL 545 405 277 87 78 130 72
Paid-up Capital
& Reserves
State Bank of
India
1198 16 1201 17 1383 18 1695 17 1785 17 1887 18 1998 18
Scheduled
Banks
4880 66 4814 66 5672 74 7984 81 8284 81 8510 81 8983 81
Non Scheduled
Banks
1337 18 1208 17 580 08 213 02 202 02 174 01 160 01
TOTAL 7415 100 7223 100 7635 100 9892 100 10271 100 10571 100 11141 100
Deposits
State Bank of
India
23091 28 23547 23 53426 25 78610 23 85840 23 94983 22 111141 23
Scheduled
Banks
51734 63 72536 70 124995 57 255899 76 282360 76 323427 77 369347 76
Non Scheduled
Banks
6977 09 7375 07 39996 18 2460 01 2658 01 2721 01 2439 01
TOTAL 81802 100 103458 100 218417 100 336969 100 370858 100 421131 100 482927 100
Loans &
Advances
State Bank of
India
14247 29 14016 21 25531 23 54068 24 59550 24 75522 26 84136 25
Scheduled
Banks
30192 61 47829 72 83586 75 170731 75 189639 76 210977 73 255462 75
Non Scheduled
Banks
4742 10 4254 07 2506 02 1373 01 1286 - 1371 01 1233 -
TOTAL 49181 100 66099 100 111623 100 226172 100 250475 100 287870 100 340831 100
Investments
State Bank of
India
8516 26 10687 26 NA 29870 28 31075 27 32245 26 35816 25
Scheduled
Banks
21727 66 27043 66 NA 77605 72 81772 72 95746 73 108808 75
Non Scheduled
Banks
2658 08 3195 08 NA 887 - 1172 01 1186 01 988 -
TOTAL 32901 100 40925 100 NA 108362 100 114019 100 129177 100 145612 100
SOURCE: Compiled from various issues of the Statistical Tables relatingto Banks in India published by
RBI; The Gazette of India Extraordinary, part II, March 31st 1970
57
The highlights of the growth of Banking Industry during 1951 – 1969 (Five Year Plan Period)
are presented in Table 2.2. There had been a continuous decline in the number of both scheduled
and non-scheduled banks during 1951 – 69 due to continuous amalgamations and liquidations.
But the decline was rapid in the case of non-scheduled banks as compared to that of scheduled
banks. The percentage share of scheduled banks in the total paid up capital and reserves,
deposits, loans and advances and investments showed an increasing trend and was substantial
than the percentage share of non-scheduled banks.
Although the Indian banking system had made considerable progress in the 1950s and the 1960s,
the benefits of this did not percolate down to the general public in terms of access to credit. This
was primarily due to the nexus between banks and industrial houses that cornered bulk of bank
credit, leaving very little for agriculture and small industries. Efforts, therefore, were made to
increase the flow of credit to agriculture. However, the share of agriculture in total bank credit
remained broadly at the same level between 1951 and 196710
. In this period, various objectives
such as enhancing the deposit rates, while keeping the cost of credit for productive activities at a
reasonably low level led to a complex structure of interest rates and other micro controls.
Phase II (1967 to 1991-92)
The second phase after independence (1967 to 1991-92) was characterised by several social
controls over the banking sector. The major issue faced at the beginning of this phase was the
strong nexus between banks and industry, as a result of which agriculture was ignored. The focus
in this phase was, thus, to break the nexus and improve the flow of credit to agriculture. The
main instruments used for this purpose were nationalisation of major banks in the country and
priority sector lending.
Under the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance of July 19,
1969, the Central Government acquired 14 major Commercial Banks with deposits of not less
than Rs. 50 crores each. These 14 banks with a total paid up capital of Rs.28.5 crores had 4134
branches, Rs.2627 crores of deposits, of Rs.1813 crores of advances at the time of nationalization
as presented in Table 2.3. The Table also shows the compensation paid to each the bank.
58
On 5th
April 1980, six more banks in the private sector each with demand and time liabilities in
India of not less than Rs.200 crores were nationalized to enhance the ability of the banking
system to meet more effectively the needs of the development of the economy and to promote
the welfare of the people more adequately. These six banks together had 2686 offices with
Rs.2110 crores of deposits and Rs.1375 crores of advances as on the last Friday of March 1980
as shown in Table 2.4.
Twenty-eight key banks were nationalised in four stages - State Bank of India on 1st July 1955,
seven associate banks in 1959-60, fourteen banks on 19th
July 1969 and six banks on 15th
April
1980. With the merger of one bank there are at present 27 banks in the public sector as shown in
Table 2.5.
TABLE 2.3
BRANCHES, DEPOSITS AND ADVANCES OF 14 COMMERCIAL BANKS
NATIONALISED ON 19th
JULY, 1969 (Rs. In Crores)
S.no BANKS BRANCHES
(No’S)
DEPOSITS
(Rs.)
ADVANCES
(Rs.)
COMPENSATION
PAYABLE (Rs.)
01 Central Bank Of
India
564 442 303 17.7
02 Bank Of India 274 358 243 14.7
03 Punjab National
Bank
570 358 257 10.2
04 Bank Of Baroda 373 283 176 8.4
05 United
Commercial
Bank
349 203 136 8.3
06 Canara Bank 325 148 109 3.6
07 United Bank Of
India
175 147 107 4.2
08 Dena Bank 234 125 76 3.6
09 Union Bank Of
India
241 115 74 3.1
10 Allahabad Bank 153 114 82 3.1
11 Syndicate Bank 307 110 90 2.5
12 Indian Bank 218 79 60 2.3
13 Bank Of
Maharashtra
153 78 55 2.3
14 Indian Overseas
Bank
198 67 45 2.5
Total 4134 2627 1813 87.4
Source: Ranga swamy B., Public Sector Banking in India publication division, Ministry of
Information and Broadcasting, Government of India.
59
TABLE 2.4
BRANCHES, DEPOSITS AND ADVANCES OF 6 COMMERCIAL BANKS
NATIONALISED ON 31st MARCH, 1980
SOURCE: Ranga swamy B., Public Sector Banking in India publication division,
Ministry of Information and Broadcasting, Government of India.
These initiatives had a positive impact in terms of spread of the bank-branch network across the
country, which in turn, accelerated the process of resource mobilisation. As a result of rapid
branch expansion witnessed from 1969, the average population per bank office, which was
65,000 at the time of nationalisation, declined to 14,000 by end-December 199011
. Large branch
expansion also resulted in increase in deposits and credit of the banking system, especially in
rural areas. The share of credit to agriculture in total bank credit increased from 2.2 per cent in
1967 to 15.8 per cent in June 198912
. However, these achievements extracted a
TABLE 2.5
EVOLUTION OF PUBLIC SECTOR BANKS
DATE/YEAR
PUBLIC SECTOR BANKS
NUMBER
01-07-1955 STATE BANK OF INDIA 01
1959-60 STATE BANK OF INDIA ASSOCIATE BANKS 07
19-07-1969 MAJOR COMMERCIAL BANKS IN PRIVATE SECTOR
WITH DEPOSITS OVER Rs.50 CRORE
14
15-04-1980 COMMERCIAL BANKS IN THE PRIVATE SECTOR
WITH DEPOSITS OVER Rs. 200 CRORE
06
PUBLIC SECTOR BANKS (AFTER MERGER)
26
Source: Various issues of RBI Trends and Progress
(Rs. IN CRORES)
BANKS BRANCHES
(NO’S)
DEPOSITS
(Rs.)
ADVANCES
(Rs.)
PUNJAB & SIND BANK 520 466 336
ANDHRA BANK 588 460 308
NEW BANK OF INDIA 402 391 237
VIJAYA BANK 571 365 208
ORIENTAL BANK OF COMMERCE 301 216 152
CORPORATION BANK 304 212 134
TOTAL 2686 2110 1375
60
price in terms of health of banking institutions. Banks did not pay adequate attention to their
profitability, asset quality and soundness. The increase in credit to the priority sector led to the
reduction of credit to the other sectors. Attempts were, therefore, made to bring some financial
discipline in respect of credit to the corporate sector. However, norms stipulated for the purpose
were found to be too rigid. On the other hand, in order to meet the priority sector targets, credit
appraisal standards were lowered. The high statutory pre-emptions eroded the profitability of the
banking sector. Lack of enough competition resulted in decline in productivity and efficiency of
the system. At the end of this phase, banks were saddled with large non-performing assets.
Banks’ capital position turned weak and they lacked the profit motive. During this period, the
deposit and lending rate structure became very complex. By the early 1980s, the banking sector
had transformed from a largely private owned system to the one dominated by the public sector.
In the mid-1980s, some efforts were made to liberalise and improve the profitability, health and
soundness of the banking sector. This phase also saw some diversification in banking activities.
Phase III (1991-92 and beyond)
The most significant phase in the evolution of banking was the phase of financial sector reforms
that began in 1991-92, which had two sub-phases (1991-92 to 1997-98; and 1998-99 and
beyond). The main issues faced in the first sub-phase (1991-92 to 1997-98) were the weak health
of the banking sector, low profitability, weak capital base and lack of adequate competition. The
reforms in the initial phase, thus, focused on strengthening the commercial banking sector by
applying prudential norms, providing operational flexibility and functional autonomy and
strengthening the supervisory practices. To infuse competition in the banking sector, several
measures were initiated such as allowing the entry of private banks into the system. A major
achievement of this phase was significant improvement in the profitability of the banking sector.
Some improvement was also observed in the asset quality, capital position and competitive
conditions, although there was still a significant scope for further improvement. However, banks
in this phase developed risk aversion as a result of which credit expansions slowed down in
general and to the agriculture in particular13
.
The focus in the second sub-phase (1998-99 and beyond) was on further strengthening of the
prudential norms in line with the international best practices, improving credit delivery,
strengthening corporate governance practices, promoting financial inclusion, strengthening the
61
urban co-operative banking sector and improving the customer service. While strengthening the
prudential norms, it was necessary to ensure that risk aversion, which had surfaced in the
previous sub-phase, did not aggravate. Focused attention, therefore, was paid to put in place
appropriate institutional measures to enable banks to recover their NPLs. The impact of these
measures was encouraging as banks were able to bring down their non-performing assets
sharply. This was the most important achievement of this phase. As the asset quality began to
improve, banks also started expanding their credit portfolio. Capital position of banks also
improved significantly. Competition intensified during this phase as was reflected in the
narrowing down of margins. Despite this, however, banks slightly improved their profitability
among others, due to increased volumes and improvement in asset quality. Two concerns arose
with regard to corporate governance practices followed by banks. These related to concentrated
ownership and quality of management that controlled the banks. The corporate governance
practices were, therefore, strengthened. Another major achievement in this phase was the sharp
increase in the flow of credit to the agriculture and SME sectors. With a view to bringing a larger
segment of excluded population within the banking fold, banks were advised to introduce a
facility of ‘no frills’ account. About 13 million `no frills’ accounts were opened in a short span of
two years. This phase also witnessed some significant changes in the use of technology by banks.
Increased use of technology combined with some other specific initiatives helped improve the
customer service by banks14
.
Post Reform Progress of the Commercial Banks
The volume of the operations, profitability and soundness position are definite indicators of the
performance of any business activity. Therefore to understand the progress or otherwise made
by the Commercial Banks, particularly Public Sector Commercial Banks, the growth of Deposits
& Credit, Net Profit earned, Capital Adequacy Ratio and the percentage of Non-Performing
Assets are analysed.
Deposits & Credit
The two main functions of the Bank are to accept deposits and give credit. Hence looking at the
growth of the Deposits and the credit gives the glimpse of the progress of the Commercial Banks
in India.
62
Table 2.6 shows the growth in Deposits accepted and Advances given by the Scheduled
Commercial Banks during the period 1950-51 to 2011-12. The trend percentages show that the
deposits have grown at 7,87,036.58% and the credit has registered a growth of 8,74,931.03%. It
can be noted that the Credit trends are higher than the deposit trends. The compounded annual
growth rate for the growth in deposits 15.568% and that of the Credit is 15.766%. The
Compounded annual growth rate of the deposits for the period 1950-51 to 1998-99 is 14.99%.
The compounded annual growth rate of the credit for the same period is 14.08%. It is 16.39%
for the deposits and 20.59 for the credit for the period 1998-99 to 2011-12 as can be seen from
Tables 2.6 and 2.7.
Table 2.7 shows growth in Deposits Bank group wise from 1998 – 99 to 2011-12. It can be
observed that the CAGR of the actual deposits of Public sector Banks have registered a positive
growth rate of 15.86 per cent but the share of the public sector banks in the total deposits has
registered a negative growth rate of 0.45 percent, while that of private sector banks has registered
a positive growth. Foreign Banks have registered a negative growth rate.
Table 2.8 shows the growth in the Advances given Bank group wise from 1998 – 99 to 2011 -12.
From the table it can be observed that the actual total advances of the public sector banks have
grown at a rate of 20.15 per cent. However, the share of the public sector commercial banks in
the total advances made by all the scheduled commercial banks has registered a negative growth
rate of 0.37 per cent, while the private sector banks have registered a positive growth rate for
both actual advances and their share in the total advances. Foreign Banks registered a positive
growth rate for actual advances but registered a negative growth for their share in the total
advances.
The compounded annual growth rate for the period 1998-99 to 2011-12 is higher for the deposits
and the credit than the period 1950-51 to 1998-99. This indicates that the prudential reforms
have put a positive impact on the Commercial Banks in improving their business.
63
Table - 2.6
DEPOSITS AND CREDIT OF ALL SCHEDULED COMMERCIAL BANKS
Year Bank
Deposits
Trends Bank
Credit
Trends
(Rs.
Crores)
(Rs.
crores)
1950-51 820 100.00 580 100.00
1970-71 5,910 720.73 4,690 808.62
1990-91 1,92,540 23480.49 1,16,300 20051.72
1998-99 771128 94040.00 369001 63620.86
1999-00 900305 109793.29 443468 76460.00
2000-01 1055387 128705.73 526151 90715.69
2001-02 1202699 146670.61 645742 111334.83
2002-03 1355653 165323.54 739551 127508.79
2003-04 1575142 192090.49 864141 148989.83
2004-05 1837558 224092.44 1150835 198419.83
2005-06 2164476 263960.49 1516555 261475.00
2006-07 2696935 328894.51 1981235 341592.24
2007-08 3320053 404884.51 2477038 427075.52
2008-09 4063204 495512.68 3000907 517397.76
2009-10 4752456 579567.80 3497054 602940.34
2010-11 5616433 684930.85 4298705 741156.03
2011-12 6453700 787036.58 5074600 874931.03
CAGR % 15.568 15.766
Source: RBI, Report on Currency and Finance, 2000-01, Vol.II and various issues of RBI
Trends and Progress
Net Profit
Net profit could be considered as one of the important indicators of the profitability.
Table 2.9 shows Net profit earned by the Banks groups wise for the period 1998-99 to 2011-12.
As it can be observed from Table the public sector banks registered a positive growth rate of
23.38 per cent for the net profit earned, but registered a negative growth rate of 0.78 per cent for
their share in the total net profit earned by all the scheduled commercial banks for the period
1998-99 to 2011-12.
64
TABLE 2.7
DEPOSITS – BANK GROUP WISE
(Rs. In Crores)
Year
Public Sector
Banks
Private Sector
Banks Foreign Banks
All
Scheduled
Banks
Deposits
% in
total Deposits
% in
total Deposits
% in
total Deposits
1998-99 636810 82.58 86855 11.26 47463 6.16 771128
1999-00 737312 81.9 113669 12.63 49324 5.48 900305
2000-01 859462 81.44 136635 12.95 59290 5.62 1055387
2001-02 968749 80.55 169440 14.09 64510 5.36 1202699
2002-03 1079167 79.6 207173 15.28 69313 5.11 1355653
2003-04 1226837 77.89 268549 17.05 79756 5.06 1575142
2004-05 1436540 78.18 314629 17.12 86389 4.7 1837558
2005-06 1622481 74.96 428251 19.79 113744 5.26 2164476
2006-07 1994199 73.94 551987 20.47 150749 5.59 2696935
2007-08 2453867 73.91 675073 20.33 191113 5.76 3320053
2008-09 3112748 76.61 736379 18.12 214077 5.27 4063204
2009-10 3691802 77.68 822801 17.31 237853 5 4752456
2010-11 4372985 77.86 1002759 17.85 240689 4.29 5616433
2011-12 5002000 77.51 1174600 18.2 277100 4.29 6453700
CAGR % 15.86 -0.45 20.45 3.49 13.43 -2.55 16.39
Source: Compiled from various issues of Reserve Bank of India Trends and Progress
Financial Soundness
Financial soundness of the banking sector is a sine qua non for the financial system’s stability in
a bank dominated country like India. Capital Adequacy and the asset quality are the two
important aspects of the financial soundness of the banking sector.
