Details of Credit and Banking
Rural India is faced with the burning problem of poor credit and banking services. The rural banking sector is also not in a good position. Farmers and people of other occupations in rural areas often fail to pay the credit to the banks and commit suicide. With such a situation increasing rapidly, it is high time we divert our attention towards credit and banking in rural areas. In the following, we will be talking about the credit system in rural areas and the role of rural banks in the economic development of the country.
History of Rural Bank
The importance of rural banking was felt right after independence and from there NABARD came into operation. It started giving credit to the farmers and other rural people at lower interest rates. That there is a difference between the monetary activities of the rural people and the urban people gave rise to the conception of the National Bank for Agricultural and Rural Development or NABARD.
As days passed, various self-help groups also started performing and brought forth microcredit generation. Post green revolution, agriculture improved and so did the income of the farmers. Thus, the role of rural banks also went through a change. After independence, rural people, poor people in need of money, were exploited a lot. Traders and local moneylenders took their advantage and granted them loans at interest rates incredibly high. Thus, deb was unavoidable. NABARD came to the rescue of these people and offered loans and credits at an easy interest rate.
Presently, India has 45 regional rural banks all across the country. Haryana Kshetriya Gramin Bank Bhiwani, Gorakhpur Kshetriya Gramin Bank etc are a few examples of a rural bank.
Banking Facilities in Rural Areas
Rural development is a lot dependent on the credit system. Modifying the banking and credit system is quite the need of the hour to improve productivity in both agricultural and no-agricultural activities. Farmers are most in the need of credit in between the time of sowing and harvesting. This is the time they are short in cash and need it for general purposes, buying cattle, investing in more land and carrying on with life.
Reserve Bank of India or RBI is the apex body of national banking. But with regard to banking facilities in rural areas, NABARD is given all the power and referred o as the apex banking body. All the activities associated with banking and credit in rural India are managed and regulated by NABARD only.
What Role does Rural Banks Perform?
The growth of the Indian economy is largely dependent on rural emancipation from socio-economic hindrances such as unemployment, poverty etc. This is where rural banks come in and the role of banking in rural development becomes undeniable. The rural credit structure is gradually getting rejuvenated with the help of the rural baking and credit system. With the increased activity of rural banks, both the priority as well as non-priority sectors have been able to get loans sanctioned. Development of agriculture-based economy is what the rural banking sector targets at and for that gives out short and long term loans. The involvement of the formal banking system has its problems also. To continue with formal banking, it is a must that there is some collateral involved. But for rural people in urgent need of credit, it is difficult to have collateral ready or sometimes they do not even possess any. As a result, the formal banking system rules them out. Here lies the importance of self-help groups or the SHGs.
The SHGs give out small credit to those in need without any collateral. Instead, the members of the group, the needy ones, commit to keeping a certain sum of money in the pool. Loans are sanctioned at an interest rate that is a lot cheaper than the formal banking system. This is why a huge number of SHGs are found to be operational throughout the country. Thus, the microcredit concept is run.
Did You Know?
NABARD was set up with the primary goal of elevating agriculture and other non-farm areas in rural areas of the country by increasing the credit flow and thus further strengthening rural India.
Initially, NABARD had the capital of Rs. 100 crores.
No other institution in India is as important as NABARD when it comes to taking care of the small industry, cottage industry, village industry and other rural local industries.
SHG Bank Linkage Programme is another name for NABARD. It encourages the banks to lend to the self-help groups so that the poor rural people in need without the capability of producing collateral can have the loans.
The pioneer of the rural banking system NABARD boasts of supporting 100% corporate social responsibility.
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FAQs on Credit and Banking in Rural Areas
1. What is meant by 'rural credit' in the context of the Indian economy?
Rural credit refers to the finance provided to farmers, artisans, and other residents in rural areas to meet their agricultural and non-agricultural needs. This credit is crucial for purchasing inputs like seeds and fertilisers, investing in equipment like tractors and pumps, managing daily consumption expenses, and funding non-farm activities that support rural livelihoods.
2. What are the major institutional sources of credit available in rural areas?
The major institutional sources of rural credit in India are part of the formal banking system and are regulated by the government and the RBI. These include:
- Commercial Banks: Nationalised and private banks that extend credit to the agricultural sector.
