What is Rural Banking? Regional, Functions, Cooperative Banks, Types

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  • Post last modified:18/01/2023
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What is Rural Banking?

A rural bank may be described as rural financial institution/ cooperative/ community financial institution or deposit taking financial group that providescustomised monetary offerings to rural communities. As a huge phase of the countries resides in rural regions, it is crucial from a economic inclusion thing that rural branches exist in cites.

But, banking within the rural areas isn’t like merchant banking that exists in cites. This unit will begin by way of examining the activities of a rural banker, underwriting, bankers to issue and different offerings.

Rural banking is the process of conducting banking transactions out in the country where bank branches are too far away to be of use. Rural banking is popular for very small towns and farmers who live far away from areas of larger population and cannot make the drive to these locations whenever they need to use banking services.

Rural banking is a common practice in places where banking institutions are few and far between and people who need to carry out banking transactions may have difficulty finding a way to do so. With modern technology, more and more people have access to online systems that allow them to conduct certain types of banking without a nearby branch but this technology is not available for everyone and demand for rural banking is still high in some areas.

Regional Rural Bank

The Regional Rural Banks were established on 2nd October 1975. The main objectives of these banks are to provide credit and other facilities particularly to small and marginal farmers and small entrepreneurs so as to develop agriculture,trade, commerce industry and other productive activities in rural areas.

The aim of rural banks is to bridge the credit gaps existing in the rural areas and they are supposed to be effective instruments of economic development in rural India. They will extend productive credit to the rural community and they will have purelyrural orientation in their activity and in the manner of extending their activity.

Regional rural banks (RRBs) are Indian scheduled commercial banks operating at regional level in different states of India. They have been created with a view of serving primarily the rural areas of India with basic banking and financial services. The area of operation of Regional Rural Banks is limited to the area as notified by Government of India covering one or more districts in the state.

Regional Rural Banking perform various functions. These are as follows:

  1. Providing banking facilities to rural and semi-urban areas.
  2. Carrying out government operations like disbursement of wages of MGNREGA workers, distribution of pensions etc.
  3. Providing para-banking facilities like locker facilities debit and credit cards, mobile banking internet banking etc.

Functions of Regional Rural Bank

Regional Rural Bank grant loans and advances to small farmers and agricultural laborers so that they can start their own farming activities including purchase of seeds, land and manure. The RRBs charge a lower rate of interest and thus they reduce the cost of credit in the rural areas functions of RRBs are as follows:

  1. RRBs grant loan and advances to small farmers and agricultural laborers so that can start their own farming activities including purchase of land seed and manure.

  2. RRBs provide banking services at the doorsteps of the rural people particularly in those areas which are not served by any commercial bank.

  3. The RRBs charge a lower rate of interest and thus they reduce the cost of credit in the rural areas.

  4. RRBs provide loan and other financial assistance to entrepreneurs in villages sub- urban areas and small towns so that they become able to enlarge their business.

  5. Loans to artisans to encourage them for the production of artistic and related goods.

  6. Encourage the saving habit among the rural and semi-urban population.

  7. A rural bank focuses on providing savings and credit services to people who live in rural areas.

  8. The financial products offered respond to the needs of its clients. A rural bank is a smaller size in assets than the very large banks.

  9. It is located generally in smaller cities and concentrates in making loans and other services to that immediate locations.

National Bank for Agriculture and Rural Development NABARD

NABARD is an apex development bank in India. It was established on 12 July 1982 by an Act of the Parliament to promote sustainable and equitable agriculture and rural prosperity through effective credit support, related services, institutional development and other innovative initiatives.

Its headquarters are based in Mumbai and it has other branches across the country. On its establishment, NABARD has taken over from the RBI its refinancing functions in relation to State Co-operative Banks and Regional Rural Banks.

The Bank is now the co-ordinating agency in relation to the Central Government, Planning Commission, State governments and Institutions at all India and State levels engaged in giving effect to the various policies and programmes relating to rural credit.

The primary objective of NABARD is to facilitate credit flow for promotion and development of agriculture, small-scale industries, cottage and village industries, handicrafts and other rural crafts. It also has the mandate to support all other allied economic activities in rural areas, promote integrated and sustainable rural development and secure prosperity of rural areas.

Functions of NABARD

NABARD is a development bank that provides credit and other facilities for the promotion and development of agriculture, small-scale industries, cottage and village industries, handicrafts and other rural crafts and other allied economic activities in rural areas.

Following are functions of NABARD:

  1. Financial Functions
  2. Development Functions
  3. Regulatory Functions

Financial Functions

As a development bank, NABARD provides various refinancing and direct financing schemes for rural and agricultural development. In an attempt to boost capital infusion in the agricultural and rural sector, NABARD provides refinance facility to cooperative banks and Regional Rural Banks (RRBs).