The capital to risk-weighted assets ratio (CRAR) remained well above the stipulated 9 per cent
for the system as a whole as well as for all bank groups during 1999 - 2012, indicating that
Indian banks remained well-capitalised as shown in Table 2.10. However the CRAR of Public
Sector Banks is below the industry average throughout the period.
65
TABLE 2.8
ADVANCES - BANK GROUP WISE
(Rs. In
crores)
Year
Public Sector
Banks
Private Sector
Banks Foreign Banks
All
Scheduled
Banks
Advances
% in
total Advances
% in
total Advances
% in
total Advances
2011-12 3878300 76.43 966400 19.04 229800 4.53 5,074,500
2010-11 3305632 76.90 797534 18.55 195539 4.55 4298705
2009-10 2,701,300 77.25 632494 18.09 163260 4.67 3497054
2008-09 2260156 75.32 575336 19.17 165415 5.51 3000907
2007-08 1797504 72.57 518402 20.93 161132 6.51 2477038
2006-07 1440146 72.69 414751 20.93 126338 6.38 1981235
2005-06 1106128 72.94 312873 20.63 97554 6.43 1516555
2004-05 854214 74.23 221303 19.23 75318 6.54 1150835
2003-04 632739 73.22 170895 19.78 60507 7.00 864141
2002-03 548436 74.16 138948 18.79 52167 7.05 739551
2001-02 480680 74.44 116430 18.03 48632 7.53 645742
2000-01 414989 78.87 68111 12.95 43051 8.18 526151
1999-00 352109 79.40 55742 12.57 35617 8.03 443468
1998-99 296959 80.48 42789 11.60 29253 7.93 369001
CAGR % 20.15 -0.37 24.94 3.6 15.86 -3.92 20.59
Source: Compiled from various issues of Reserve Bank of India Trends and Progress
Table 2.11 shows the percentage of the NPAs to Total Advances group wise and sector wise.
Non Performing Assets are a reflection of the lower quality of the assets. Reduction in the
percentage of the NPAs is a positive sign and indicates good credit management. It can be
observed from the table that the percentage of the NPAs of the Public Sector Banks for both
priority and non priority sectors declined and registered a negative growth rate of 11.77 per cent
and 14.26 per cent for the period 1998-99 to 2011-12. The percentage of NPAs of the Private
sector banks also registered a negative growth rate of 12.62 and 8.53 per cent for priority and
non-priority sector advances. However the foreign banks have registered a positive growth rate
of 14.6 and 6.94 percent for priority and non-priority sector advances.
66
The Public Sector Banks have registered an overall growth in the Deposits accepted and Credit
disbursed along with an increase in the profits and asset quality. It is a positive sign, because
profit earning entities can contribute more towards achieving Social agenda.
TABLE 2.9
NET PROFIT - BANK GROUP WISE
(Rs. In Crores)
Year
Public Sector
Banks
Private Sector
Banks Foreign Banks
All Scheduled
Banks
Net
Profit
% in
total
Net
Profit
% in
total
Net
Profit
% in
total Net Profit
1998-99 3253 67.32 1052 21.77 527 10.91 4832
1999-00 5113 73.46 880 12.64 967 13.89 6960
2000-01 4316 67.43 1141 17.83 944 14.75 6401
2001-02 8301 71.74 1778 15.37 1492 12.89 11571
2002-03 12295 72.01 2956 17.31 1824 10.68 17075
2003-04 16546 74.3 3481 15.63 2243 10.07 22270
2004-05 18976 77.48 3534 14.43 1982 8.09 24492
2005-06 21524 72.77 4985 16.85 3069 10.38 29578
2006-07 20152 64.59 6465 20.72 4585 14.69 31202
2007-08 26592 62.24 9522 22.29 6612 15.48 42726
2008-09 NA NA NA NA NA NA 52750
2009-10 NA NA NA NA NA NA 57109
2010-11 NA NA NA NA NA NA 81700
2011-12 NA NA NA NA NA NA 70,300
CAGR % 23.38 -0.78 24.64 0.24 28.78 3.56 24.35
Source: Compiled from various issues of Reserve Bank of India Trends and Progress
67
TABLE 2.10
CAPITAL ADEQUACY RATIO - BANK GROUP WISE (as at end of march)
BANK
GROUP/
YEAR
Scheduled
Commercial
Banks
Public
Sector
Banks
Nationalised
Banks
SBI
Group
Old
Private
Sector
Banks
New
Private
Sector
Banks
Foreign
Banks
1999 11.3 11.3 10.6 12.3 12.1 11.8 10.8
2000 11.1 10.7 10.1 11.6 12.4 13.4 11.9
2001 11.4 11.2 10.2 12.7 11.9 11.5 12.6
2002 12 11.8 10.9 13.3 12.5 12.3 12.9
2003 12.7 12.6 12.2 13.4 12.8 11.3 15.2
2004 12.9 13.2 13.1 13.4 13.7 10.2 15.0
2005 12.8 12.9 13.2 12.4 12.5 12.1 14.0
2006 12.3 12.2 12.3 11.9 11.7 12.6 13.0
2007 12.3 12.4 12.4 12.3 12.1 12.0 12.4
2008 13.0 12.5 12.1 13.2 14.1 14.4 13.1
2009
Basel
I 13.2 12.3 12.1 12.7 14.3 15.1 15
Basel
II 14.0 13.5 13.2 14.0 14.8 15.3 14.3
2010
Basel
I 13.6 12.1 12.1 12.1 13.8 17.3 18.1
Basel
II 14.5 13.3 13.2 13.5 14.9 18.0 17.3
2011
Basel
I 13.02 11.78 12.15 11.01 15.15 15.55 17.71
Basel
II 14.19 13.08 13.47 12.25 16.46 16.87 16.97
2012
Basel
I 12.94 11.88 11.84 11.97 14.47 14.9 17.31
Basel
II 14.24 13.23 13.03 13.7 16.21 16.66 16.74
Source: Compiled from various issues of Reserve Bank of India Trends & Progress
68
TABLE 2.11
PERCENTAGE OF NPA'S TO TOTAL ADVANCES
Public
sector Banks
Private Sector
Banks Foreign Banks
Year
Priority
Sector
Non-
Priority
Sector
Priority
Sector
Non-
Priority
Sector
Priority
Sector
Non-
Priority
Sector
1997 26.25 20.61 NA NA NA NA
1998 23.31 19.24 NA NA NA NA
1999 21.09 19.83 NA NA NA NA
2000 18.56 20.9 NA NA NA NA
2001 16.48 14.94 8.51 12.30 NA NA
2002 14.66 14.08 9.9 24.55 NA NA
2003 12.48 9.77 6.66 20.50 NA NA
2004 9.75 8.32 5.07 14.44 NA NA
2005 7.55 5.96 3.13 7.31 NA NA
2006 5.57 3.13 2.14 3.89 NA NA
2007 5.60 2.58 1.99 3.30 0.87 2.81
2008 4.85 1.83 1.79 5.33 0.80 3.52
2009 3.98 2.61 1.91 6.13 1.17 6.12
2010 3.57 2.18 2.23 4.96 1.95 5.59
2011 4.01 2.05 1.93 4.61 1.72 3.93
CAGR
% (11.77) (14.26) (12.62) (8.53) 14.60 6.94
Source: Calculated based on sector wise advances and NPA,s compiled from various issues
of Reserve Bank of India Trends and Progress
PART B: SOCIAL BANKING
Introduction
Profit is the main motivation for any economic activity. In the larger perspective, any economic
activity is a part of social responsibility. Social responsibility demands that business should help
to solve allied social problems and issues and reach its sociopolitical goals. Business should be
an active guardian of society’s conscience and problems.
The term Social Responsibility is defined differently by different authors.
69
Votaw says “the term Social Responsibility is a brilliant one; it means something but not
always the same thing to everybody. To some it conveys the idea of legal responsibilities
or liabilities; to other it means socially responsible behaviour in an ethical sense. Many
simply equate it with charitable contribution; some take it to mean socially conscious
behaviour”.
Keith Davis attempts the concept by a two-fold classification of tasks: “Social
Responsibility begins where the law ends; Social Responsibility refers to the
businessmen’s decisions and actions taken for reasons at least particularly beyond the
firm’s direct economic or technical interest. Thus, Social Responsibility has two rather
different faces. On the one hand, businessmen recognize that since they are managing an
economic unit in society, they have broad obligation to the community with regard to
economic development affecting public welfare. A quite different type of social
responsibility is, on the other hand, a businessman’s obligation to nature and developing
human values. Accordingly, the term Social Responsibility refers to both socio-
economic and socio-human obligation to others.
From the above definitions, Social Responsibility may be recognized as social consciousness,
socio-human obligation, solution of society’s problems, positive contribution to human
betterment and involvement in social welfare.
Concept of Social Banking
Social Banking, in general, can be understood as the Social Responsibility of the Banks. Social
Banking can be regarded as the institutional intermediation between the privileged and the
under-privileged sections of the society, to even out the inherent imbalances in their bargaining
capacities. Social Banking aims to restrain the privileged class of borrowers from pre-empting
loanable funds on the basis of their bargaining strength and accessibility to the lender bank.
Social banking is an economic activity, which is pursued in developing countries for ushering in
social and economic change. To some extent, this function is considered synonymous with
development banking, and can be defined to be a conscious and deliberate policy action of the
Central Bank to channel loanable funds towards socially desirable investments. This action is
70
followed on the premise that social priorities must take precedence over private gains, more so,
in consonance with the ethical principles of equity and distributive justice.
A developing economy embodies the characteristics of sub optimally utilized available physical
and natural resources, and a large multitude of latent human resource. Human beings constitute
a society, and the economic and social upliftment of the people is, unquestionably, the
appropriate indicators of development. Therefore, it stands to reason that banks should consider
Social Banking an indispensable service to the society rather than an unavoidable obligation.
Social Banking in India
A major developmental objective of India has been the building up of a financial infrastructure
geographically wide and functionally diverse to help in the process of resource mobilization and
to meet the expanding and emerging needs of a developing economy. The prime focus of
attention has been the banking system and the nationalization of banks in 1969 and 1980 was
seen as the major step to ensure that timely and adequate credit support would be available for
viable productive endeavour. Nationalisation was recognition of the potential of banking system
to promote broader economic objectives, such as growth, better regional balance of economic
activity and the diffusion of economic power. It was designed to make the system reach out to
the small man and rural and semi-urban areas and to extend credit coverage to sectors hither to
neglected by the banking system and through positive affirmative action provide for such
expansion of credit to agriculture and small industry in place of what was regarded as a
somewhat oligopolistic situation where the system served mainly the urban and individual
sectors and where the grant of credit was seen to be an act of patronage and receiving it an aspect
of privilege.
Social Banking in India can be defined as that part of ‘banking’ which works for economic
betterment of poorer segments of the society and thus encompasses all those banking operations,
plans and programmes which aim to carry and which extend the banking services to such of the
territorial divisions, population segments and economic sectors and sub sectors whose economic
operations are not viable presently, but given the support of bank’s services, have a potential for
viability. This, thus, includes operations like differential interest rate lending, priority sector
lending, expansion of branch network to hitherto un-banked rural and semi-urban centres,
71
extension of support to various poverty alleviation and employment generation programmes like
IRDP, TRYSEM, SEPUP etc. Basic characteristic common to all these constituents of Social
Banking is that the target groups in all these operations lack financial strength, professional and
organizational skills and operational viability making them ineligible for being accepted as
‘clientele’ in a profit seeking and safety conscious commercial banking system. The targets of
Social Banking lack not only these basic resources but in large number of cases, also, lack the
knowledge, initiative and urge for their acquisition and use, leading to a situation that mostly it is
not the potential beneficiary who goes to the bank but it is the other way round. The bank, in
these operations, operates not as a mere financier but also as a promoter, advisor, motivator,
monitor and the like.
The following can be considered as the components of the Social Banking in India:
Skewing of bank lending towards ‘Priority Sectors’ – agriculture, small businesses and
entrepreneurs which were viewed as deserving as they contained large numbers of the
poor and had restricted access to formal credit and lowering the cost of credit – cheap
credit was viewed as means of enabling the poor to borrow and of putting moneylenders
out of business.
Skewing of bank branch placement towards un-banked rural and semi-urban locations –
this constituted the centerpiece of Social Banking. State control of bank placements was
used to reach population that had previously had no access to formal financial
institutions.
Financial inclusion – it is the delivery of banking services at an affordable cost to the vast
sections of disadvantaged and low income groups. Unrestrained access to public goods
and services are in the nature of public good, it is essential that availability of banking
and payment services to the entire population without discrimination is the prime
objective of the public policy.
I. Priority Sector Lending
Priority sector lending policy, as adopted in India, essentially covers the following
dimensions:
72
It identifies those sectors of the economy and sections of the society which are crucial
for the development of the nation but were hither-to-neglected by the commercial
banking institutions. The entire rural sector and certain economic activities which
have the potential of providing self employment to the people of modest means in
urban sector thus became the thrust area of the credit policy. They were accorded
priority for credit deployment because they were nationally important and socially
relevant.
It directs the commercial banking institutions, public and private, domestic and
foreign, to give preferential treatment and priority in their credit operations to the
sectors and sections identified for this purpose.
It stipulates certain minimum allocation of credit for the target groups by the banks in
an obligatory manner.
It insists on the extension of credit facilities to the target groups with liberalized terms
and conditions including the rate of interest, norms of margin and security, repayment
system etc.
It directs the banks to advance a certain proportion of its net bank credit to the priority
sector in direct form i.e., to the target groups proper as well as in an indirect form i.e.,
for the ultimate benefit of the target group.
It desires a pro-active approach on part of the banker wherein he is involved in the
overall development of his service area and the residents of the same.
It integrates the credit with other non-credit inputs needed for the development in a
planned manner.
It makes the banker a participant in the implementation of the credit linked
development programmes sponsored by the Government.
Meaning
The term priority sector itself suggests that certain sectors of the economy are to be taken up
on a priority basis for rapid economic development. Broadly Priority Sector comprises the
following:
Agriculture
73
Small Scale Industries (including setting up of industrial estates).
Small road and water transport operators (owning upto 10 vehicles).
Small business (Original cost of equipment used for business not to exceed Rs.20 lakh).
Retail Trade (advances to private retail traders upto Rs.10 lakh).
Professional and self-employed persons (borrowing limit not exceeding Rs.10 lakh of
which not more than Rs.2 lakh for working capital; in the case of qualified medical
practitioners setting up practice in rural areas, the limits are Rs.15 lakh and Rs.3 lakh
respectively and purchase of one motor vehicle within these limits can be included under
priority sector).
State sponsored orgainsiation for scheduled Castes/Scheduled Tribes.
Education (educational loans granted to individuals by banks).
Housing [both direct and indirect] – loans upto Rs.15 lakhs irrespective of the rural/Semi-
urban/urban/metro area, loans upto Rs.1 lakh and Rs.2 lakh for repairing of houses in
rural /semi-urban and urban areas respectively].
Consumption loans (under the consumption credit scheme for weaker sections).
Micro-credit provided by banks either directly or through any intermediary; loans to self
help groups (SHGs) / Non-Governmental Organisations (NGOs) for onlending to SHGs.
Loans to the software industry (having credit limit not exceeding Rs.1 crore from the
banking system).
Loans to the specified industries in the food and agro-processing sector having
investment in plant and machinery up to Rs.5 crore.
Investment by banks in venture capital (venture capital funds / companies registered with
SEBI).
Classification
The following is the broad classification of the Priority Sector Lending in India.
(a) Direct Finances for Agricultural Purposes
Direct Agricultural advances denote advances given by banks directly to farmers for agricultural
purposes. These include short-term loans for raising crops i.e., for crop loans. In addition,
advances upto Rs.5 lakh to farmers against pledge/hypothecation of agricultural produce
74
(including warehouse receipts) for a period not exceeding 12 months, where the farmers were
given crop loans for raising the produce, provided the borrowers draw credit from one bank. The
sub-target for direct agriculture advances is 13.5 per cent of the NBC.
Direct finance also includes medium and long-term loans (Provided directly to farmers for
financing production and development needs) such as Purchase of agricultural implements and
machinery, Development of irrigation potential, Reclamation and Land Development Schemes,
Construction of farm buildings and structures, etc. Other types of direct finance to farmers
include loans to plantations, development of allied activities such as fishery, poultry etc. and also
establishment of bio-gas plants, purchase of land for agricultural purposes by small and marginal
farmers and loans to agri-clinics and agri-business centres.
(b) Indirect Finance to Agriculture
Indirect finance denotes to finance provided by banks to farmers indirectly, i.e., through other
agencies. Sub-target for indirect agriculture advances is 4.5 per cent of NBC. Important items
included under indirect finance to agriculture are as under:
Credit for financing the distribution of fertilizers, pesticides, seeds, etc.
