Evolution of Indian Banking System and Rural Finance

Study Notes

The General Bank of India and Bank of Hindustan were established in the 18th century, while the first bank of India, the Presidency Banks, was established in 1809 under the charter of the British East India Company.
The Imperial Bank of India was formed in 1921 and later became the State Bank of India.
The Reserve Bank of India (RBI) was established in 1935 and was nationalized in 1949.
Pre-independence, the Indian banking system was not sound and there were hundreds of private banks under unprincipled managements.
In 1949, the government of India took two major steps towards bringing structural reforms in the banking sector by passing the banking regulation act and nationalizing the RBI.
Indian rural banking system evolved around the 1950s with the establishment of cooperative banks to cater to the needs of the agriculture and small scale industry sectors, while big corporate and commercial banks cornered much of the bank credit.
The period between 1969 and 1990 was the period of greatest prosperity and productivity for Indian banking sector, with thousands of new bank branches established across rural India, and this period was known as the evolution of “Social Banking” in India.
Banks provided targeted and low-priced loans for the lower income households residing in rural areas and came up with credit planning, quantitative credit targets, and subsidized credit for the same customer segments.
In 1977, the RBI enforced the "1:4 license policy" which mandated banks to open four branches in rural unbanked locations for every branch opened in an already banked location.
In 1980, the RBI brought in another major policy change in terms of priority sector lending (PSL) targets to bring economic and social change in rural areas focusing on 14 different sectors including agriculture, small scale industries, weaker sections, etc.
The formal financial institutions in India include commercial banks, regional rural banks (RRBs), and cooperative banks, while informal providers include landlords, local shopkeepers, traders, professional moneylenders, etc.
Rural finance service providers in India are regulated by the RBI with the delegated task of supervising rural cooperative banks and RRBs by the National Bank for Agriculture and Rural Development (NABARD).Regional Rural Banks in India: A Conceptualization and Evolution
Regional Rural Banks (RRBs) were established in 1975 to support rural lending operations of commercial banks in India.
The Narsimham committee conceptualized the creation of RRBs as a new set of regionally oriented rural banks, combining local feel and familiarity of rural problems characteristic of cooperatives with the professionalism and large resource base of commercial banks.
RRBs were set up through the promulgation of RRB Act of 1976.
Initially, RRBs faced viability problems and severe non-performing assets, and were called "White Elephants" due to their subsidized lending operations.
Based on the recommendations of the Narsimham and Bhandari Committees, RRBs were provided greater autonomy for expansion and diversification of loan portfolio by allowing non-target and non-priority sector lending, rural housing sector finance, widening of avenues of profitable investment, reallocation of loss-making branches, and opening extension counters and deregulation of interest rates.
RRBs have joint shareholding by the Central Government, the concerned State Government, and the sponsoring bank.
RRBs were supposed to evolve as specialized rural financial institutions for developing the rural economy by providing credit to small and marginal farmers, agricultural laborers, artisans, and small entrepreneurs.
RRBs have been instrumental in providing credit facilities to rural areas, especially in the priority sector.
As of March 2021, 43 RRBs are operational in India, with a total network of 21,927 branches.
The total business of RRBs increased from INR 6,44,016 crore in March 2020 to INR 7,39,775 crore in March 2021.
The gross NPA ratio of RRBs decreased from 9.21% in March 2020 to 6.50% in March 2021.
The RRBs are regulated by the Reserve Bank of India, with a focus on ensuring their financial stability and viability.

Description

Test your knowledge on the evolution of Indian banking system and rural finance with this informative quiz. From the establishment of the first banks in the 18th century to the nationalization of the Reserve Bank of India and the creation of Regional Rural Banks, learn about the major policy changes and structural reforms that have shaped the Indian banking system. Test your understanding of the role of cooperative banks, priority sector lending, and rural finance service providers in providing credit facilities to small and marginal farmers, artisans, and small entrepreneurs