  1. Providing short-term and medium-term loans: It provides short and medium term facilities to state co-operative banks, RRBs etc. The purpose of short and medium term credit is to funds for seasonal agriculture operations, marketing and distribution of agriculture inputs, rural commercial trade activities and production and marketing of handicraft goods produced by small industries and village and cottage industries, craftsmen and artisans.

    These short terms loans are provided for period ranging up to 15 months and tenure for medium term loans is between 18 months to 7 years.

  2. Providing long-term Loans: This is a long-term refinance facility of NABARD. The credit is normally provided period ranging up to 25years. It is intended to create income-generating assets in Agriculture and allied sectors, Artisan units, small-scale industries, Non-Farm Sector (Small and Micro Enterprises), handicrafts industry, handloom industry, power loom units, etc.

  3. Refinancing of Industries in Rural Area: The NABARD provides refinance to all small, village and cottage industries, artisans in rural areas. When there are natural calamities like drought ,famine army as enemy operations etc, the NABARD provides refinance to State Co-operative Banks and RRBs for a maximum period of 7 years.

Development Functions

These include the following:

  1. Co-ordination of rural credit institutions.
  2. Institutions building for the improvement of capacity of credit delivery system.

  3. Performing agency functions on behalf of the Government and the Reserve Bank for monitoring and evaluating the work in agricultural related activities.

  4. Providing facilities for research in agricultural and rural development activities out of its Research and Development fund. The training facilities are provided in the field of rural banking, agriculture and rural development through Bankers of ‘Rural Development Institute and National Bank staff colleges at Lucknow, Bhopal, and Mangalore and college of Agricultural Banking at Pune.

  5. Disseminating information regarding, rural banking and development.

  6. Helping the State Government in subscribing to the Share capital to State Co- operative banks.

  7. Providing direct credit in cases, approved by the Government of India, connected with agriculture and rural development.

  8. Maintaining an Easy Credit Aid Fund out of its profits so that entrepreneurs getting refinance facilities for village, cottage and small industries may be provided margin money. This is an interest free and is recovered in annual instalments after the loan has been fully repaid.

Regulatory Functions

The following regulatory functions are performed by the NABARD:

  1. It undertakes inspection of regional rural banks and of Co-operative banks except the primary agricultural credit societies, apex co-operative marketing federations, state handloom weaving societies etc.

  2. Applications for opening of a branch by the regional rural bank as Co-operative bank other than the primary agricultural credit societies, are to be submitted to the Reserve Bank of India through the NABARD.

  3. The NABARD is empowered to obtain any information or statement from the Co-operative banks and the regional rural banks that it may deem necessary.

Cooperative Banks

Cooperative Banks in India have become an integral part of the success of the Indian Financial Inclusion story. They have achieved many landmarks since their creation and have helped a normal rural Indian to feel empowered and secure. A cooperative bank is a financial entity that belongs to its members, who are at the same time the owners and the customers of their bank.

Cooperative banks are often created by persons who belong to the same local or professional community or share a common interest. Cooperative banks have been set up under the various Cooperative Societies Acts enacted by the State Governments. Hence, State Governments regulate these banks.

In 1966, there was a need to regulate their activities to ensure their soundness and to protect the interests of depositors. Consequently, certain provisions of the Banking Regulation Act, 1949, were made applicable to cooperative banks as well.

Types of Cooperative Banks

Types of cooperative banks can be further divided into the following:

  1. Primary Agricultural Credit Societies (PACSs)
  2. District Central Cooperative Banks
  3. State Cooperative Banks
  4. Land Development Banks

Primary Agricultural Credit Societies (PACSs)

This is an association of borrowers and non-borrowers who reside in a particular locality. The funds of the society are derived from the share capital and deposits of members and loans from central co-operative banks.

The borrowing powers of the members and of the society are fixed. Loans are given to members for the purchase of cattle, fodder, fertilisers, pesticides, implements, etc. The main functions of the PACSs are to provide short- and medium-term credit; supply agricultural and other production requirements and undertake marketing of agricultural produce.

In addition, these cooperatives help in formulating and implementing a plan for agricultural production for the village and undertake such educative, advisory and welfare functions as the members might be willing to take up.

District Central Cooperative Banks

These are federations of primary credit societies in a district and are of two types – those having a membership of primary societies only and those having a membership of societies and individuals. The funds of these banks consist of share capital, deposits, loans and overdrafts from state cooperative banks and joint stocks.

These banks finance member societies within the limits of the borrowing capacity of these societies. They also conduct all the business of a joint stock bank.

State Cooperative Banks

These are federations of the central co-operative bank and act as a watchdog of the co-operative banking structure in the state. Their funds are obtained from share capital, deposits, loans and overdrafts from the Reserve Bank of India. State cooperative banks lend money to central co-operative banks and primary societies and not directly to farmers.

Land Development Banks

These are organised into three tiers, namely, state, central and primary, and they meet the long-term credit requirements of farmers for developmental purposes. The state land development bank oversees the primary land development banks situated in their districts.

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