Loans up to Rs.40 lakhs granted for financing distribution of inputs for the allied
activities such as cattle feed, poultry feed, etc.
Loans to Electricity Boards for reimbursing the expenditure already incurred by them for
providing low tension connection from step-down point to individual farmers for
energizing their wells.
Loans to State Electricity Boards for Systems Improvement Scheme under Special
Project Agriculture (SI-SPA).
Deposits held by the banks in Rural Infrastructure Development Fund (RIDF) maintained
with NABARD.
Subscription to bonds issued by Rural Electrification Corporation (REC) exclusively for
financing pump-set energisation programmes in rural and semi-urban areas and also for
financing system improvement programme(SI-SPA).
Subscriptions to bonds issued by NABARD with the objective of financing
agriculture/allied activities.
Loans to farmers through PACs, FSS and LAMPS.
75
(c) Other Types of Indirect Finance to Agriculture
Finance for hire-purchase schemes for distribution of agriculture machinery and
implements.
Loans for constructions and running of storage facilities (warehouse, market yards, go-
downs and silos) including cold storage units designed to store agriculture
produce/products, irrespective of their location. If the storage units are registered as SSI
unit, the loans granted to such units may be classified under advances to SSI, provided
the investment in P&M is within the stipulated ceiling.
Advances to custom-service units managed by individuals, institutions, or organization
who maintain a fleet of tractors, bu8lldozers, wee-boring equipments, thrashers,
combines, etc., and undertake work from farmers on contract basis.
Loan to individuals, institutions that undertake spraying operations.
Loans to cooperative marketing societies, co-operative bankes for re-lending to co-
operative marketing societies (provided a certificate from the State Co-operative Bank in
faviour of such loans is produced) for disposing the produce of the members.
Loans to cooperative banks of produces (e.g. Aarey Milk Colony Cooperative Bank,
consisting of licensed cattle owners).
Financing of farmers indirectly through co-operative system (otherwise by subscription to
bonds and debentures issues), provided a certificate from the State Cooperative Bank in
favour of such loans is produced.
Advances to State Sponsored Corporations advancing to weaker sections.
Finance extended to dealers in drip irrigation/sprinkler irrigation system/agricultural
machinery, irrespective of their locations, subject to the following conditions:
a. The dealer should be dealing exclusively in such items or if dealing in other products,
should be maintaining separate and distinct records in respect of such items.
b. A ceiling of up to Rs.30 lakhs per dealer should be observed.
Loans to National Cooperative Department Corporation (NCDC) for lending to the
cooperative sector for purposes coming under the priority sector.
For loans to farmers for purchase of shares in Co-operative Sugar Mills and Sugar Mills
set up as joint stock companies and other agro based processing units (Maximum 6 shares
76
of Rs.1,000 each or 3 shares of Rs.2,000 each, i.e., Rs.6,000 per eligible borrower
irrespective of their land holding).
Loans to Arthias (Commission agents in rural/semi-urban areas) for meeting their
working capital requirements on account of credit extended to farmers for supply of
inputs.
Lending to Non Banking Financial Companies (NBFCs) for on-lending to agriculture.
Investments by banks in securitized assets, which represent indirect advances to
agriculture.
(d) Small Scale Industries (SSI)
Small Scale industrial units are those engaged in the manufacture, processing or preservation of
goods and whose investment in plant and machinery (original cost) does not exceed Rs.1 crore.
These would, inter alia, include units engaged in mining or quarrying, servicing and repairing of
machinery. In the case of ancillary units, the investment in plant and machinery (original cost)
should also not exceed Rs.1 crore to be classified under Small Scale industry.
The investment limit of Rs.1 crore for classification as SSI has been enhanced to Rs.5 crore in
respect of certain specified items under hosiery, hand tools, drugs and pharmaceutical and
stationery items by the Government of India.
(e) Tiny Enterprise
The status of ‘Tiny Enterprises’ is given to all small scale units whose investment in plant and
machinery us up to Rs. 25 lakhs, irrespective of the location of the unit.
(f) Small Scale Service and Business Enterprises (SSSBE’s)
Industry related service and business enterprises with investment up to Rs.10 lakhs in fixed
assets, excluding land and building will be given benefits of small scale sector. For computation
of value of fixed assets, the original price paid by the original owner will be considered
irrespective of the price paid by subsequent owners.
(g) Indirect Finance to Small Scale Industry
Indirect finance to SSI includes the following important items:
Financing of agencies involved in assisting the decentralized sector in the supply of
inputs and marketing of outputs of artisans, village and cottage industries.
Finance extended to Government sponsored corporation/organisations providing funds to
the weaker sections in the priority sector.
77
Advances to handloom co-operatives.
Term finance/loans in the form of lines of credit made available to State Industrial
Development Corporation/State Financial Corporations for financing SSIs.
Credit provided by commercial banks to KVIC under the scheme for provision of credit
to KVIC by consortium of banks for lending to viable khadi and Village Industrial units.
Funds provided by banks to SIDBI/SFCs by way of rediscounting of bills of SSIs which
are originally discounted by a Commercial Bank and rediscounted by SIDBI/SFCs.
Subscription to bonds floated by SIDBI, SFCs, SIDCs and NSIC exclusively for
financing SSI units.
Financing of NBFCs or other intermediaries for on-lending to the tiny sector. More so,
all new loans granted by banks to NBFCs and other intermediaries for on-lending to SSI
sector w.e.f. November 11, 2003.
Deposits placed with SIDBI by Foreign Banks in fulfillment of shortfall in attaining
priority sector targets.
Bank finance to HUDCO either as a line of credit or by way of investment in special
bonds issued by HUDCO for on-lending to artisans, handloom weavers, etc. under tiny
sector may be treated as indirect lending to SSI (Tiny) Sector.
Loans for setting up Industrial Estates.
All KVI Sector advances, irrespective of their size, location and investment in plant &
machinery and will be eligible for consideration under the sub-target of 60 per cent of the
SSI segment within priority sector.
Manufacturing of common salt through any process including manual operation which
satisfy the norms under SSI.
Units engaged in ship breaking / dismantling which satisfy SSI norms.
Banks loan to bought leaf factories manufacturing tea provided original cost in P& M
does not exceed the prescribed limit.
(h) Investments
Investments made by the banks in special bonds issued by the specified institutions could be
reckoned as part of priority sector advances, subject to the following conditions:
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State Financial Corporations (SFCs)/ State Industrial Development Corporations
(SIDCs): Subscription to bonds exclusively floated by SFCs & SIDCs for financing SSI
units will be eligible for inclusion under priority sector as indirect finance to SSI.
Rural Electrification Corporation (REC): Subscription to special bonds issued by REC
exclusively for financing pump-set energisation programme in rual and semi-uran areas
and the System Improvement Programme under its Special Projects Agriculture (SI-SPA)
will be eligible for inclusion under priority sector lending as indirect finance to
agriculture.
NABARD: Subscription to bonds issued by NABARD with the objective of financing
exclusively agriculture / allied activities and the non-farm sector will be eligible for
inclusion under the priority sector as indirect finance to agriculture / SSI, as the case may
be.
Small Industries Development Bank of India (SIDBI): Subscriptions to bonds
exclusively floated by SIDBI for financing of SSI units will be eligible for inclusion
under priority sector as indirect finance to SSIs.
National Small Industries Corporation Ltd. (NSIC): Subscription to bonds issued by
NSIC exclusively for financing of SSI units will be eligible for inclusion under priority
sector as indirect finance to SSIs.
National Housing Bank (NHB): Subscription to bonds issued by NHB exclusively for
financing of housing, irrespective of the loan size per dwelling unit, will be eligible for
inclusion under priority sector advances as indirect housing finance.
Housing & Urban Development Corporation (HUDCO):
a. Subscription to bonds issued by HUDCO exclusively for financing of housing,
irrespective of the loan size per dwelling unit, will be eligible for inclusion under
priority sector advances as indirect housing finance.
b. Investments in special bonds issued by HUDCO for on-lending to artisans,
handloom weavers, etc. under tiny sector will be classified as indirect lending to
SSI (Tiny) sector.
Other Investments: Investments by the banks in venture capital will be eligible for
inclusion in Priority sector Lending. This is subject to the condition that the venture
capital funds / companies are registered with SEBI.
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Lines of Credit: Banks may consider on merit proposals received from SIDCs and SFCs
for sanction to term loan in the form of lines of credit.
Bills Rediscounting: Funds provided by commercial banks to SIDBI by way of
rediscounting of bills of SSIs will be considered as priority sector lending.
Deposits in Rural Infrastructure Development Fund (RIDF): Outstanding balances of the
deposits placed by Banks in RIDF of NABARD would be reckoned as Indirect finance to
agriculture.
Leasing & Hire Purchase: Para-banking activities such as leasing and hire purchase
financing undertaken departmentally by banks will be classified as priority sector
advances, provided the ultimate beneficiary satisfies the criteria laid down by RBI for
treating such advances to Priority Sector.
(i) Weaker Sections
The weaker sections under priority sector include the following:
Small and marginal farmers with land holding of 5 acres and less and landless labourers,
tenant farmers and share croppers.
Artisans, village and cottage industries where individual credit limits do not exceed
Rs.50,000/-
Beneficiaries of Swarnajayanti Gram Swarojgar Yojana (SGSY).
Scheduled Castes and Scheduled Tribes.
Beneficiaries of Differential Rate of Interest (DRI) Scheme.
Beneficiaries under Swarna Jayanti Shahari Rojgar Yojana (SJSRY).
Beneficiaries under the Scheme for Liberation and Rehabilitation of Scavengers (SLRS).
Self Help Groups (SHGs).
(j) Small Road & Water Transport Operators
Advances to small road and water transport operators owning to fleet of vehicles not exceeding
six vehicles, including the one proposed to be financed.
(k) Retail Traders
Advances granted to (i) private retail traders dealing inessential commodities (fair price shops)
and consumer cooperative stores and (ii) other private retail traders with credit limits not
exceeding Rs. 2 lakhs. (Advances to retail traders in fertilizers will form part of indirect finance
for agriculture and those to retail traders of mineral oils under small business).
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(l) Professional & Self Employed Persons
Loans to professional and self employed persons include advances given for the purpose of
purchasing equipment, repairing or renovating existing equipment and/or acquiring and repairing
business premises or purchasing tools and/or for working capital requirements to medical
practitioners including Dentists, Chartered Accountants, Cost Accountants, Lawyers or
Solicitors, Engineers, Architects, Surveyors, Construction Contractors or Management
Consultants or to a person trained in any other art or craft who holds either a degree or diploma
from any institution established, aided or recognized by the Government or to a person who is
considered by the bank as technically qualified or skilled in the field in which he employed.
Besides, certain loan facilities given to accredited journals and cameraman who are free lancers.
Company secretary, operators of health centres and beauty parlour are also included in this
category.
(m)State Sponsored Organisations for SC/STs
Advances sanctioned to state sponsored organizations for SC/STs for the specific purpose of
purchase and supply of inputs to and/or the marketing of the output of the beneficiaries of these
organizations.
(n) Education
Educational loans should include only loans and advances granted to individuals for educational
purposes and not those granted to institutions and will include all advances granted by the banks
under special schemes, if any, introduced for the purpose.
(o) Housing
a. Direct Housing Finance
(i) Loans up to Rs.5 lakhs for construction of houses granted to all categories of
borrowers except to own employees of the banks.
(ii) Loans up to Rs.50,000/- for repairs to damaged houses granted to all categories of
borrowers except to own employees of the banks.
b. Indirect Housing Finance
(i) Assistance given to any Governmental agency or to a Non-governmental agency,
approved by the National Housing Bank for provision of refinance for the purpose of
constructing houses and also for slum clearance and rehabilitation of slum dwellers
where the loan component does not exceed Rs.5 lakhs per housing unit.
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(ii) Subscription to bonds issued by NHB and HUDCO exclusively for financing of
housing as defined under the priority sector (i.e., for construction of houses where the
loan component does not exceed Rs.2 lakhs per dwelling unit).
(p) Consumption Loans
Pure consumption loans granted under the consumption credit scheme should be included in this
item. The purpose and ceilings per family in respect of consumption loans are as follows.
a. General consumption Rs.150
b. Medical expenses Rs.500
c. Educational Needs Rs.200
d. Marriage ceremonies Rs.500
e. Funerals, births etc Rs.150
f. Certain religious ceremonies Rs.150
(q) Funds Provided to RRBs
The amount of funds provided by the sponsoring banks to the RRBs for the purpose of on-
lending be treated as priority secto lending of the sponsor banks. Fifty per cent of the amount of
refinance granted to RRBs will be treated as indirect finance to agriculture and 40 per cent of the
amount of refinance as advance to weaker sections.
Action taken in the case of Non-achievement of priority sector lending target
a. Domestic scheduled commercial banks having shortfall in lending to priority sector /
agriculture are allocated amounts for contribution to the Rural Infrastructure
Development Fund (RIDF) established in NABARD. Details regarding
operationalisation of the RIDF such as the amounts to be deposited by banks, interest
rates on deposits, period of deposits etc., are decided every year after announcement in
the Union Budget about setting up of RIDF.
b. In the case of foreign banks operating in India which fail to achieve the priority sector
lending target or sub-targets, an amount equivalent to the shortfall is required to be
deposited with SIDBI for one year at the interest rate of 8 per cent per annum.
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Time Limit for Disposal Of loan Applications
a. All loan applications upto a credit limit of Rs.25,000 should be disposed of within a
fortnight and those for over Rs.25,000 within 8 to 9 weeks.
b. All loan applications for SSI upto a credit limit of Rs.25,000 should be disposed off
within 2 weeks and those up to Rs.5 lakhs within 4 weeks provided the loan applications
are complete in all respects and accompanied by a check list.
Rate of Interest for loans
As per the current interest rate policy, in the case of loans up to Rs. 2 lakh, the interest rate
should not exceed the prime lending rate (PLR) of the bank, while in the case of loans above
Rs.2 lakh, banks are free to determine the interest rate.
Monitoring by RBI
Priority sector lending by commercial banks is monitored by Reserve Bank of India through
periodical Returns received from them. Performance of banks is also reviewed in the various set
up under the Lead Bank Scheme (at State, District and Block levels).
Historical Backdrop of Priority Sector Lending
The priority sector concept and its lending policy have been evolved over a period of time. With
the passage of time, some important modifications have been made in the composition and the
nature of credit support. The deliberations of some committees and working groups have
effected the modifications. The following are the two aspects of the priority sector viz.,
Genesis of the priority sector lending policy; and
Some prominent changes or landmarks in the policy over time.
Genesis of the Priority Sector Lending Policy
The nationalization of the major commercial banks that was done on July, 19, 1969 gave a
specific shape to the priority sector concept by identifying the sectors/activities and sections for
the banks to accord priority in their lending programmes.
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The target allocation of priority sector lending was systematically perceived in the “Report of
the Working group on the Modalities of Implementation of the Priority Sector Lending and
the 20-Point Economic Programme by Banks” – popularly known as the Krishnaswamy
Committee in 1980 indicating the scope of priority sector lending. The Committee observed
that the concept of priority sector lending was mainly to ensure that the assistance from the
banking system flows in an increasing measure to those sectors of the economy which though
account for a significant proportion of the national product, have not received adequate support
of the institutional finance in the past. The group gave a wider and clearer definition of priority
sectors (direct/indirect) including agriculture, small scale industries, rural artisans,m retail trade,
small business, professional and self employed, tiny sector, housing loan for the poor/slum
clearance, consumption credit etc.
Three other Committees assume importance in the context of priority sector lending policy.
They are:
Agricultural Credit Review Committee popularly known as the Khusro Committee
(1991) set up by the Reserve Bank of India;
The Committee on Financial Reforms popularly known as the Narasimham
Committee (1991) appointed by the Government of India;
The Committee appointed by the Reserve Bank of India to look into the credit related
programmes of the Small Scale Industries popularly known as the Naik Committee
(1992).
While the Khusro Committee advocated two category solutions to rural credit, Narasimham
Committee recommended the redefining of the priority sectors and then doing away with the
directed credit programmes altogether. According to the Khusro Committee, only the weaker
sections in the priority sector who cannot stand the pressure of market forces should be kept in
the revised priority sector credit policy. Both the Committees laid emphasis on reducing the
percentage share of priority sectors in the total bank credit on one hand and the extent of subsidy
in the cost of credit i.e., rate of interest on the other. Naik Committee, however, made the credit
policy further tightened particularly by emphasizing the specific quota for the tiny sector in the
total credit advanced to the SSI by the banks.
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Committees on Priority Sector Lending and their Recommendations
The Banks were nationalized during 1969 with an aim of reaching all sections of society and all
sectors of development adequately. The National Council had underlined the need for
development banking. New changes were introduced in the banking sector to meet the
challenges the industry was facing from time to time. Different Expert Committees were setup
to deeply analyse each of the situations/needs arising from time to time. The following is the
brief mention of the important points given in the reports.
