The the expectation was that each regional

biggest challenge to the banks in this country for the next decade is to capture
the banking business of 50 percent population of this country of over 120
billion. Financial exclusion is a critical concern for low earning household
and small businesses located in semi-urban or rural India. It is the lack of
banking services for the people under poverty line.

240 million adults in rural area do not have bank account today. Recent study
of census has shown that rural households that use banking services have
increased from 30% to 54% from 2001 to 2011. But still nearly 46% of the rural
households are excluded from banking services.

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Total no. of household

Household availing banking services


Total no. of household

Household availing banking services
























above data shows that the RRBs have performed well in rural credit and rural
development. In order to expand further and to achieve the target of financial
inclusion they will have to face many challenges. Some of the challenges are
mentioned below:

Lack of banking facility in the
locality – Expansion of the Banks:

committee for setting up regional rural banks suggested setting up of five
pilot banks in the first year at selected places on experimental basis which
could be extended based on their performance. Setting up of new regional rural
banks so rapidly in a relatively very short period of time will create problems
for concerned regional rural banks and their sponsored banks.  The time line for setting up the regional
rural banks has been forced by the higher authorities, which without choice
needs to be accepted by the sponsoring commercial Banks, State Governments and
even the Co-operatives.

first, the location for these branches in various districts were not selected
in a co-ordinated manner at the State level, demarcating the areas of
operations of the existing institutional credit agencies was suggested by
Working Group on Rural Banks. The other important test in rural banking
expansion process is the proportion of number of branches opened in relation to
the number which was expected to be opened in the given time at unbanked
centers.  There was no directive from the
government in this regard but the expectation was that each regional rural bank
will open 20 to 30 branches in first year of its operation and another 20-30 in
second year of operation to reach the target of 50-60 branches in ‘underbank’
centers of its operation. This branch expansion target seemed un-achievable by
Regional Rural Banks.

of Small Borrowers

are not able to meet the expected level of loans. The reasons for not achieving
the expected level of loans are mentioned below:

Most of the RRBs are lending directly to
the economically weaker section of the rural society. RRBs used borrowed funds
for lending purpose. The staff of regional rural banks has to make special
efforts to identify potential small borrowers who can be able to pay the loan
at relatively higher rate of interest by farming, small business and small

Secondly at the time of considering the
application of borrower is to verify the genuineness of the borrower as the
person of small means. The farmer which the staff considers to be ‘small’ or
‘marginal’ farmer may have substantial amount of income from non-farming
activities. Similarly, a small artisan or person owning a small business may
not be really poor. Such persons should not deprive the genuine small borrower.


Procedural Formalities

borrowers from the rural India are mostly illiterate and poor. They don’t deal
with the staff directly to borrow the money. The complicated procedures involved
in giving loans by the Regional Rural Bank causes intermediaries to emerge. These
intermediaries take advantage of poverty and illiteracy of rural borrowers and
exploit them to get loan from regional rural banks with certainty and within
the minimum time.




on Informal Sources of Credit:

 Many small borrowers still depend on the
informal and non-institutional sources for the supply of credit. Regional rural
banks need to study that under which circumstances small borrowers make their
choice between formal and informal sources of funds. Such study will help
Regional Rural banks to tap such borrowers who depend on informal sources of
credit for their needs.



rural banks are facing the problem of mobilizing the funds. They depend on
NABARD for their operations. Poor and illiterate people from the rural India do
not have a steady source of income. Thus they cannot save their money. The poor
savings of these customers is the major cause that RRBs have low deposits.


risk of credit:

households may have highly irregular and volatile income streams. Irregular
wage labor and the sale of agricultural products are the two main sources of
income for rural households. The poor rural households (landless and marginal
farmers) are particularly dependent on irregular wage employment. Rural
households also have irregular expenditure patterns. The typical expenditure
profile of rural households is small, with daily or irregular expenses incurred
through the month. Furthermore, a majority of households incur at least one
unscheduled expenditure per year, with the most frequent reasons being medical
or social emergency. In short, the rural customer is generally considered to be
a risky one.


High Non-Performing Loans (NPL):

Due to irregular income and expenditure pattern in
rural India, the regional rural banks are suffering from the problem of high
Non-performing loans. The irregular pattern in the expenditure and income of
the rural India is because of the monsoon season and the loan waiver schemes announced
by the political parties for their agenda. Agricultural sector has 7.7% of the
NPLs while non agri-sector has 3.5% of NPLs. Also in order to give the targeted
amount of low the employees in the bank do not check the trustworthiness of the
borrower to repay the loan. Thus the untrained employees are also part of this
problem. If the banks wants see the rural India as the opportunity for growth
rather than regulatory requirement they have to address such issues. In order
to increase financial access to rural areas banks need to focus on basic
conditions such as proper infrastructure and regulatory framework. Banks need
to think innovatively to increase the access to rural areas.



Lengthy Legal Process:

 A Regional
Rural Bank has to use lengthy court procedures for recovery of non-performing loans.
The regional rural banks cannot lend more in the rural area because there is risk
involves in lending to the weaker section of the society and the cost and time
involve in recovering the small loans are high.


High cost to serve:

 Branches are the most
used channel in rural areas. This is because many rural people are not literate
and are not comfortable using technology-driven channels such as ATMs, phone
banking or internet banking. On the other hand, a branch is an expensive channel
for banks. In addition, rural people, whenever they have access to banks, have
frequent low ticket and cash-based transactions, which increase the overall
transaction cost for their bank.





procedures adopted by Regional Rural banks for loaning are strict and complex. Since
many of the consumers are illiterate, they find it hard to understand these
complex procedures thus RRBs have not been able to expand their lending to
weaker section of society.  In the matter
of procedures for deposits as well as loaning, they operate very much like the
scheduled commercial banks. Not all the states have issued books to all
cultivators which could also be used by the RRBs for verifications of land
holdings and avoiding over-financing by different credit agencies on the basis
of the same assets of the borrower.


