Rural Credit Architecture Needs Renovation

Increasing the outreach of banks to cover the financial needs of the rural borrower with low credit needs has been one of the major objectives that our nation has been pursuing since the late 1950s. However, the reality of the financial world is much different as it continues to elude more than half the population.

The rural banking system has done a commendable job in improving the credit line in these developing regions. In the comparatively literate and affluent geographical areas, there is a new network of rural branches, financial institutions (RFIs) including cooperatives and bank branches of several commercial banks.

Though the focus of which has shifted midway, somewhere during the 1990s to urban lending, rural banking bodies are now gaining impetus. The rise in rural deposits has now created imbalance in the credit route, thus lending bodies are now shifting their focus towards rural banking.

Several banks have started searching for intermediaries like microfinance institutions (MFIs) for providing credit to small time borrowers. MFIs, in some cases borrow finances from banks at low rates and lend them up to three times the borrowing rates, in the same area where bank branches function. The CRISIL conducted studies on three major parameters – the bank branches, the deposits and the credit penetration across nearly 630 districts, out of which the bottom 50 districts have just three banks per 100,000 of population, just half of the 7.6 bank branches at an all-India level. . These districts have just 2% of the total bank branches in the country.

Lack of awareness, low income, poverty, and illiteracy are the key factors that have led to the lowering in demand for finances. RBI in its recent guidelines for new banking licenses has insisted that 25% of the branches have to be opened in un-banked rural centers. Policy announcements have been focusing on improving education while the actual implementation there are imbalances. Hoping to bring about a change in the rural financial