Report of the Organisational Framework for implementation of Social Objectives – Gadgil
Committee (1969).
Report of the Banking Commission – Sariya Committee (1972).
Working Group on Priority Sector Lending & Twenty Point Economic Programme –
Krishnaswamy Committee (1980).
Committee to Review the Arrangements for Institutional Credit for Agriculture & Rural
Development – Sivaraman Committee (1981).
Report on the Committee to Examine Certain Operational Aspects of Rural Lending – Ojha
Committee (1988).
A Review of the Agricultural Credit System in India: Report of the Agricultural Credit
Review Committee – Khusro (1991).
Report on the Committee on Financial System – Narasimham Committee (1991).
Report of the Committee to Examine the Adequacy of Institutional Credit to SSI Sector and
Related Aspects – Naik Committee (1992).
Report on the Expert Committee on Integrated Rural Development – Mehta (1994).
R V Gupta Committee on flow of Credit to Agriculture (1977)
Report of the Organisational Framework for implementation of Social Objectives –
Gadgil Committee (1969): The specific objectives in appointing the Committee were to
build an appropriate organisational framework for the implementation of social objectives
and to find out the adequacy of institutional credit to neglected sections and weaker sections
of the country. This is one of the basic documents based on which the Banking Commission
started its report in 1972. This is the first report which brought the banking sector into the
fold of Social Banking. This report made it clear that if social development is to take place,
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there should be coordination between the Government Departments and the banking sector
and development plans should be dove-tailed with the credit plans.
Report of the Banking Commission – Sariya Committee (1972): This is the report that
specified the functions of a Rural Bank/Cooperative society/Cooperative Bank. It also
described what should be the operational area of a rural bank branch, at that particular time
and the operation of a lead bank.
Working Group on Priority Sector Lending & Twenty Point Economic Programme –
Krishnaswamy Committee (1980): This report is one of the fundamental document on
the priority sector lending. Even though the concept of weaker section was mentioned by
the Gadgil Committee, a clear definition of “weaker section” indicating the constituents was
spelt out only in this report. Even today, the RBI’s norms on priority sector are based on
this report only.
Committee to Review the Arrangements for Institutional Credit for Agriculture &
Rural Development – Sivaraman Committee (1981): The involvement of credit
institutions in general and commercial banks in particular has been considered an integral
part of the rural banking system by the end of seventies. The spread the rural banking units
and their obligations and functions was becoming wider and deeper. This raised a number
of issues including the need to create an apex level institution exclusively for dealing with
banking for rural development. This resulted into the setting up of a very important
Committee known as CRAFICARD. This report was instrumental in the birth of National
Bank for Agriculture and Rural Development.
Report on the Committee to Examine Certain Operational Aspects of Rural Lending –
Ojha Committee (1988): Implications: The credit system in India through the banking
sector has been streamlined by the recommendations of this Committee. Two things were
achieved viz., streamlining the credit system and bottom-up planning by the preparation of
credit plans at the village level to the district level. This is further facilitated by the dove-
tailing of the developmental plans with the credit plans. The system of Service Area
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Approach has totally removed duel financing in rural areas and brought in a credit discipline
among all sections of rural and semi-urban areas. Each village has been surveyed, credit
plans were prepared for the villages, blocks and districts with details of forward and
backward linkages.
A Review of the Agricultural Credit System in India – Report of the Agricultural
Credit Review Committee – Khusro (1991): For the first time since independence an
official Committee made some observations and recommendations which showed a different
tone as compared with earlier Committee suggestions and policy statements. The trend
between the social control and Service Area Approach was moving only in one direction
viz., asking the credit institutions to give more credit to the rural/agricultural borrowers at
more and more concessional rates. This Committee has put a break to this trend and created
an opportunity for a fresh thinking. The Committee’s in-depth analysis of viability of rural
lending and the forthright suggestions for improving them deserve special mention.
Report on the Committee on Financial System – Narasimham Committee (1991, 1998):
In the 1990s the winds of liberlisation were blowing all over the world and were cutting
across the sectors and sections. The need to review the policies relating to the credit
systems was urgently felt. The Government of India appointed a high power Committee to
review the financial system as a whole in the light of imperatives of liberalization.This
Committee on the financial system was headed by Shri. Narasimham and is known as
Narasimham Committee. The recommendations of the committee were a fundamental
departure from the then existing banking sector regulations. The major objective of the
reforms was to create a viable and efficient banking system, which would thereby improve
the productivity and efficiency of the financial sector. The major policy changes brought
about emphasized deregulation and liberlisation. The first phase of reforms focused on
cleaning up bank balance sheets and bringing about greater disclosure and transparency in
accounting. The second phase of reforms aims to further strengthen the banking sector and
to move towards international best practices in areas relating to banking policy, institutional,
supervisory and legislation.
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Report of the Committee to Examine the Adequacy of Institutional Credit to SSI Sector
and Related Aspects – Naik Committee (1992): This Committee was appointed by the
Reserve Bank of India under the Chairmanship of Shri P.R. Naik, the then Deputy Governor
of RBI to examine the difficulties faced by the SSI units in securing the institutional credit.
It submitted its report in August, 1992. As the name of the Committee suggests, it was given
the specific task of examining (i) the adequacy of institutional credit for SSI, with further
reference to increase in the cost of raw materials and locking up of the available and locking
up of the available resources due to delay in the realization of the sale proceeds from large
companies and Government agencies; (ii) the need for making any
recommendation/relaxation in the norms fixed by the Tandon/Chore Committee; (iii) any
revision in the rehabilitation of sick SSI units. Most of the recommendations of the Naik
Committee have been accepted by the Reserve Bank of India in stages. The application of
working capital norms as suggested has been accepted and accordingly suitable instructions
have been issued to the commercial banks.
Report on the Expert Committee on Integrated Rural Development – Mehta (1994):
Ever since the inception, the implementation of IRDP has always remained an area of
concern and criticism. Most of the Committees on priority sector after 1980 have made an
implicit or an explicit reference to its working and the ways of improving upon it. The
concurrent evaluation studies have brought out various shortcomings in the implementation
of this programme. To look into some of the important issues, a Committee was appointed
by the Reserve Bank of India to remove the deficiencies of IRDP and its functioning. This
Committee was headed by Shri D.R. Mehta, Deputy Governor of RBI, which submitted its
report in November, 1994. As per the recommendations of Mehta Committee, the back-end
subsidy has been introduced under IRDP.
R V Gupta Committee on flow of Credit to Agriculture (1997): This is a one-man-high-
level committee appointed by the Reserve Bank of India in December in 1997 to look into
the “Flow of Credit to Agriculture” under the environment of liberalization. It is popularly
known as Gupta Committee. In its report submitted on April 27, 1988. the Committee
among other things has made two important recommendations as under:
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i) Complete deregulation of rates of interest on agricultural loans, and
ii) Introduction of Annual Cash Credit Limits (ACCL) to all agricultural borrowing
families.
The RBI has promptly accepted the second recommendation and has asked the banks to
introduce the ACCL to all borrowing families and disburse all loans in cash to facilitate dealer
choice to borrowers and foster an environment of trust. The RBI has further advised the banks to
delegate adequate powers to branch managers to enable disposal of 90 per cent of the loan
applications at the branch level. The banks would have to ensure that pre-sanction appraisal of
the borrowers focuses on income stream of the borrower, his credibility, his capability for taking
up the activities proposed, integrity and technical viability of the proposal and desist from asking
for additional collateral by way of gurantors where the land mortgage is considered adequate.
The rural lending, in general, and priority sector in particular, has grown in stature over years
from the days of nationalization to the level of specialization i.e, from the neglected sector to
specialized sector today. This has been possible only because of deep studies and analysis of
various Expert Committees including the Banking Commission’s recommendations on rural
banking.
Prominent Changes / Landmarks in the Priority Sector Credit Policy
In the course of implementation of the priority sector credit policies, certain changes were made
from time to time in view of the changing perceptions and environment. The prominent among
them are indicated below.
(i) The exports, which were included in the priority sector in the beginning, were later on
deleted. However, in the era of liberalization and globalization, the exports were
again accorded priority status for the purpose of bank credit particularly for the
foreign banks operating in India.
(ii) The list of participating institutions in the implementation of priority sector credit
policy has expanded over time. To start with, it was specifically meant for public
sector commercial banks. Later in 1978 onwards, the private sector banks were also
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desired to follow suit. From March, 1992 onwards, the foreign banks operating in
India are also given the specific targets to fulfill in the priority sectors.
(iii) There have been noticeable changes in the overall and sub-targets of priority sector
credit obligations of the banks over time. For instance, the overall targets for the
domestic banks in the beginning were fixed at one third of their net bank credit.
From 1985 onwards, these have been revised upwards to 40 per cent. Similarly, the
priority sector credit operations for the foreign banks were initially fixed at 15% of
their net bank credit obligations. The same has been enhanced to 32% at present. As
regards the sub sector targets, the domestic commercial banks were advised to lend
15% of their net bank credit in the form of direct agricultural advances in1983. The
same was revised upwards to 16% in 1985 and was ultimately fixed at 18% in 1989.
After involving the foreign banks in priority sector, the separate targets for the SSI
and export credit were fixed at 10% to start with and then were revised upwards at
12.5%.
(iv) In pursuance of the Naik Committee recommendations a separate target for the tiny
sector in the SSI sector was fixed. It was stipulated that 40% of the total SSI
advances by the domestic banks should be earmarked for the tiny category industries.
(v) In pursuance of the Krishnaswamy Committee recommendations a separate target for
the weaker sections at 10% of the net bank credit or 25% of the priority sector credit
was introduced. The DRI credit was included in the priority sector from the inception
in 1972 onwards. It should be noted that the domestic banks are directed to lend one
per cent of their previous year’s outstanding at a highly concessional rate of four per
cent in certain specified categories of weaker sections.
(vi) With the launching of nationwide poverty alleviation programmes in the form of
Integrated Rural Development Programme in 1980, a new phase of the priority sector
credit policy was initiated. The extension of credit support to these programmes was
included in the bank’s obligation towards priority sectors. Later on many such credit
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linked development schemes were devised, revised and introduced for the bank’s
participation.
Targets Under Priority Sector Lending
The Reserve Bank of India, for the implementation of the Social Agenda, has fixed targets and
sub-targets for the Sectors that are treated as priority sectors. The prevalent targets at present are
given in Table 2.12 follows:
Forty per cent of the domestic Indian Commercial Banks – Public as well as Private
Sector Banks should go to Priority Sector.
Ten per cent of net bank credit of the domestic Indian Commercial Banks - Public as well
as Private Sector Banks will be for the weaker sections.
Table 2.12
TARGETS FOR PRIORITY SECTOR LENDING
Category Domestic Banks (both Public Sector and
Private Sector Banks)
Foreign Banks
Operating in India
Total Priority Sector
Advances
40 per cent of Net Bank Credit (NBC) 32 per cent of Net Bank
Credit
Total Agricultural
Advances
18 per cent of NBC No target
SSI Advances No target 10 per cent of NBC
Export Credit Export credit does not form part of priority
sector
12 per cent of NBC
Advances to Weaker
Sections
10 per cent of NBC No target
DRI Advances 1 per cent of previous year’s total advances No target
Source: Definition of Priority Sector Lending given by Reserve Bank of India
Foreign Banks operating in India should lend a minimum of 32% of their net bank credit
to priority sectors.
Foreign banks should reach 12% sub-targets each in export credit and credit to SSI
sector.
Any shortfall in the priority sector targets by the foreign banks should be placed in the
form of deposits with SIDBI for an year at the rate of 10% per annum.
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Total lending to agriculture (both direct & indirect) should not be less than 18% of the net
bank credit of the domestic Indian Commercial Banks. However, agricultural lendings
under the indirect category should not exceed 1/4th
of the sub-target of 18% i.e., 4.5% of
the net bank credit. However, such advances under indirect category in excess of 4.5% of
net bank credit, if any, will be taken into consideration in computing the performance
under the overall priority sector target of 40% of the net bank credit.
Any shortfall in achieving the sub target of 18% for agriculture targets as on 31.12.1994,
subject to the maximum of 1.5% of the net bank credit should be deposited with
NABARD. This deposit would earn a floating rate of 0.5% over the ruling maximum
term deposit rate payable at quarterly interval.
With the enhancement of the investment limit of SSI from R.60 lakhs to Rs.3 crores and
for the tiny sector from Rs.5 lakhs to Rs.25 lakhs, the banks should ensure that out of the
total funds earmarked for SSI, 40% is made available for the units with investment up to
Rs.5 lakhs, 20% for the units between Rs. 5 – 25 lakhs and the remaining for other SSI.
Those banks which fail to fulfill their overall priority sector target of 40% even after their
contribution to the Rural Infrastructure Development Fund (RIDF) of NABARD will
constitute a consortium of banks to lend money to national level KVIC and state level
KVIBs. This will be treated as indirect lending to SSI under priority sector lending. This
loan will be provided at 1.5% below the average Prime Lending Rate (PLR) of five major
banks in the consortium and will carry Government guarantees.
At least one per cent of the previous year’s net bank credit outstanding should go to DRI
and 40% of it should go to SC/ST.
Bank’s minimum allocation of housing finance should be at 1.5% of the previous year’s
incremental deposit. Of this, 20% should be provided by way of direct lending. Of this
20%, at least half should be given as direct lending in rural and semi-urban areas.
Another 30% of the total allocation is to be provided as indirect lending by way of term
loan to housing finance companies, housing boards, slum clearance boards and other
public agencies primarily for augmenting supply of serviced land and constructed units.
Remaining 50% of the total allocation shall be by way of investment in secured bonds
and debentures of HUDCO and NHB.
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RRBs are also brought under priority sector lending and the targets are similar to
commercial banks.
Sixty per cent of the net bank credit of Urban Cooperative Banks should be in the form of
priority sector advances.
Net Bank Credit
The net bank credit should tally with the figure reported in the fortnightly return submitted under
section 42(2) of the Reserve Bank of India Act, 1934. However, outstanding deposits under the
FCNR(B) and NRNR Schemes are excluded from net bank credit for computation of priority
sector lending target /sub-targets.
It may be noted that the RBI has redefined the concept of Net Bank Credit.
Previously:
Net Bank Credit = Total Advances – (Bills rediscounted & funds mobilized through Foreign
Currency non-residents (FCNR) and Non-resident Indian (NRI)
At Present:
Net Bank Credit = Total Advances – (FCNR & NRI deposits deductible only to the
Extent of advances made against these deposits)
Comparison of Priority Sector Lending – Pre and Post Reform
The Government Policy towards Priority Sector Lending did not get affected by the
implementation of the Financial Sector Reforms. However, there are slight changes in the sub-
targets. The table 2.13 shows the differences in the policy towards Priority Sector Lending in
the pre-reform and post-reform period.
Table 2.13
PRIORITY SECTOR LENDING OR DIRECTED CREDIT – PRE & POST REFORM
STATUS
Pre-Reform Status Reform Measures
Definition comprised agriculture, small scale
industries (including setting up of industrial
estates), small road and water transport
operators, small business, retail trade,
1992: Export credit target of 10 per cent
introduced
1993: Foreign banks target revised to 32 per
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professional and self employed persons, State
sponsored organizations for SCs/STs,
educational loans granted to individuals by
banks under their schemes, credit scheme for
weaker sections and refinance by sponsor
banks to RRBs.
Target for Indian Banks: 40 per cent of net
bank credit of which direct agriculture 18 per
cent, advances to weaker sections 10 per cent
of bank credit.
Target for foreign banks includes export
sector: 10 per cent by March 1989, 12 per
cent by March 1990, 15 per cent by March
1992.
cent which includes export credit with sub-
targets of 10 per cent for export and 10 per cent
for SSI.
1993: Target of 18 per cent for agriculture for
Indian Banks to include indirect advances to the
extent of 4.5 per cent of Net Bank Credit.
1996: Export sub target raised from 10 to 12 per
cent.
1993-1998 – Definition of priority sector
enlarged to include:
(i) loans to traditional plantation crops,
viz.Tea, coffee, rubber, cardamom, etc.
irrespective of size of holdings.
(ii) Loans for housing upto Rs.5,00,000.
(iii) Loans to transport operator’s upto 10
vehicles.
(iv) Advances to dealers of drip/sprinkler
irrigation system and agricultural
machinery.
(v) Investments made by banks in special
bonds of SIDBI, NABARD, NHB, NSIC,
HUDCO, SFCs, SIDCs and REC and
contributions to Rural Infrastructure
Development Fund (RIDF).
(vi) Banks’ investment in bonds issued by
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Rural Electrification Corporation (REC) for
financing its Systems Improvement
Scheme under Special Project Agriculture
(SI – SPA).
