The Lead Bank Scheme (LBS)

The Lead Bank Scheme (LBS) is a key banking initiative aimed at achieving coordinated rural development through banking services. It was introduced to address the lack of banking infrastructure in rural India and promote financial inclusion.

Origin of the Lead Bank Scheme

The scheme was introduced in 1969 by the Reserve Bank of India (RBI) based on the recommendations of the Gadgil Study Group. This initiative emerged during a time when rural areas lacked adequate banking services, hindering economic development. The LBS sought to overcome this gap by designating specific banks as “lead banks” responsible for the development of a particular district through comprehensive banking services.

Objectives of the Lead Bank Scheme

The main objectives of the Lead Bank Scheme are:

Promote Financial Inclusion: Extending banking services and credit facilities to all sections of the rural population, including small farmers, agricultural workers, rural artisans, and economically weaker groups.

Coordinated Development: Coordinating the activities of all financial institutions, including banks, cooperatives, and non-banking institutions, to ensure effective resource mobilization in the district.

Credit Planning: Preparing and implementing District Credit Plans (DCP) and Annual Credit Plans (ACP) for key sectors like agriculture, small industries, and services.

Enhance Rural Credit Delivery: Improving rural credit by identifying gaps in infrastructure, finance, and services needed for rural development.

Eradicate Poverty and Unemployment: Supporting poverty alleviation and employment generation programs for the upliftment of weaker sections of society.

Functions of the Lead Bank

The lead bank in a district performs several key functions to achieve the objectives of the LBS:

Survey and Monitoring: Conducts surveys to identify gaps in banking and financial services, creating a comprehensive understanding of the credit needs of the district’s population.

Preparation of District Credit Plan (DCP): Responsible for preparing a credit plan that includes sector-wise targets for various banks operating in the district.

Coordination with Government Agencies: Works closely with district authorities, local governments, and development agencies for successful implementation of banking and financial inclusion programs.

Promotion of Self-Employment: Facilitates the implementation of government schemes like the Swarnjayanti Gram Swarozgar Yojana (SGSY), Pradhan Mantri Awas Yojana (PMAY), and Pradhan Mantri Mudra Yojana (PMMY).

Financial Literacy and Awareness Programs: Organizes programs to educate the rural population about banking services, saving schemes, and loan products.

Annual Credit Plans (ACP): Sets targets for loan disbursement in agriculture, small industries, and rural employment schemes.

Monitoring and Reporting: Monitors the progress of credit plans and financial initiatives, reporting to district, state, and national authorities.

Two Important Phases of Lead Bank Activities

Phase I: Survey of the Lead District

In this phase, the Reserve Bank of India (RBI) emphasizes the following functions for the lead bank:

• Surveying the potential areas for banking in the district.
• Identifying businesses that rely on non-institutional credit sources and providing them with bank credit to enhance their income.
• Examining marketing facilities for agricultural and industrial products and linking credit with these marketing channels.
• Encouraging cooperation among different banks to open new branches.
• Estimating the credit gaps in various sectors of the district’s economy.
• Developing contacts and maintaining liaison with government and other relevant agencies.

Phase II: Preparation of Credit Plans

In this phase, the lead bank is expected to focus on:

• Formulating Bankable Loaning Schemes: Creating schemes that utilize intensive labor to generate additional employment.
• Disbursing Loans to Increase Productivity: Providing loans to improve agricultural productivity and allied activities, thereby enhancing income levels.
• Maximizing Credit to Weaker Sections: Ensuring that credit is available for productive purposes, particularly targeting the weaker sections of society.

By carrying out these two phases effectively, the Lead Bank Scheme aims to stimulate rural development, enhance financial inclusion, and reduce poverty in rural areas through coordinated efforts in banking and credit facilitation.

Regional Rural Banks (RRBs):

Overview and Genesis

The Regional Rural Banks (RRBs) were established to address the challenges faced by small and marginal farmers in accessing credit for production and investment purposes. The inception of RRBs was motivated by the realization that despite the nationalization of banks, the rural credit system remained insufficient to meet the needs of the rural poor.

Genesis of RRBs

• 1969: The All India Rural Credit Review Committee (AIRCRC), under the chairmanship of Sri B. Venkatappaiah, identified the need for institutional financial agencies in the public sector to cater to the rural poor. The committee emphasized that, despite nationalization, rural credit remained largely unchanged.

• Narasimham Committee (1975): To address these issues, the Government of India formed a working committee under the leadership of Sri M. Narasimham to review financial assistance for weaker sections in rural areas. The committee recommended the establishment of Regional Rural Banks (RRBs) to overcome the shortcomings of commercial banks and cooperatives in providing rural credit.

Formation of RRBs

• The Government of India accepted the recommendations of the Narasimham Committee, leading to the establishment of RRBs through the Regional Rural Banks Ordinance on 26th September 1975.
• On October 2nd, 1975, the first five RRBs were set up as pilot projects, each sponsored by a commercial bank. These banks were established in various regions of India:

• The Regional Rural Banks Ordinance of 1975 was later replaced by the Regional Rural Banks Act, 1976.

Objectives of RRBs

The primary objectives of RRBs are to foster the economic development of rural areas and provide financial support to weaker sections of society. These objectives include:

Developing the Rural Economy: Providing adequate financial services to stimulate rural economic growth.

Providing Credit for Agriculture and Allied Activities: Extending credit for activities such as agriculture, animal husbandry, fisheries, and horticulture.

Encouraging Small-Scale Industries and Artisans: Promoting small-scale industries and supporting rural artisans.

Reducing Dependence on Private Moneylenders: Offering an alternative to private moneylenders, particularly for small and marginal farmers and rural artisans.

Filling the Credit Gap: Addressing the credit void left by the withdrawal of private moneylenders.

Promoting Development in Backward and Tribal Areas: Opening new branches to foster economic development in these underserved areas.

Supporting Weaker Sections: Assisting financially weaker individuals by meeting their consumption and emergency needs.

Functioning of RRBs

• Each RRB is sponsored by a scheduled commercial bank and operates within a specific district or two districts, with a typical branch covering a rural population of about 20,000 people.

Capital Structure

• The authorized share capital of each RRB is Rs. 1 crore, shared between:
  • Central Government: 50%
  • State Government: 15%
  • Sponsoring Commercial Bank: 35%
• The issued capital for each RRB is Rs. 25 lakhs.

Interest Rates and Operations

• Interest Rates: RRBs charge the same interest rates on loans as Primary Agriculture Credit Societies (PACS), but they are allowed to offer 0.5% higher interest on deposits than commercial banks, making their deposit schemes more attractive.
• Simplified Procedures: RRBs follow simplified procedures for agricultural loans, as recommended by the Sri Baldev Singh Working Group.
• Local Language Transactions: Transactions are conducted in local languages to ensure ease of communication for the rural population.
• Low Operational Costs: The cost of operations or user charges in RRBs are kept low compared to commercial banks, making them more accessible to rural farmers and artisans.

By meeting the credit needs of rural populations, particularly small farmers, artisans, and the economically weaker sections, RRBs play a pivotal role in driving rural development and improving financial inclusion in India.