- Regional Rural Banks (RRBs): Specialised banks established to serve the credit needs of rural and semi-urban areas.
- Cooperative Credit Societies: Member-based institutions providing short-term and long-term loans to farmers at low interest rates.
- Land Development Banks: Provide long-term credit for land improvement and agricultural development.
- NABARD: The apex institution that refinances and regulates these rural credit agencies.
3. What is the importance of credit and banking for rural development?
Credit and banking are fundamental to rural development as they help break the cycle of poverty and dependence on informal lenders. They enable farmers to adopt modern farming techniques, increase productivity, and generate higher incomes. Furthermore, access to formal credit promotes non-farm sector growth, such as small-scale industries and services, leading to diversified employment opportunities and a stronger, more resilient rural economy.
4. What is NABARD, and what are its primary functions?
NABARD stands for the National Bank for Agriculture and Rural Development. It is the apex regulatory body for all matters concerning policy, planning, and operations in the field of credit for agriculture and other economic activities in rural areas. Its key functions include providing refinance assistance to other rural credit institutions, supervising Regional Rural Banks (RRBs) and Cooperative Banks, and promoting integrated rural development projects.
5. What is the SHG-Bank Linkage Programme and why is it considered a revolutionary step in rural finance?
The SHG-Bank Linkage Programme is an initiative, notably driven by NABARD, that connects Self-Help Groups (SHGs) with the formal banking system. It is considered revolutionary because it enables the delivery of 'microcredit' (small loans) to the rural poor, especially women, without the need for collateral. Its significance lies in promoting financial discipline through collective responsibility, which ensures high repayment rates and empowers marginalised communities financially and socially.
6. How do Regional Rural Banks (RRBs) differ from Commercial Banks in their objectives?
While both are scheduled commercial banks, their objectives differ in focus. Commercial Banks have a broad, universal banking mandate catering to all sectors. In contrast, Regional Rural Banks (RRBs) were specifically created with the objective of providing credit and other banking facilities primarily to small and marginal farmers, agricultural labourers, and artisans in rural areas. Their core mission is to enhance financial inclusion and bridge credit gaps in the countryside.
7. What are the key differences between formal and informal sources of rural credit?
The key differences lie in their regulation, cost, and lending practices:
- Regulation: Formal sources (banks, cooperatives) are regulated by the RBI, ensuring fair practices. Informal sources (moneylenders, traders) are unregulated.
- Interest Rates: Formal credit has lower, standardised interest rates. Informal credit is characterised by extremely high and often exploitative interest rates.
- Collateral: Formal institutions usually require legal collateral. Informal lenders might not, but often use other forms of leverage or coercion.
- Purpose: Formal credit is typically for productive purposes, while informal credit may be for both productive and consumption needs.
8. What are the major challenges and problems that affect the rural banking system in India?
The rural banking system faces several significant challenges. A major issue is the high volume of loan defaults, which impacts the financial health of banks. Other problems include insufficient capital, high operational costs due to geographical spread, lack of adequate infrastructure like reliable internet connectivity, and intense competition from the deeply entrenched informal credit sector. These factors can make rural lending a high-risk and low-profitability venture.
9. Why is providing credit to Self-Help Groups (SHGs) often more effective than lending to individuals in rural areas?
Lending to SHGs is often more effective due to the principle of collective responsibility. Peer pressure within the group ensures timely loan repayments, significantly reducing the risk of default for banks. Moreover, SHGs act as platforms for building financial literacy, promoting regular savings, and providing mutual support, which ensures the credit is used more productively and sustainably compared to individual loans that lack such a support structure.
10. How has technology, such as digital banking, impacted credit access in rural India?
Technology has been a game-changer for rural credit access. Innovations like mobile banking, UPI, and the Aadhaar Enabled Payment System (AePS) have significantly improved financial inclusion. They reduce the reliance on physical bank branches, make transactions faster and more transparent, and allow for direct benefit transfers (DBT) into accounts. This digital transformation is gradually lowering transaction costs and making formal credit more accessible to people in remote areas.