(vii) Advances upto Rs.10 mn in software
industry.
2000 – 01: The definition of priority sector
lending expanded to include bank finance to
agriculture through (i) non-banking finance
companies and (ii) finance for distribution of
inputs for activities allied to agriculture upto
Rs.15 lakh.
2005 – 06: The scope of priority sector credit
has been increased and provides
opportunities to banks to make loans on
commercially viable terms. There is no
element of interest subsidy.
Further, the banks have an option to invest
shortfall in priority sector lending in
NABARD/SIDBI, thus exercising freedom
not to lend to commercially unviable
activities.
Source: Various issues of Reserve Bank of India Trends and Progress
Trends of Priority Sector Advances – Bank Group wise
The Public Sector banks in India are given the additional responsibility of leading financial
sector development and of driving the Government’s social agenda. The fulfillment of this
social agenda or otherwise can be understood by looking into the Priority Sector Advances given
by the Public Sector Banks since nationalization (I Phase). Table 2.14 shows the Priority Sector
95
Advances given by Public Sector Banks sector wise i.e., Agriculture – direct and indirect, small
scale enterprises and other priority sectors from 1969, the year of I phase of nationalization, to
2012. The table also shows the trends of these advances. The total priority sector advances
registered a growth of 256395 per cent, of which Agriculture registered a growth of 295432
percent, SSIs 154319 per cent and other Priority Sectors registered a trend increase of 11,61,364
per cent during the period. The compounded annual
TABLE 2.14
TRENDS OF ADVANCES TO THE PRIORITY SECTORS BY PUBLIC SECTOR
BANKS
Amount Outstanding (Rs. Crore)
Agricultural
Advances (i) Direct (ii) Indirect SSIs
Other Priority
Sector Advances
Total Priority
Sector Advances
Year Amt Trend Amt Trend Amt
Tren
d Amt Trend Amt Trend Amt Trend
Jun-69 162 100 40 100 122 100 257 100 22 100 441 100
Mar-95 23513 14514 20813 52033 2700 2213 25843 10056 12438 56536 61794 14012
Mar-96 26351 16266 22892 57230 3459 2835 29482 11472 13751 62505 69609 15784
Mar-97 31012 19143 25826 64565 5186 4251 31542 12273 16548 75218 79131 17944
Mar-98 34305 21176 28303 70758 6002 4920 38109 14828 18881 85823 91319 20707
Mar-99 37631 23229 31167 77918 6464 5298 42591 16572 23661 107550 104094 23604
Mar-00 45296 27960 34247 85618 11049 9057 46045 17916 30816 140073 127478 28907
Mar-01 53685 33139 38003 95008 15682 12854 48445 18850 40395 183614 146546 33230
Mar-02 63083 38940 44909 112273 18174 14897 49743 19355 53712 244145 171185 38817
Mar-03 73507 45375 51799 129498 21708 17793 52988 20618 71448 324764 203095 46053
Mar-04 84435 52120 62170 155425 22265 18250 58311 22689 96170 437136 244456 55432
Mar-05 109917 67850 83038 207595 26879 22032 68000 26459 125114 568700 307046 69625
Mar-06 155220 95815 112126 280315 43093 35322 82434 32075 163756 744345 409748 92913
Mar-07 205091 126599 146941 367353 58150 47664 104703 40740 201023 913741 521180 118181
Mar-08 248685 153509 176135 440338 72550 59467 148651 57841 211627 961941 608963 138087
Mar-09 299415 184824 NA NA NA NA 191408 74478 233327 1060577 724150 164206
Mar-10 372463 229915 NA NA NA NA 276319 107517 214995 977250 863777 195868
Mar-11 414991 256167 NA NA NA NA 376625 146547 236999 1077268 1028615 233246
Mar-12 478600 295432 NA NA NA NA 396600 154319 255500 1161364 1130700 256395
Source: Compiled from various issues of Reserve Bank Trends and Progress
96
growth rate of the priority sector lending by the Public Sector Banks upto the year 1997-98 is
19.54% and from 1997-98 to 2011-12 is 19.21% . This indicates that there is a slight drop in the
percentage of credit lent to the priority sectors in the post reform period.
All Scheduled Banks group wise have achieved their targets for the Priority Sector lending even
during the reform periods, except for the year 2011-12, as shown in the Table 2.15. The Priority
Sector Lending by Public Sector Banks achieved a growth rate of 19.40 per cent. The Private
Sector Banks have achieved a growth rate of 26.1 per cent and the Foreign Banks have achieved
a growth rate of 18.72 per cent for the period 1997 to 2012. It is a real surprise to note that the
CAGR of the Priority Sector lending by the Public Sector Banks for the period 1997 – 98 is quite
less when compared to the Priority Sector Lending of Private Sector Banks for the same period.
It is even less than the industry average for the period. The growth rate of the % to Net Bank
Credit of the Public Sector Banks is negative 0.76 indicating actual decrease in the percentage of
the priority sector advances to net bank credit. It appears that the Banks, particularly the Public
Sector Banks are perceiving Priority Sector Lending as adherence to regulation and as a mere
compliance function.
Chart 2.1
PRIORITY SECTOR ADVANCES BY PUBLIC SECTOR COMMERCIAL BANKS (1969-2012)
Source: Compiled from various issues of Reserve Bank Trends and Progress
0
100000
200000
300000
400000
500000
600000
1969
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Agricultural Advances
SSIs
Other Priority Sector Advances
97
It can be observed from Chart 2.1 that after the nationalization of the major Commercial Banks
in the year 1969 the credit flow to all the Priority Sectors registered a continuous growth. The
flow of Credit to the Agricultural Sector is higher than that of the Small Scale Industries and
other Priority Sectors throughout the period i.e., 1969 to 2012.
TABLE 2.15
PRIORITY SECTOR LENDING – BANK GROUP WISE
(Rs. In Crores)
Public Sector Banks
Private Sector Banks
Foreign Banks
Total
Priority
Sector
Advances
Year Total
Priority
Sector
Advances
% to
Net
Bank
Credit
% to
Total
Priority
Sector
Advances
Total
Priority
Sector
Advances
% to
Net
Bank
Credit
% to
Total
Priority
Sector
Advances
Total
Priority
Sector
Advances
% to
Net
Bank
Credit
% to
Total
Priority
Sector
Advances
1997 79,131 41.7 84.09 8832
41.2 9.39
6139 37.7 6.52 94,102
1998 91,319 41.8 83.11 11614
40.9 10.57
6940 34.3 6.32 109,873
1999 1,07,200 43.5 82.7 14155
41.4 10.92
8270 37 6.38
129625
2000 1,27,807 43.6 82.18 18019
38.7 11.59
9699 35 6.24
155525
2001 1,46,546 43.0 81.44 21567
36.7 11.99
11835 34 6.58
179948
2002 1,71,484 43.5 81.42 25709
40.9 12.21
13414 34 6.37
210607
2003 1,99,786 41.2 79.49 36705
44.4 14.6
14848 33.9 5.91
251339
2004 2,44,456 43.6 78.44 48920
47.3 15.7
18276 34.8 5.86
311652
2005 3,10,093 43.2 NA 69886
43.6 NA
NA NA NA -
2006 4,10,379 40.3 NA 106566
42.8 NA NA NA NA -
2007 4,09,748 40.3 69.2 144549
42.9 24.41 37831 33.4 6.39
592128
2008 5,21,376 39.7 70.87 164068
47.8 22.3 50254 39.5 6.83
735698
2009 6,10,450 44.7 71.3 190207
46.8 22.22 55483 34.3 6.48
856140
2010 8,63,777 41.6 75.88 2,14,669
45.8 18.86 59960 36 5.27
1138406
2011 10,28,615 41.3 76.54 2,48,828
46.6 18.51 66527 40 4.95
1343970
2012 11,30,700 37.2 75.50 2,86,400
39.4 19.12 80500 40.9 5.37
1497600
CAGR
% 19.40 -0.76 -0.71 26.10 -0.30 4.85 18.72 0.54 -1.28 20.26
Source: Compiled from various issues of Reserve Bank Trends and Progress
Even after the implementation of the reforms the Priority Sector lending targets remained at 40
per cent for the Indian Banks and 32 per cent for the Foreign Banks. The components of the
Priority Sector are changed taking into consideration the changing requirements. All the
Scheduled Commercial Banks have achieved their targets throughout the periods with an
98
exception of one or two years. Despite the Banking policy that sub serves the goals of greater
penetration of banking services and financial inclusion, the CAGR for Priority Sector Lending of
Public sector Banks is less than that of Foreign banks and Private Sector Banks. The CAGR of
Priority Sector Advances as a percentage to Net bank Credit is nominal and further in the case of
foreign banks it is negative. Banks have to recognize the importance of the Priority Sectors in
the achievement of the Economic Development and assume their role accordingly. Their lies
greater responsibility on the Public Sector Commercial Banks in achieving this objective, for
their very genesis is on achieving the objective of serving these sectors.
Chart 2.2
SHARE OF BANK GROUPS IN TOTAL PRIORITY SECTOR ADVANCES (1997-98)
Chart 2.3
SHARE OF BANK GROUPS IN TOTAL PRIORITY SECTOR ADVANCES (2011-12)
Source: Compiled from various issues of Reserve Bank Trends and Progress
Charts 2.2 and 2.3 show the Share of Bank Groups in Total Priority Sector Advances for the
years 1997-98 and 2011-12. It is clear from the charts that the share of Public Sector Banks has
come down from 84.10 per cent to 75.5 per cent. However Public Sector Banks still hold a
lion’s share in the Total Priority Sector Advances.
84.10%
9.39% 6.51%
Public Sector Banks Priority Sector Advances
Private Sector Banks Priority Sector Advances
Foreign Banks Priority Sector Advances
75.5
19.12
5.38 Public Sector Banks Priority Sector Advances
Private Sector Banks Priority Sector Advances
Foreign Banks Priority Sector Advances
99
II. Bank Branch Expansion
Introduction
Statutory powers to grant licenses for opening of branches by commercial banks in India were
first conferred on the Reserve Bank of India by the Banking Companies (Restriction of
Branches) Act, 1946 which came into force on November 22, 1946. As its name indicates, this
Act was designed primarily with a view to checking the indiscriminate growth of branch banking
witnessed in India during the period of the Second World War.
The substantative provisions of this Act were subsequently incorporated in Section 23 of the
Banking Regulation Act, 1949 in terms of which, no banking company shall open a new place of
business in India or change otherwise than within the same city, town or village, the location of
an existing place of business situated in India, without the prior permission of the Reserve Bank.
Another important provision of this Section refers to the criteria the Reserve Bank may follow in
dealing with the applications of banks for grant of permission to open new offices. Section 23(2)
of the Banking Regulation Act lays down that before granting any permission under this section,
the Reserve Bank may be required to be satisfied by an inspection under Section 35 or otherwise,
in regard to the following matters:
the financial condition and history of the applicant bank
the general character of its management
the adequacy of its capital structure
the earnings prospects
whether opening of the new office will serve public interest
These provisions of the Act and the criteria laid down therein form the statutory basis for the
regulation by the Reserve Bank of the branch expansion activity of commercial banks in such a
manner as to assist the sound development of the banking system capable of meeting the
growing requirements and the changing conditions of the economy.
100
Objectives of the Statutory Provisions
The genesis of Section 23 of the Banking Regulation Act, 1949 may thus be traced to the
necessity (i) to control the indiscriminate opening of branches by banks and (b) to assist and
promote economic growth by adoption of a vigorous and positive branch licensing policy
designed to achieve the twin objectives of mobilization of resources and also extension of credit
facilities to rural areas and the development of banking habit among the people, particularly
those in rural areas.
Accordingly, the two dimensions emanating from the above statutory provisions are
i. Regulatory comfort
ii. Public interest
It follows from the above that (a) the branch authorisation policy is used to ensure that branch
distribution is more dispersed to cover rural, semi-urban and other under-banked areas consistent
with the public policy objectives and (b) the branch authorisations are restrictive where there is
inadequate regulatory comfort.
Evolution of the policy over a period
During the period of the Second World War, India witnessed indiscriminate growth of branch
banking. To restrict branch expansion, a restrictive policy was followed initially during the years
1947 to 1954. Thereafter, till 1962, a liberal Branch Licensing Policy was pursued by RBI. In
1962, banks were compelled to open branches in unbanked/banked centres in a ratio of 1:2. For
a coordinated branch expansion, banks were advised to submit a plan for 3 years ie., 1962 to
1965. In 1968, social control measures were introduced. Commercial banks were urged to make
a continuous study of banking needs and business potential of various regions and step up the
pace of branch expansion by 30% of their performance in the preceding two years. All-India and
large regional banks were required to open at least 25% of their new branches in unbanked
centres. The earlier norm of two banked centres for every unbanked centre was modified to the
ratio of 1:1 between banked and unbanked centres15
.
In 1969, when 14 major banks were nationalized, there were 6955 branches of public sector
banks in the country and the Average Population per Branch Office (APPBO) for the country as
101
a whole was 64,000. Public Sector Banks were expected to co-ordinate amongst themselves and
thereby avoid duplication of efforts in the spread of banking facilities in under-banked areas.
Accordingly, in February 1970, RBI decided to issue licences as and when the banks become
eligible for opening offices at urban centres, on the basis of ratio of one office in an urban centre
for every two offices opened after December 1969 in rural and semi-urban centres (in the case of
banks which had more than 60% of their offices in rural and semi-urban centres) and in the case
of other banks, the ratio was one office in an urban centre for every three offices in rural and
semi-urban centres.
In September 1971, the requirement of banks to open the requisite number of offices in
rural/semi-urban areas to get an entitlement for opening urban offices including those at
metropolitan and port towns was relaxed so that more offices in metropolitan/port towns might
be opened.
From January 1977, a bank had to open 4 offices in unbanked rural centres to get an entitlement
to open one office in a metropolitan/port town and one office in a banked centre. It was however
open to banks to seek an entitlement of a banked centre in lieu of an entitlement to metropolitan/
port town16
.
Branch Expansion during 1980’s and 1990’s
During the years 1969 to 1980, there was a phenomenal increase of 19855 branches and the total
number of public sector bank branches increased from 6955 to 26810. It may however be
mentioned that during the period 1979-81, under Branch Expansion, States and districts with a
higher Average Population Per Branch Office (APPBO) than the national APPBO of 20,000
were identified and District-wise branch expansion programmes were drawn up in consultation
with State Governments and banks were advised to open branches at the identified centres.
During the period 1980 to 1990, there was a tremendous growth of bank branches and the
number of branches of Public Sector Banks increased from 26,810 to 42,079. Towards the end
of the 1985-90 plan periods, the country had an impressive network of about 60,000 branches
which were considered as adequate to meet the banking requirements. Besides, the adoption of
Service Area Approach(SAA) to rural lending under which each bank branch was expected to
cover about 15 to 25 villages, also ensured that the banking needs of every village in the country
102
was adequately taken care of. The target of APPBO of 17,000 in rural and semi-urban was more
or less achieved by then. The aforesaid achievements/developments were taken into account
while evolving the approach to branch expansion for the period 1990-95 and it was decided that
there was no need for evolving any particular branch expansion programme as such for any
specific period, with targets like population coverage per bank office, as was being done in the
past. In the light of the above findings, it was decided to leave it to the judgement of the
individual banks to assess the need for additional branches taking into account factors such as
business potential and financial viability. The above approach continued during the period 1995
to 200517
.
Liberalised Branch Expansion Policy – September 2005
In the year 2005 a new liberalized Branch Authorisation Policy was conveyed to the banks. The
emphasis on branch expansion in under-banked areas and semi-urban/rural centres continued in
the new policy. It was indicated in the policy that banks are encouraged to open branches in
under-banked districts and rural centres. In order to facilitate banks to identify centres in under-
banked districts, a list of such districts was also forwarded to banks. In addition, new private
sector banks are required to open 25% of their branches in semi-urban and rural centres on an
ongoing basis.
Foreign banks
The branch authorisation policy for Indian banks which is in vogue since September 2005 is also
applicable to foreign banks subject to certain additional parameters, as under:
Foreign banks and its group's track record of compliance and functioning in the global
markets would be considered. Reports from home country supervisors will be sought,
wherever necessary.
Weightage would be given to even distribution of home countries of foreign banks having
presence in India.
The treatment extended to Indian banks in the home country of the applicant foreign bank
would be considered.
103
Due consideration would be given to the bilateral and diplomatic relations between India
and the home country.
The branch expansion of foreign banks would be considered keeping in view India's
commitments at W.T.O. ATMs would not be included in the number of branches for such
computation.
Thus, the emphasis on provision of banking facilities in rural/semi-urban/under banked areas
continued in the Branch Authorisation Policy as it evolved over a period of time. Branch
authorisation policy needs to be continued to be leveraged towards achieving the ultimate
objective of financial inclusion.