Lack of Adequate Support from
Development Programs:

 Successful implementation of a scheme like
minor irrigation, dairy development, poultry and fisheries crucially depends on
development programs of the State Governments. For example, in the case of
minor irrigation, groundwater surveys, rural electrification and creation of
drainage facilities are considered crucial. In the case of dairy development,
animal breeding programs, veterinary services and establishment of chilling
plants and centers and processing unit are required for the viability of the loans
for the purchase of animals. Similarly, vertically integrated activities are
also critical for the poultry and fisheries credit schemes.


Urban Orientation of Bank’s Staff:

attitude of the staff working in regional rural banks towards the rural
customer is still urban. The staff member holding the positions of officers and
above are asking for higher salaries. They don’t consider themselves as the integral
part of socio-economic culture in which they work. They are looking for the
opportunities to shift to the banks in the cities. This attitude of staff
working in regional rural banks is also a challenge.


Gap in Pay Scales:

lower operating costs in Regional Rural Banks at present, as compared to that
of the rural branches of the Commercial Banks (which had been advanced as one
of the major arguments justifying the establishment of the Regional Rural
Banks), may become invalid in the coming years. It would become difficult for
the Regional Rural Banks to retain its staff for a longer period at salaries
much lower than those provided by the commercial Banks in rural as well as
urban areas. Even though it is believed that trade unions cannot be legally organized
by the staff of the Regional Rural Banks under the Regional Rural Banks Act,
there are indications of the formation of “STAFF ASSOCIATIONS” in
some of the Regional Rural Banks with the objective of impressing upon the
management the need to increase their salaries etc. It will be difficult to
maintain for a long time two types of pay-scales in each area for similar work.


Financial Literacy and Education:

majority of the rural banking customers are from unbanked population. They have
very low level of awareness towards banking system. Banks, thus, needs to
invest in financial literacy and awareness programs. Financial illiteracy and
difficulty in understanding the banking services are the major obstacles in
providing the access to the rural customers. The efforts of the banks in this direction are, however,
much to be desired. NABARD has already set up fund for financial literacy of rural people in the areas of operation of
branchless banking by using this fund. The RBI in their Annual Statement has indicated
its dissatisfaction about delaying progress made by the banks in the rural area.


Banking is most cost effective compared to other channels to reach unbanked areas.
Thus all three stakeholders viz. the Telecom Operators, Banks and Merchants
should work in coordination with each other and develop a suitable business
model on robust technology platform to achieve the desired results.













Simplification & Standardization
of Loan Application:

rural banks should make the process for application of loans simple and standardize.
They should also reduce the number of documents required for the application of

Reduction in Processing Time:

time taken for processing the loan application by RRBs is above average. They
do not have trained staff those who work with socio-economic responsibility.
This requires a change of mindset of the RRBs staff. Such procedural delays
defeat the very purpose of the borrowers when they fail to get the help at the
critical time.


Revamping the Legal System:

 The high level of NPA is assuming
frightening proportions. The RRBs are advised to be guided only by commercial
motives in granting and recovering the loans made by them to their customers.
The legal system should be amended so as to reduce the long drawn legal battle
for making recoveries. Enabling legislation is required to be enacted and allow
the banks to foreclose the loans. Foreclosure provisions in India are
inadequate under which the mortgagor is absolutely debarred of his right to
redeem the property. A court decree is required for getting the foreclosure
right against the mortgagor which is a lengthy and time consuming process.

of DRTs:

Recovery Tribunals (DRTs) should be increased so that the debt recovery system
becomes faster. The DRTs should straight away be given the powers to issue
certificate of recovery. Government should give power to banks for taking
possession and sale of securities without intervention of the courts.


& Settlement Scheme:

Reserve Bank of India should approve a compromise and settlement scheme for the
RRBs so that the RRBs may make compromise and settlement instead of engaging in
the long drawn legal battle.

Strict Adherence to Prudential
Income Recognition Norms:

should check the documents of the small lenders very meticulously. This will
allow the weaker section of society to take advantage of the schemes introduced
for them.

in order to show profit does not make enough provisions for bad debts. They
also misclassify their accounts and understate the NPAs. The parent bank should
look into this menace.


Restructuring of the Capital Base:

in the share capital of the regional rural banks by the local investors should
be allowed. Such shareholding should be open to cooperatives, other local
institutions and individuals within the jurisdiction of Regional Rural Bank.

Development of Human Resources
(Staff Training):

staff of rural banks should be trained for the various banking processes. They
should be provided training of behavioral sciences. The staff should be
customer friendly and conversant with the local environment.

Staff Compensation:

staff at rural banks should be paid equal compensation as that of the urban
banks. Proper training and remuneration should be provided to the staff of
regional rural banks.

Faster Banks Expansion:

expansion in the unbanked and underbanked area should be made faster.

Introduction of Information

technological advancement in banking sector has not reached the regional rural
banks. The business base of these banks is still very low as compared to the
scheduled commercial banks. Rural areas are power deficient. Because of these
two reasons information technology cannot be adopted by these banks. The
different branches of a RRB should be interlinked with each other through a
computer network and at a later stage ATMs may also be installed at
headquarters level.



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