Banking Industry - Vision 2010
[Source: IBA Committee under the Chairmanship of Shri S C Gupta, CMD IOB ]

Rural and Social Banking Issues

Since the second half of 1960s, commercial banks have been playing an important role in the socio-economic transformation of rural India. Besides actively implementing Government sponsored lending schemes, Banks have been providing direct and indirect finance to support economic activities. Mandatory lending to the priority sectors has been an important feature of Indian banking. The Narasimham committee had recommended for doing away with the present system of directed lending to priority sectors in line with liberalization in the financial system. The recommendations were, however, not accepted by the Government. In the prevailing political climate in the country any drastic change in the policy in this regard appears unlikely.

The banking system is expected to reorient its approach to rural lending. "Going Rural" could be the new market mantra. Rural market comprises 74% of the population, 41% of Middle class and 58% of disposable income. Consumer growth is taking place at a fast pace in 17113 villages with a population of more than 5000. Of these, 9989 villages are in 7 States, namely Andhra Pradesh, Bihar, Kerala, Maharashtra, Tamilnadu, Uttar Pradesh and West Bengal. Banks' approach to the rural lending will be guided mainly by commercial considerations in future.

Commercial Banks, Co-operatives and Regional Rural Banks are the three major segments of rural financial sector in India. Rural financial system, in future has a challenging task of facing the drastic changes taking place in the banking sector, especially in the wake of economic liberalization. There is an urgent need for rural financial system to enlarge their role functions and range of services offered so as to emerge as "one stop destination for all types of credit requirements of people in rural/semi-urban centres.

Barring commercial banks, the other rural financial institutions have a weak structural base and the issue of their strengthening requires to be taken up on priority. Co-operatives will have to be made viable by infusion of capital. Bringing all cooperative institutions under the regulatory control of RBI would help in better control and supervision over the functioning of these institutions. Similarly Regional Rural banks (RRBs) as a group need to be made structurally stronger. It would be desirable if NABARD takes the initiative to consolidate all the RRBs into a strong rural development entity.

Small Scale Industries have, over the last five decades, emerged as a major contributor to the economy, both in terms of employment generation and share in manufactured output and exports. SSIs account for 95% of the industrial units and contribute about 40% of the value addition in the manufacturing sector. There are more than 32 lac units spread all over the country producing over 7500 items and providing employment to more than 178 lac persons. The employment generation potential and favourable capital-output ratio would make small scale sector remain important for policy planners.

Removal of quantitative restrictions on a large number of items under the WTO and opening up of Indian market to greater international competition have thrown both challenges and opportunities for the SSI sector. Low capital base and weak management structure make these units vulnerable to external shocks, more easily. However the units which can adopt to the changing environment and show imagination in their business strategy will thrive in the new environment.

Instead of following the narrow definition of SSI, based on the investment in fixed assets, there is a move to look at Small and Medium Enterprises (SME) as a group for policy thrust and encouragement. For SMEs, banks should explore the option of E-banking channels to develop web-based relationship banking models, which are customer-driven and more cost-effective. Government is already considering a legislation for the development of SME sector to facilitate its orderly growth.

In the next ten years, SME sector will emerge more competitive and efficient and knowledge-based industries are likely to acquire greater prominence. SMEs will be dominating in industry segments such as Pharmaceuticals, Information Technology and Biotechnology. With SME sector emerging as a vibrant sector of the Indian economy, flow of credit to this sector would go up significantly. Banks will have to sharpen their skills for meeting the financial needs of this segment. Some of the Banks may emerge as niche players in handling SME finance. Flow of credit to this Sector will be guided purely by commercial considerations as Banks will find SMEs as an attractive business proposition.