Revision of the Branch Expansion Policy, 2009
In terms of the existing statutory provisions as contained in Section 23 of the Banking
Regulation Act, 1949, no banking company shall open a new place of business in India or change
otherwise than within the same city, town or village, the location of an existing place of business
situated in India, without the prior permission of the Reserve Bank. Such permissions are
granted in terms of the existing Branch Authorisation Policy, as revised from time to time. The
components of the extant Branch Authorisation Policy, which was last revised in September
2005, have been incorporated in the Master Circular on Branch Authorisation dated July 1, 2009.
Major Components of the Extant Branch Authorisation Policy
(i) With the objective of liberalising and rationalising the branch authorisation policy, a
framework for a branch authorisation policy which would be consistent with the
medium term corporate strategy of banks and public interest has been put in place since
September 2005. The Master Circular on Branch Authorisation dated July 1, 2009
contains the elements of the branch authorisation policy as updated from time to time.
(ii) In addition to the requirement relating to the financial condition and history of the
banking company, the general character of its management, and the adequacy of its
capital structure and earning prospects, the branch authorisation policy framework has
the elements enumerated in the following paragraphs.
a. The RBI will, while considering applications for opening branches give weightage to the
nature and scope of banking facilities provided by banks to common persons, particularly
104
in underbanked areas (districts), actual credit flow to the priority sector, pricing of
products and overall efforts for promoting financial inclusion, including introduction of
appropriate new products and the enhanced use of technology for delivery of banking
services.
b. Such an assessment will include policy on minimum balance requirements and whether
depositors have access to minimum banking or “no frills” banking services, commitment
to the basic banking activity viz., acceptance of deposits and provision of credit and
quality of customer service as, inter alia, evidenced by the number of complaints received
and the redressal mechanism in place in the bank for the purpose.
c. The need to induce enhanced competition in the banking sector at various locations.
d. Regulatory comfort will also be relevant in this regard. This would encompass:
compliance with not only the letter of the regulations but also whether the bank’s
activities are in compliance with the spirit and underlying principles of the regulations.
the activities of the banking group and the nature of relationship of the bank with its
subsidiaries, affiliates and associates.
quality of corporate governance, proper risk management systems and internal control
mechanism.
(iii) As regards the procedural aspects, the earlier system of granting authorisations for
opening individual branches from time to time has been replaced by a system of giving
aggregated approvals, on an annual basis, through a consultative and interactive
process. Banks' branch expansion strategies and plans over the medium term are
discussed by the RBI with individual banks. The medium term framework and the
specific proposals would cover the opening, closing, shifting, merger and conversion of
all categories of branches.
(iv) In terms of the new branch authorisation policy, banks will not be required to approach
Regional Offices of Reserve Bank of India for “licence” for opening branches.
However, they have to approach RBI,DBOD,CO for authorisation for opening
branches.
(v) Banks have been advised in terms of the extant policy that they are encouraged to open
branches in under-banked districts and rural centres. In order to facilitate banks to
105
identify centres in under banked districts, a list of such districts has also been forwarded
to banks.
Relaxations in the extant Branch Authorisation policy
The following are the relaxations provided by the extant Branch Authorisation policy:
Opening of Off-site ATMs
With effect from June 12, 2009, Scheduled Commercial Banks (including foreign banks) have
been granted general permission to install Off-site ATMs, subject to reporting, without having
the need to take permission from the Reserve Bank in each case. However, this would be subject
to any direction which the Reserve Bank may issue, including for closure/shifting of any such
Off-site ATMs, wherever so considered necessary by the Reserve Bank.
Business Facilitator/ Business Correspondent(BF/BC) Model
With the objective of ensuring greater financial inclusion and increasing the outreach of the
banking sector, banks have been permitted to use the services of Non-Governmental
Organisations / Self Help Group (NGOs/SHGs), Micro Finance Institutions (MFIs) and other
Civil Society Organisations (CSOs) as intermediaries in providing financial and banking services
through the use of BF/ BC Model. Under this model, the permitted agencies have been enabled
to deliver banking services at unbanked/under-banked areas through an agency model. With a
view to further scaling up the BC model, banks were permitted to engage individuals under the
following three categories as Business Correspondent: (i) retired bank employees, (ii) retired
Government employees and (iii) ex-servicemen. Based on the announcement made in the
Annual Policy 2009-10, a Working Group has been constituted to look into the aspects relating
to further enlarging the list of permitted entities which can be appointed as Business
Correspondents. The Working Group has since submitted its report recommending certain
measures to further scale up the implementation of Business Correspondent model, which is
under the consideration of Reserve Bank.
Doorstep Banking
Banks were also permitted to prepare schemes for offering Doorstep Banking facilities,
including collection/delivery of cash, to their customers (including individuals, Corporate, PSUs,
106
Government Department etc.), with the approval of their Boards, in accordance with the
guidelines issued by Reserve Bank of India.
Evaluation of the extant policy
It is relevant to mention here that after the introduction of the revised Branch Authorisation
Policy in September 2005, the number of authorisations issued to banks as a percentage of the
number of authorisations sought by them has been progressively going up, contrary to the
perception in some quarters that the new policy introduced in September 2005 has been
restrictive in granting authorisations to banks for opening branches. As against 62%
authorisations granted to banks (as a percentage of the number of authorisations sought) in the
year 2005-06 ( prior to introduction of the revised policy), the percentage of authorisations
granted (vis-à-vis authorisations sought) has gone upto 68% (2006-07), 87%(2007-08) and
91%(2008-09) respectively in the three years after the introduction of the revised policy.
Further, better distribution has been achieved across the geographical spectrum in as much as
rural and semi-urban branches authorised as a percentage of total number of authorisations, on an
average, has substantially gone up from 32% during the period from 2003-04 to 2005-06 (prior
to implementation of the new Branch Authorisation policy) to 51 % during the period from
2006-07 to 2008-09 (after implementation of the new Branch Authorisation policy).
As regards foreign banks, the number of authorisations issued during the calendar years 2006,
2007,2008 is 13,19 and 20 respectively as against the WTO commitment of 12 branches per
year.
Branch Expansion of all Scheduled Commercial Banks (1969 - 2012)
Therefore it can be observed from the Branch authorisation policy over a period of time and the
extant branch authorization policy subserves the goals of greater penetration of banking services
and financial inclusion. Table 2.16 shows that the Total Number of branches have increased from
8,260 in the year 1969 to 81,240 in the year 2012 at a compounded annual growth rate of 5.40%.
The rural branches have increased from 1860 to 46,244 at a compounded annual growth rate of
7.67%. The Population per bank sharply fell 63,800 per branch to 9,399 per branch with a
107
negative compounded annual growth rate of 4.31 per cent. The commercial banks positively
contributed to the goal of penetration of banking services and financial inclusion. The figures in
brackets show the percent in Total.
TABLE 2.16
BRANCH EXPANSION OF ALL COMMERCIAL BANKS
As on June 30
Total no. of
branches
No. of Rural
Branches
Trends for number of rural branches
Rural Branches
As percentage Of the total
Population Per bank
Office
Trends for population per bank
office
1969 8260 1860 100 22 63800 100 1991 60650 32750 1761 54 14150 22.17 2005 68500 32070 1724 47 15000 23.51 2012 81,240 46244 2486 57 9,399 14.73
CAGR % 5.40 7.67 (4.31)
Source: Economic Survey, 2011-12, Table 4.5
Table 2.17, 2.18 and 2.19 show the Bank Group and Population Group wise branch expansion
for the period 1997 to 2012 along with the Compounded Annual Growth Rate (CAGR)
calculations.
The Compounded annual growth rate for the increase in the branches of the Public Sector
Commercial Banks for the period 1997 to 2012 is - Rural 0.839 per cent, Semi-urban 3.394 per
cent, Urban 3.645 per cent, Metropolitan cities 4.563 per cent, Total 2.636 per cent. Thus, it can
be observed that the CAGR of the increase in the Rural branches is the lowest and Metropolitan
cities is the highest. It is also observed that the share of the rural branches in the total branches
fell from 42.35 per cent in the year to 32.88 per cent in the year 2012 and that of the semi-urban
branches has slightly increased from 23.4 per cent to 26.34 per cent. The Compounded annual
growth rate for the increase in the branches of the Indian Private Sector Banks for the period
1997 to 2012 is - Rural 2.08 per cent, Semi-urban 7.08 per cent, Urban 7.95 per cent,
Metropolitan cities 10.03 per cent, Total 7.03 per cent. Thus it can be observed that the CAGR
of the increase in the Rural branches is not only the lowest, and Metropolitan cities is the highest.
It is also observed that the share of the rural branches in the total branches fell from 25.0 per cent
108
in the year 1997 to 11.75 per cent in the year 2009 and that of the semi-urban branches fell from
34.6 per cent to 26.53 per cent.
TABLE 2.17
DISTRIBUTION OF PUBLIC SECTOR BRANCHES IN INDIA - POPULATION
GROUP-WISE
Number of Branches
Bank
Group/Year
No. of
Banks
Rural Semi
urban
Urban Metro
politan
Total
1997 27 19,411 10,420 8,035 6,624 44,490
(43.63) (23.4) (18.06) (14.90) (100.0)
1998 27 19,423 10,535 8,202 6,746 44,906
(43.25) (23.46) (18.26) (15.02) (100.0)
1999 27 19,423 10,662 8,447 6,928 45,460
(42.73) (23.45) (18.58) (15.24) (100.0)
2000 27 19,429 10,677 8,530 7,010 45,646
(42.56) (23.39) (18.69) (15.36) (100.0)
2001 27 19,331 10,870 8,689 7,177 46,067
(41.96) (23.60) (18.86) (15.58) (100.0)
2002 27 19,243 10,907 8,740 7,187 46,077
(41.76) (23.67) (18.97) (15.60) (100.0)
2003 27 19,193 10,935 8,792 7,222 46,142
(41.60) (23.70) (19.05) (15.65) (100.0)
2004 27 19,059 11,240 9,099 7,410 46,808
(40.72) (24.01) (19.44) (15.83) (100.0)
2005 27 19,067 11,371 9,269 7,579 47,286
(40.32) (24.05) (19.60) (16.02) (100.0)
2006 27 18,048 11,332 9,692 9,287 48,359
(37.32) (23.43) (20.04) (19.02) (100.0)
2007 27 18,197 11,736 10,247 9,726 49,906
(36.46) (23.52) (20.53) (19.49) (100.0)
2008 27 18,575 12,738 11,241 10,381 52,935
(35.10) (24.06) (21.23) (19.61) (100.0)
2009 27 18,972 13,553 11,936 10,894 55,355
(34.27) (24.48) (21.56) (19.68) (100.0)
2010 27 19,567 14,595 12,920 11,743 58,825
(33.26) (24.81) (21.96) (19.96) (100.0)
2011 26 20,387 15,978 13,569 12,277 62,211
(33.49) (25.68) (21.81) (19.73) (100.0)
2012 26 22,188 17,773 14,248 13,527 67,466
(32.88) (26.34) (21.11) (20.05) (100.0)
CAGR % 0.839 3.394 3.645 4.563 2.636
Note: Figures in parenthesis show the percentage of the branches in the total
Source: Compiled from various issues of Report on Trend and Progress of Banking in
India
109
The presence of the foreign banks in the Rural and Semi-urban areas is almost nil. Only 7 and 8
branches are operating in the Rural Areas and Semi-Urban areas. The Compounded annual
growth rate for the increase in the branches of the Foreign Banks for the period 1997 to 2012 is -
Urban 8.31 per cent, Metropolitan cities 2.68 per cent, Total 3.67 per cent. Thus it can be
observed that the concentration of the foreign banks is in the urban and metropolitan cities only.
Chart 2.4
Distribution of Public Sector Branches in India - Population Group-wise
Source: Compiled from various issues of Report on Trend and Progress of Banking in
India
It is clear from chart 2.4 that the percentage share of Rural Branches in the total branches is
decreasing. The percentage share of Urban and Metropolitan Branches increased during the
period 1997-98 to 2011-12. However the percentage share of Semi-urban branches also
increased during the period.
19,4
11
19,4
23
19,4
23
19,4
29
19,3
31
19,2
43
19,1
93
19
,05
9
19,0
67
18,0
48
18,1
97
18,5
75
18,9
72
19,5
67
20,3
87
22,1
88
10,4
20
10
,53
5
10,6
62
10,6
77
10,8
70
10,9
07
10
,93
5
11,2
40
11,3
71
11,3
32
11,7
36
12,7
38
13,5
53
14,5
95
15,9
78
17,7
73
8,0
35
8,2
02
8,4
47
8,5
30
8,6
89
8,7
40
8,7
92
9,0
99
9,2
69
9,6
92
10,2
47
11,2
41
11,9
36
12,9
20
13,5
69
14,2
48
6,6
24
6,7
46
6,9
28
7,0
10
7,1
77
7,1
87
7,2
22
7,4
10
7,5
79
9,2
87
9,7
26
10,3
81
10
,89
4
11,7
43
12,2
77
13,5
27
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Metropolitan
Urban
Semi-Urban
Rural
Year
P
e
r
c
e
n
t
a
g
e
110
TABLE 2.18
DISTRIBUTION OF INDIAN PRIVATE SECTOR BANK BRANCHES IN INDIA –
POPULATION GROUP-WISE
Number of Branches
Year Rural Semi-
Urban
Urban Metro
politan
Total
1997 1,136 1,567 1,049 783 4,535
(25.0) (34.6) (23.1) (17.3) (100.0)
1998 1,145 1,609 1,102 860 4,716
(24.3) (34.1) (23.4 ) (18.2) (100.0)
1999 1,136 1,643 1,143 965 4,887
(23.2) (33.6) (23.4) (19.7) (100.0)
2000 1,137 1,679 1,169 998 4,983
(22.8) (33.7) (23.5) (20.0) (100.0)
2001 1,135 1,723 1,248 1,099 5,205
(21.8) (33.1) (24.0) (21.1) (100.0)
2002 1,139 1,773 1,354 1,168 5,434
(21.0) (32.6) (24.9) (21.5) (100.0)
2003 1,138 1,810 1,452 1,224 5,624
(20.2) (32.2) (25.8) (21.8) (100.0)
2004 1,106 1,768 1,537 1,383 5,794
(19.1) (30.5) (26.5) (23.9) (100.0)
2005 1,097 1,831 1,714 1,479 6,121
(17.9) (29.9) (28.0) (24.2) (100.0)
2006 992 1,828 1,963 1,875 6,658
(14.89) (27.45) (29.48) (28.16) (100.0)
2007 987 2,077 2,102 1,901 7,067
(13.96) (29.39) (29.74) (26.89) (100.0)
2008 1,056 2,483 2,518 2,250 8,307
(12.71) (29.89) (30.31) (27.08) (100.0)
2009 1,121 2,680 2,743 2,421 8,965
(12.50) (29.89) (30.60) (27.00) (100.0)
2010 1,201 3,037 3,027 2,762 10,027
(11.97) (30.28) (30.18) (27.55) (100.0)
2011 1,311 3,814 3,315 3,162 11,602
(11.30) (32.87) (28.57) (27.25) (100.0)
2012 1,581 4,687 3,569 3,615 13,452
(11.75) (34.84) (26.53) (26.87) (100.0)
CAGR % 2.08 7.08 7.95 10.03 7.03
Note: Figures in parenthesis show the percentage of the branches in the total
Source: Compiled from various issues of Report on Trends and Progress
of Banking in India
111
Chart 2.5
Distribution of Indian Private Sector Bank Branches in India - Population Group-wise
Source: Compiled from various issues of Report on Trends and Progress of Banking in
India
Chart 2.5 distribution of Indian Private Sector Banks – Population group wise. It can be
observed from the chart that the percentage share of Rural Branches has come down during the
1,1
36
1,1
45
1,1
36
1,1
37
1,1
35
1,1
39
1,1
38
1,1
06
1,0
97
992
987
1,0
56
1,1
21
1,2
01
1,3
11
1,5
81
1,5
67
1,6
09
1,6
43
1,6
79
1,7
23
1,7
73
1,8
10
1,7
68
1,8
31
1,8
28
2,0
77
2,4
83
2,6
80
3,0
37
3,8
14
4,6
87
1,0
49 1,
102
1,1
43
1,1
69
1,2
48
1,3
54
1,4
52
1,5
37
1,7
14
1,9
63
2,1
02
2,5
18
2,7
43
3,0
27
3,3
15
3,5
69
783
860
965
998
1,0
99
1,1
68
1,2
24
1,3
83
1,4
79
1,8
75
1,9
01
2,2
50
2,4
21
2,7
62
3,1
62
3,6
15
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Metropolitan
Urban
Semi-Urban
Rural
P e r c e n t a g e
Y E A R
112
period 1997-98 to 2011-12. However the percentage share of Semi-urban branches has
registered an increase. The share of Urban and Metropolitan Branches also has increased.
TABLE 2.19
DISTRIBUTION OF FOREIGN BANK BRANCHES IN INDIA - POPULATION
GROUP-WISE Number of Branches
Bank
Group/Year
Rural Semi
urban
Urban Metro
politan
Total
1997 0 3 17 161 181
- (1.7) (9.4) (88.9) (100.0)
1998 0 3 17 168 188
- (1.6) (9.0) (89.4) (100.0)
1999 - 2 14 162 178
- (1.1) (7.9) (91.0) (100.0)
2000 - 2 14 170 186
- (1.1) (7.5) (91.4) (100.0)
2001 - 2 15 179 196
- (1.0) (7.7) (91.3) (100.0)
2002 - 2 27 217 246
- (0.8) (11.0) (88.2) (100.0)
2003 - — 24 180 204
- (—) (11.8) (88.2) (100.0)
2004 - – 31 188 219
- - (14.2) (85.8) (100.0)
2005 – 1 42 206 249
- (0.4) (16.9) (82.7) (100.0)
2006 – 1 37 224 262
– (0.4) (14.1) (85.5) (100.0)
2007 – 2 43 227 272
– (0.7) (15.8) (83.5) (100.0)
2008 – 2 50 227 279
- (0.7) (17.9) (81.4) (100.0)
2009 4 4 53 234 295
(1.4) (1.4) (18.0) (79.3) (100.0)
2010 5 6 60 237 308
(1.62) (1.95) (19.48) 76.95) (100.0)
2011 7 8 61 241 317
(2.21) (2.52) (19.24) (76.03) (100.0)
2012 7 8 61 246 322
(2.17) (2.48) (18.94) (76.40) (100.0)
CAGR % 2.125 6.32 8.31 2.68 3.67
Note: Figures in parenthesis show the percentage of the branches in the total
Source: Compiled from various issues of Report on Trend and Progress of Banking in
India
113
Chart 2.6
Distribution of Foreign Bank Branches in India - Population Group Wise
Source: Compiled from various issues of Report on Trends and Progress of Banking in
India
Chart 2.6 shows the distribution of Foreign Bank Branches in India – Population group wise. It
is very much clear from the chart that the presence of Foreign Bank Branches in the Rural and
Semi Urban regions is dismal. The Foreign Banks are concentrating in the Urban and
Metropolitan areas only.
3 3 2 2 2 2 0 0 1 1 2 2 4 6 8 8 17
17
14
14
15
27
24 31
42
37
43
50 53
60
61
61
161
168
162
170
179
217
180
188
206
224
227
227
234
237
241
246
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Metro politan
Urban
Semi urban
Rural
114
Comparison
The table 2.20 shows the comparison of the Compounded Annual Growth Rate for the period
1997-2012 Bank Group wise and Population wise.
TABLE 2.20
COMPOUNDED ANNUAL GROWTH RATE (CAGR) – BANK GROUP WISE &
POPULATION WISE DURING THE PERIOD 1997-2012
Parameters Bank Group
Public Sector
Banks
Indian Private
Sector Banks
Foreign
Banks
Total
1. Branch Expansion
Rural 0.839 2.08 2.125 0.916
Semi-Urban 3.394 7.08 6.32 4.00
Urban 3.645 7.95 8.31 4.31
Metropolitan 4.563 10.03 2.68 5.34
Total 2.636 7.03 3.67 3.183
Source: Calculated from the data compiled from various issues of Report on
Trends and Progress of Banking in India
Despite the extant branch authorization policy that sub serves the goals of greater penetration of
banking services and financial inclusion, it is surprising to note that the CAGR of Branch
expansion for the Rural Areas is the lowest. The CAGR of the Branch expansion of 2.125 for
the foreign banks is a misnomer, for; from nil representation in the years 1997 to 2008 7 rural
branches were started in the year 2012. This can be taken as almost nil representation of foreign
banks in the rural areas. The maximum CAGR of 5.34 per cent is registered for the Metropolitan
branches followed by 4.31 per cent for urban branches indicating concentration of bank branches
in these areas.
Because of the implementation of the financial sector reforms 1991-92 through 1997-98 and
1998-99 and beyond the focus of the banking sector shifted to applying prudential norms. In this
process the banks developed risk aversion. This could be one of the reasons for the low share of
the rural branches and very less expansion in the semi-urban areas by public sector and Indian
private sector banks. Foreign Banks operating in India should lend a minimum of 32 percent of
their net bank credit to priority sectors which comprises of exports and Small Scale Industries.
Also the branch expansion of foreign banks is considered keeping in view India’s commitments
115
at W.T.O. This could be one of the reasons for the non presence of the foreign banks in the rural
areas.
The Banking sector and particularly the Public Sector Banks have performed impressively in
achieving greater penetration into the Rural and Sub urban areas. The Population per bank has
registered a decrease from 63,800 in the year 1969 to 9,399 in the year 2012 at a CAGR of 4.31
per cent. However the branch expansion of the Scheduled Commercial Banks including Public
Sector Banks have, not only slowed down, but also have registered a negative growth. Emphasis
on the Banking Sector, particularly, Public Sector Banks on the Prudential norms and
Profitability could be a major reason.
However along with achieving the improvement of quality of assets and profitability Public
Sector Banks have to carry on with the Social agenda of extending the reach of the financial
services to the rural poor and underprivileged, if not with brick and mortar branches, with the
use of the Technology and by innovative practices.
III. FINANCIAL INCLUSION
An effective financial system should empower individuals, facilitate better integration with
economy, actively contribute to development and give protection against economic shocks.
Inclusive finance, through securing savings, by providing appropriately priced credit and
offering tailor made insurance products to all, and by giving payment and remittance services,
should help vulnerable groups such as low income groups, weaker sections, etc., to increase
incomes, acquire capital, manage risk and work their way out of poverty.
Access to finance by the poor and vulnerable groups is a prerequisite for poverty reduction and
social cohesion. This has to become an integral part of the financial systems to promote inclusive
growth. Providing access to finance is a form of empowerment of the vulnerable groups.
The recent developments in banking technology have transformed banking from the traditional
brick-and-mortal infrastructure like staffed branches to a system supplemented by other channels
like automated teller machines (ATM), credit/debit cards, internet banking online money
transfers, etc. The important point, however, is that access to such technology is restricted only
to certain segments of the society. Increasingly sophisticated customer segmentation technology
116
is facilitating to accurately target sections of the market leading to restricted access to financial
services for some groups. There is a growing divide, with an increased range of personal finance
options for a segment of high and upper middle income population and a significantly large
section of the population who lack access to even the most basic banking services. This is
termed ‘financial exclusion’. These people, particularly, those living on low incomes, cannot
access mainstream financial products such as bank accounts, credit, remittances and payment
services, financial advisory services, insurance facilities, etc.
The extent of financial exclusion is revealed by the figures given by the NSSO survey 59th
round
(2003). They are as following:
45.9 million farmer households out of a total of 89.3 million, which is 51.4 per cent, do
not access credit either from institutional or non institutional sources.
Despite the vast network of bank branches, of the total farmer households who access
credit, only 27 per cent access formal sources of credit, of which one-third also borrow
from non-formal sources.
73 per cent of farmer households have no access to formal sources of credit.
Region wise analysis shows that farm households not accessing credit from formal
sources as a proportion to total farm households is especially high at 95.91%, 81.26% and
77.59% in the North Eastern, Eastern and Central regions respectively.
Overall indebtedness to formal sources of finance alone is only 19.66% in these three
regions.
Occupational group wise analysis shows that marginal farmer households constitute 66
per cent of total farm households. Only 45 per cent of these households are indebted to
either formal or non formal sources of finance.
About 20 per cent of indebted marginal farmer households have access to formal sources
of credit.
Among non-cultivator households nearly 80 per cent do not access credit from any
source.
Social group wise analysis reveals that only 36 per cent of scheduled tribe farmer
households and 51 per cent of scheduled caste and other backward classes farmer
households are indebted mostly to informal sources.
117
Basic statistical returns of the Reserve Bank of India reveal that critical exclusion in
terms of credit is manifest in 256 districts, spread across 17 States and 1 Union territory,
with a credit gap of 95 per cent and above. This is in respect of Commercial Banks and
Regional Rural Banks.
Inspite of the several efforts made by the Government and Reserve Bank of India so far, a
sizeable majority of the population, particularly vulnerable groups, continue to remain excluded
from the opportunities and services provided by the financial sector18
. In order to address the
issues of financial inclusion, the Government of India constituted a “Committee on Financial
Inclusion” on 22nd
June 2006 under the Chairmanship of Dr. C. Rangarajan. The Committee
submitted its final report to Hon'ble Union Finance Minister on 04 January 2008.
The terms of reference assigned to the Committee were:
To study the pattern of exclusion from access to financial services disaggregated by region,
gender and occupational structure.
To identify the barriers confronted by vulnerable groups in accessing credit and financial
services, including supply, demand and institutional constraints.
To review the international experience in implementing policies for financial inclusion and
examine their relevance / applicability to India.
To suggest :
a strategy to extend financial services to small and marginal farmers and other vulnerable
groups, including measures to streamline and simplify procedures, reduce transaction
costs and make the operations transparent;
measures including institutional changes to be undertaken by the financial sector to
implement the proposed strategy of financial inclusion;
a monitoring mechanism to assess the quality and quantum of financial inclusion
including indicators for assessing progress.
Financial Inclusion – Definition
The Deliberations of the Committee on the subject of Financial Inclusion contributed to a
consensus that merely having a bank account may not be a good indicator of financial inclusion.
Further, indebtedness as quantified in the NSSO 59th round (2003) may not also be a reflective
118
indicator. Therefore the ideal definition should look at people who want to access financial
services but are denied the same. If genuine claimants for credit and financial services are denied
the same, then that is a case of exclusion. As this aspect would raise the issue of credit
worthiness or bankability, it is also necessary to dwell upon what could be done to make the
claimants of institutional credit bankable or creditworthy. This would require re-engineering of
existing financial products or delivery systems and making them more in tune with the
expectations and absorptive capacity of the intended clientele. Based on the above consideration,
a broad working definition of financial inclusion is given by the Committee which is as under:
“Financial inclusion is defined as the process of ensuring access to financial services and timely
and adequate credit where needed by vulnerable groups such as weaker sections and low income
groups at an affordable cost.”
The essence of financial inclusion is in trying to ensure that a range of appropriate financial
services is available to every individual and enabling them to understand and access those
services. Apart from the regular form of financial intermediation, it may include
(i) a basic no frills banking account for making and receiving payments,
(ii) a savings product suited to the pattern of cash flows of a poor household,
(iii) money transfer facilities,
(iv) small loans and overdrafts for productive, personal and other purposes,
(v) insurance (life and non-life), etc.
While financial inclusion, in the narrow sense, may be achieved to some extent by offering any
one of these services, the objective of “Comprehensive Financial Inclusion” would be to provide
a holistic set of services encompassing all of the above.
The major observations and the recommendations of the Committee include the following:
(i) Demand Side Factors: The Committee opined that, while financial inclusion can be
substantially enhanced by improving the supply side or the delivery systems, it is also
important to note that many regions, segments of the population and sub-sectors of the
economy have a limited or weak demand for financial services. In order to improve their
level of inclusion, demand side efforts need to be undertaken including improving human
and physical resource endowments, enhancing productivity, mitigating risk and
strengthening market linkages. However, the primary focus of the Committee has been on
improving the delivery systems, both conventional and innovative.
119
(ii) National Mission on Financial Inclusion: The Committee felt that the task of financial
inclusion must be taken up in a mission mode as a financial inclusion plan at the national
level. A National Mission on Financial Inclusion (NaMFI) comprising representatives
from all stakeholders may be constituted to aim at achieving universal financial inclusion
within a specific time frame. The Mission should be responsible for suggesting the
overall policy changes required for achieving the desired level of financial inclusion, and
for supporting a range of stakeholders – in the domain of public, private and NGO sectors
– in undertaking promotional initiatives. A National Rural Financial Inclusion Plan
(NRFIP) may be launched with a clear target to provide access to comprehensive
financial services, including credit, to atleast 50% of financially excluded households by
2012 through rural/semi-urban branches of Commercial Banks and Regional Rural
Banks. The remaining households, with such shifts as may occur in the rural/urban
population, have to be covered by 2015. Semi-urban and rural branches of commercial
banks and RRBs may set for themselves a minimum target of covering 250 new
cultivator and non-cultivator households per branch per annum, with an emphasis on
financing marginal farmers and poor non-cultivator households.
(iii) Development and Technology Funds: There is a cost involved in this massive exercise
of extending financial services to hitherto excluded segments of population. Such costs
may come down over a period of time with the resultant business expansion. However, in
the initial stages some funding support is required for promotional and developmental
initiatives that will lead to better credit absorption capacity among the poor and
vulnerable sections and for application of technology for facilitating the mandated levels
of inclusion. The Committee has, therefore, proposed the constitution of two funds with
NABARD – the Financial Inclusion Promotion & Development Fund and the Financial
Inclusion Technology Fund with an initial corpus of Rs. 500 crore each to be contributed
in equal proportion by GOI / RBI / NABARD. This recommendation has already been
accepted by GOI.
(iv) Business Correspondent Model: Extending outreach on a scale envisaged under
NRFIP would be possible only by leveraging technology to open up channels beyond
branch network. Adoption of appropriate technology would enable the branches to go
120
where the customer is present instead of the other way round. This, however, is in
addition to extending traditional mode of banking by targeted branch expansion in
identified districts. The Business Facilitator/Business Correspondent (BF/BC) models
riding on appropriate technology can deliver this outreach and should form the core of the
strategy for extending financial inclusion. The Committee has made some
recommendations for relaxation of norms for expanding the coverage of BF/BC.
Ultimately, banks should endeavour to have a BC touch point in each of the 6,00,000
villages in the country.
(v) Procedural Changes: The Committee thought that Procedural Changes like simplifying
mortgage requirements, exemption from Stamp Duty for loans to small and marginal
farmers and providing agricultural / business development services in the farm and non-
farm sectors respectively, will help in extending financial inclusion.
(vi) Role of RRBs: RRBs, post-merger, represent a powerful instrument for financial
inclusion. Their outreach vis-à-vis other scheduled commercial banks particularly in
regions and across population groups facing the brunt of financial exclusion is
impressive. RRBs account for 37% of total rural offices of all scheduled commercial
banks and 91% of their workforce is posted in rural and semi-urban areas. They account
for 31% of deposit accounts and 37% of loan accounts in rural areas. RRB’s have a large
presence in regions marked by financial exclusion of a high order. They account for 34%
of all branches in North-Eastern, 30% in Eastern and 32% in Central regions. Out of the
total 22.38 lakh SHGs credit linked by the banking industry as on 31st March 2006, 33%
of the linkages were by RRBs which is quite impressive to say the least. Significantly the
more backward the region the greater is the share of RRBs which is amply demonstrated
by their 56% share in the North-Eastern, 48% in Central and 40% in Eastern region.
RRBs are, thus, the best suited vehicles to widen and deepen the process of financial
inclusion. However, there has to be a firm reinforcement of the rural orientation of these
institutions with a specific mandate on financial inclusion. With this end in view, the
Committee has recommended that the process of merger of RRBs should not proceed
beyond the level of sponsor bank in each State. The Committee has also recommended
the recapitalisation of RRBs with negative Net Worth and widening of their network to
121
cover all unbanked villages in the districts where they are operating, either by opening a
branch or through the BF/BC model in a time bound manner. Their area of operation
may also be extended to cover the 87 districts, presently not covered by them.
(vii) SHG – Bank Linkage Scheme: The SHG - Bank Linkage Programme can be regarded
as the most potent initiative since Independence for delivering financial services to the
poor in a sustainable manner. The programme has been growing rapidly and the number
of SHGs financed increased to 29.25 lakhs on 31 March 2007. The spread of the SHG -
Bank Linkage Programme in different regions has been uneven with Southern States
accounting for the major chunk of credit linkage. Many States with high incidence of
poverty have shown poor performance under the programme. NABARD has identified 13
States with large population of the poor, but exhibiting low performance in
implementation of the programme. The ongoing efforts of NABARD to upscale the
programme in the identified States need to be given a fresh impetus. The Committee has
recommended that NABARD may open dedicated project offices in these 13 States for
upscaling the SHG - Bank Linkage Programme. The State Govts. and NABARD may set
aside specific funds out of the budgetary support and the Micro Finance Development
and Equity Fund (MFDEF) respectively for the purpose of promoting SHGs in regions
with high levels of exclusion. For the North-Eastern Region, there is a need to evolve
SHG models suited to the local context of such areas. NGOs have played a
commendable role in promoting SHGs and linking them with banks. NGOs, being local
initiators with their low resources, are finding it difficult to expand in other areas and
regions. There is, therefore, a need to evolve an incentive package which should motivate
these NGOs to diversify into other backward areas. The SHG - Bank Linkage
Programme is now more than 15 years old. There are a large number of SHGs in the
country which are well established in their savings and credit operations. The members of
such groups want to expand and diversify their activities with a view to attain economies
of scale. Many of the groups are organizing themselves into federations and other higher
level structures. To achieve this effectively, resource centres can play a vital role.
Federations of SHGs at village and taluk levels have certain advantages. Federations, if
they emerge voluntarily from amongst SHGs, can be encouraged. However, the
Committee feels that they cannot be entrusted with the financial intermediation function.
122
(viii) Extending SHG – Bank Linkage Scheme to Urban Areas: There are no clear
estimates of the number of people in urban areas with no access to organized financial
services. This may be attributed, in part at least, to the migratory nature of the urban poor,
comprising mostly of migrants from the rural areas. Even money lenders often shy away
from lending to urban poor. The Committee has recommended amendment to NABARD
Act to enable it to provide micro finance services to the urban poor.
(ix) Joint Liability Groups: SHG-bank linkage has emerged as an effective credit delivery
channel to the poor clients. However, there are segments within the poor such as share
croppers/oral lessees/tenant farmers, whose loan requirements are much larger but who
have no collaterals to fit into the traditional financing approaches of the banking system.
To service such clients, Joint Liability Groups (JLGs), an upgradation of SHG model,
could be an effective way. NABARD had piloted a project for formation and linking of
JLGs during 2004-05 in 8 States of the country through 13 RRBs. Based on the
encouraging response from the project, a scheme for financing JLGs of tenant farmers
and oral lessees has also been evolved. The Committee has recommended that adoption
of the JLGs concept could be another effective method for purveying credit to mid-
segment clients such as small farmers, marginal farmers, tenant farmers, etc. and thereby
reduce their dependence on informal sources of credit.
(x) Micro Finance Institutions – NBFCs: Micro Finance Institutions (MFIs) could play a
significant role in facilitating inclusion, as they are uniquely positioned in reaching out to
the rural poor. Many of them operate in a limited geographical area, have a greater
understanding of the issues specific to the rural poor, enjoy greater acceptability amongst
the rural poor and have flexibility in operations providing a level of comfort to their
clientele. The Committee has, therefore, recommended that greater legitimacy,
accountability and transparency will not only enable MFIs to source adequate debt and
equity funds, but also eventually enable them to take and use savings as a low cost source
for on-lending. There is a need to recognize a separate category of Micro finance – Non
Banking Finance Companies (MF–NBFCs), without any relaxation on start-up capital
and subject to the regulatory prescriptions applicable for NBFCs. Such MF-NBFCs could
provide thrift, credit, micro-insurance, remittances and other financial services up to a
specified amount to the poor in rural, semi-urban and urban areas. Such MF-NBFCs may
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also be recognized as Business Correspondents of banks for providing only savings and
remittance services and also act as micro insurance agents. The Micro Financial Sector
(Development and Regulation) Bill, 2007 has been introduced in Parliament in March
2007. The Committee feels that the Bill, when enacted, would help in promoting orderly
growth of microfinance sector in India. The Committee feels that MFIs registered under
Section 25 of Companies Act, 1956 can be brought under the purview of this Bill while
cooperative societies can be taken out of the purview of the proposed Bill.
(xi) Revitalising the Cooperative System: Though the network of commercial banks and
RRBs has spread rapidly and they now have nearly 50,000 rural/semi-urban branches,
their reach in the countryside both in terms of the number of clients and accessibility to
the small and marginal farmers and other poorer segments is far less than that of
cooperatives. In terms of number of agricultural credit accounts, the Short Term
Cooperative Credit System (STCCS) has 50% more accounts than the commercial banks
and RRBs put together. On an average, there is one PACS for every 6 villages; these
societies have a total membership of more than 120 million rural people making it one of
the largest rural financial systems in the world. However, the health of a very large
proportion of these rural credit cooperatives has deteriorated significantly. For the
revival of the STCCS, the Vaidyanathan Committee Report has suggested an
implementable Action Plan with substantial financial assistance. The implementation of
the Revival Package would result in the emergence of strong and robust cooperatives
with conducive legal and institutional environment for it to prosper. A financially sound
cooperative structure can do wonders for financial inclusion given its extensive outreach.
(xii) Micro Insurance: Micro-insurance is a key element in the financial services package for
people at the bottom of the pyramid. The poor face more risks than the well off. It is
becoming increasingly clear that micro-insurance needs a further push and guidance from
the Regulator as well as the Government. The Committee concurs with the view that
offering micro credit without micro-insurance is self-defeating. There is, therefore, a need
to emphasise linking of micro credit with micro-insurance.
Initiatives by Reserve Bank of India for Facilitating Financial Inclusion:
In the Annual Policy Statement of the Reserve Bank for 2005-06 it was observed as under:
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• RBI will implement policies to encourage banks which provide extensive services while dis-
incentivising those which are not responsive to the banking needs of the community, including
the underprivileged.
• The nature, scope and cost of services will be monitored to assess whether there is any denial,
implicit or explicit, of basic banking services to the common person.
• Banks are urged to review their existing practices to align them with the objective of financial
inclusion.
In keeping with these objectives, the Reserve Bank has formulated its broad approach to
financial inclusion as indicated below.
Aim at ‘connecting’ people with the banking system and not just credit dispensation.
Aim at giving people access to the payments system.
Use multiple channels such as civil service organizations, NGOs, post offices, farmers’
clubs, panchayats, MFIs, etc. as Business Facilitators to expand the outreach of banks.
Adopt a decentralized approach, which is state and region specific and has close
involvement and cooperation between the respective State Governments and banks.
Make use of ICT using bio-metric smart cards and mobile hand held electronic devices
for receipts and disbursement of cash by agents of banks, such as business
facilitators/correspondents.
Portray financial inclusion as a viable business model and opportunity.
Aim at continuous evaluation, sharing of experiences, feedback and improvement.
In consonance with the above broad approach, the Reserve Bank has undertaken a number
of measures for attracting the financially excluded population into the structured financial
system.
1. No-Frills Accounts and General Purpose Credit Cards
(i) In November 2005, banks were advised to make available a basic banking ‘no-frills’ account
with low or nil minimum balances as well as charges to expand the outreach of such accounts to
vast sections of the population.
(ii) Banks are required to make available all printed material used by retail customers in the
concerned regional language.
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(iii) In order to ensure that persons belonging to low income group, both in urban and rural areas
do not encounter difficulties in opening bank 163 accounts, the know your customer (KYC)
procedure for opening accounts has been simplified for those accounts with balances not
exceeding Rs 50,000/- and credits thereto not exceeding Rs.1,00,000/- in a year. The simplified
procedure allows introduction by a customer on whom full KYC drill has been followed.
(iii) Banks have been asked to consider introduction of a General Purpose Credit Card
(GCC) facility up to Rs. 25,000/- at their rural and semi-urban branches. The credit
facility is in the nature of revolving credit entitling the holder to withdraw up to the
limit sanctioned. Based on assessment of household cash flows, the limits are
sanctioned without insistence on security or purpose. Interest rate on the facility is
completely deregulated. Fifty per cent of the GCC loans can be treated as part of the
banks’ priority sector lending.
2. Adoption of Districts for 100% Financial Inclusion
(i) A decentralized strategy has been adopted for ensuring financial inclusion. The State Level
Bankers Committee (SLBC) identifies one district for 100 % financial inclusion. Surveys are
then conducted using various databases such as electoral rolls, public distribution system, or
other household data, to identify households without bank account. Responsibility is given to the
banks in the area for ensuring that all those who wanted to have a bank account are provided
with one by allocating the villages among the different banks. Bank staff or their agents who are
usually local NGOs or village volunteers contact the households at their doorstep.
(ii) Recognizing the need for providing social security to vulnerable groups, in some cases banks
have provided, in association with insurance companies, innovative insurance policies at
affordable cost, covering life disability and health cover. SHGs and MFIs are also being used
extensively for financial inclusion on the credit side.
(iv) So far, SLBCs have reported having achieved 100 per cent financial inclusion in the
Union Territory of Puducherry, Himachal Pradesh and in some districts of Haryana,
Karnataka, Kerala, Punjab and Rajasthan. Reserve Bank advised its Regional
Directors to undertake an evaluation of the progress made in these districts by an
independent external agency to draw lessons for further action in this regard. The
outcome of the efforts made is reflected in the increase of 6 million new ‘no frills’
bank accounts opened between March 2006 and 2007.
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(v) In certain less developed States, such as in North Eastern Region, Bihar, Chhatisgarh
and Uttarakhand, Working Groups headed by the representatives of the Reserve Bank
have made specific recommendations for financial inclusion, strengthening financial
institutions and improving currency and payments systems. The concerned regional
offices of the Reserve Bank are monitoring the implementation of these
recommendations.
3. Use of Intermediaries as Agents in Microfinance
(i) In January 2006, the Reserve Bank permitted banks to utilise the services of non-
governmental organizations (NGOs/SHGs), microfinance institutions (other than Non-Banking
Financial Companies) and other civil society organisations as intermediaries in providing
financial and banking services through the use of business facilitator and business correspondent
(BC) models. The BC model allows banks to do ‘cash in - cash out’ transactions at a location
much closer to the rural population, thus addressing the last mile problem.
(ii) Banks are also entering into agreements with Indian Postal Authorities for using the
enormous network of post offices as business correspondents, thereby increasing their outreach
and leveraging on the postman’s intimate knowledge of the local population and trust reposed in
him.
4. Use of ICT Solutions for Enhancing Outreach of Banks
(i) The Reserve Bank has been encouraging the use of ICT solutions by banks for enhancing
their outreach with the help of their Business Correspondents (BCs). The BCs carry hand-held
devices, which are essentially smart card readers. The information captured is transmitted to a
central server where the accounts are maintained. These devices are used for making payments to
rural customers and receiving cash from them at their doorsteps.
(ii) Mobile phones have also been developed to serve as card readers. Account holders are
issued smart cards, which have their photographs and finger impressions. Certain banks have
been using this technology in Andhra Pradesh, Karnataka and Maharashtra. Pilot studies have
also been carried out in Mizoram and Uttarakhand.
5. Financial Literacy and Credit Counselling
(i) Recognising that lack of awareness is a major factor for financial exclusion Reserve Bank is
taking a number of measures for increasing financial literacy and credit counseling. A
multilingual website in 13 Indian languages on all matters concerning banking and the common
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person has been launched by the Reserve Bank on 18 June 2007. Comic type books introducing
banking to schoolchildren have already been put on the website. Similar books will be prepared
for different target groups such as rural households, urban poor, defence personnel, women and
small entrepreneurs. Financial literacy programs are being launched in each State with the active
involvement of the State government and the SLBC.
(ii) Each SLBC convenor has been asked to set up a credit-counselling centre in one district as a
pilot and extend it to all other districts in due course.
(iii) A Centre for Financial Education & Excellence is proposed to be set up in RBI’s College of
Agricultural Banking at Pune.
Progress of the Financial Inclusion
A snapshot of the progress made by banks under the Financial Inclusion Programmes (April 10 –
March 13) for key parameters - Branch expansion in rural areas, Agent Banking - Business
Correspondent/ Business Facilitator Model, Combination of Branch and BC Structure to deliver
Financial Inclusion, during the three year period is as under:
Nearly 2,68,000 banking outlets have been set up in villages as on March 13 as against
67,694 banking outlets in villages in March 2010
About 7400 rural branches opened during this period
Nearly 109 million Basic Savings Bank Deposit Accounts (BSBDAs) have been added,
taking the total no. of BSBDAs to 182 million. Share of ICT based accounts have
increased substantially – Percentage of ICT accounts to total BSBDAs has increased from
25% in March 10 to 45% in March 13
With the addition of nearly 9.48 million farm sector households during this period, 33.8
million households have been provided with small entrepreneurial credit as at the end of
March 2013
With the addition of nearly 2.25 million non farm sector households during this period,
3.6 million households have been provided with small entrepreneurial credit as at the end
of March 2013.
About 4904 lakh transactions have been carried out in ICT based accounts through BCs
during the three year period
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It is important to analyse this progress against the some disconcerting trends that were noticed in
the run up to the structured Financial Inclusion initiatives that the banks launched since 2010
onwards. First, the number of banked centres in the country between 1991 and 2007 had actually
come down (from 35236 to 34471). Second, the number of rural branches during the same period
had also declined significantly (from 35206 to 30409). Against this backdrop, the progress made
during 2010-13 is certainly remarkable22
.
Despite all the attempts made by the Reserve Bank, the extent of financial exclusion continues to
be significant in India, when compared with some of the advanced as well as developing
countries as shown in Table 2.21. When compared to other countries India is only better than
Phillipines in terms of Number of Branches per 1 lakh adults, it is standing last in terms of
Number of ATMs per lakh of adults. However India’s position is slightly better and is
occupying third position in terms of Bank Loan and Deposits as per cent to GDP.
TABLE 2.21
SELECT INDICATORS OF FINANCIAL INCLUSION - CROSS COUNTRY
COMPARISON (FOR THE YEAR 2011)
Country Number of
branches (per 0.1
million adults)
Number of
ATMs (per 0.1
million adults)
Bank loan as
per cent of
GDP
Bank deposits as
per cent of GDP
1 2 3 4 5
India 10.64 8.90 51.75 68.43
Australia 29.61 166.92 128.75 107.10
Brazil 46.15 119.63 40.28 53.26
France 41.58 109.80 42.85 34.77
Mexico 14.86 45.77 18.81 22.65
United States 35.43 - 46.83 57.78
Korea 18.80 - 90.65 80.82
Philippines 8.07 17.70 21.39 41.93
Source: Reserve Bank Trends and Progress 2012.
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Therefore Reserve Bank of India through its Policy and Supervision has to make strides in
achieving the Financial Inclusion. The Scheduled Commercial Banks, particularly the Public
Sector Banks have to put a committed effort for achieving the Financial Inclusion Policy. The
Banks should not see Financial Inclusion as a mere compliance. They have to come with some
out of the box solutions for the existing situations which culminate into a win-win situation.
CONCLUSION
Indian Banking, especially the Public Sector Banks, has performed impressively in achieving
social goals, extending the geographical reach and functional spread of financial services,
especially for the rural poor. The massive and speedy quantitative growth as well as the
unprecedented growth in social lending/banking has created a number of strains. However since
the mid-1980’s, banks have entered a phase of consolidation and enhanced sophistication. The
commercial principles of viability, efficiency, prudence and profitability are now receiving much
attention. The new banking scenario has called for more efficiency on the part of the banks
simultaneously with shouldering the responsibility of developing the backward regions and
neglected social sectors. The Indian Banking system has responded positively for this call by
improving the quality of the assets and the profitability. At the same time, the Reserve Bank has
been making consistent efforts to strengthen credit delivery, improve customer service and
encourage banks to provide banking services to all segments of the population. Despite
considerable expansion of the banking system in India, large segments of the country’s
population are not adequately served, some as savers and others as borrowers. The expansion of
banking services that are designed to serve all potential customers efficiently is, therefore,
emerging as a major concern that is engaging the attention of the authorities: Reserve Bank of
India/Government.
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References:
1. As quoted by the Indian Central Banking Enquiry Committee (1931), Chapter II page 11.
2. Hundis are the oldest form of credit instruments that were used as early as the 12 century
AD. Deposits were accepted by some indigenous banks under the ‘khata putta’ system.
However, most indigenous banks like Multanis and Marwaris did not accept deposits as they
relied on their own funds, see Bagchi(1987).
3. Northcote Cooke, ‘Rise and Progress of Banking in India’ (1863) quoted by Tandon (1988).
4. (Leeladhar, 2007).
5. Reserve Bank of India (History), Volume I, page 6.
6. Reserve Bank of India (History) Vol.II, Pg 235
7. “Central Banking in India, A Retrospect”, Speech by Shri C.D Deshmukh for the Shri
R.R.Kale Memorial Lecture at Gokhale Institute of Politics & Economics, 1948.
8. Page 38, Banking Commission, 1971
9. Statistical Abstracts Relating to Banks in India, Various Issues.
10. Page 38, Banking Commission, 1971
11. Handbook of Statistics on the Indian Economy, 2006-07.
12. Ibid.
13. Narasimham Committee Report, 1991.
14. RBI Trends and Progress 2010-11
15. RBI History Vol. II pg 791.
16. Extant Branch Expansion Policy, 2009
17. Ibid
18. NSSO Survey 59th
round (2003)
19. RBI Trends and Progress 2012, Table IV.33
20. RBI Trends and Progress 2012, Table IV.34
21. RBI Trends and Progress 2012, Table IV.35
22. RBI Trends and Progress 2013
