Chapter 2 RURAL BANKING: A THEORETICAL REVIEW Rural populace around the world is almost always in the clutches of poverty, and is invariably deprived of all the amenities enjoyed by the urban inhabitant. Rural populace around the world is not famous for their prolonged poverty. It is estimated that not less than 70 per cent of the world’s poor are living in the rural areas and in the developing world, around 55 per cent of their total population are in the rural area (IFAD, 2010). Poor education, health and sanitation, lack of social assets, limited economic opportunities and social inequalities are the causes and manifestations of poverty. Despite intensive poverty eradication measures among countries, the menace is actively present among many Asian and Sub-Saharan countries. Lack of infrastructure and utilities such as road, electricity, drinking water, schools, hospitals, communication systems etc. in rural areas lead most of the heavy industries and non-farm job avenues to urban areas, and this has forced the majority of countrymen to depend mainly on agriculture for their livelihood. Seasonal rainfall, obsolete technology, inadequate support such as transport, storage, processing and marketing; and lack of market information lead to underemployment in agriculture. Added to this, the exploitation of money lenders due to the absence of formal financial institutions and also the reluctance of these financial institutions to lend money to the rural farmers aggravated the situation further. Thus, these severe problems lead the rural inhabitants to their migration which ultimately ends up in city slums and adds to urban poverty. To improve the economic and social conditions of the rural mass, there have been many policy and administrative initiatives called “rural development programme” in both developed and developing countries. Recently, there has been a shift of focus in rural development programmes
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Chapter 2
RURAL BANKING: A THEORETICAL REVIEW
Rural populace around the world is almost always in the clutches of
poverty, and is invariably deprived of all the amenities enjoyed by the urban
inhabitant. Rural populace around the world is not famous for their prolonged
poverty. It is estimated that not less than 70 per cent of the world’s poor are
living in the rural areas and in the developing world, around 55 per cent of their
total population are in the rural area (IFAD, 2010). Poor education, health and
sanitation, lack of social assets, limited economic opportunities and social
inequalities are the causes and manifestations of poverty. Despite intensive
poverty eradication measures among countries, the menace is actively present
among many Asian and Sub-Saharan countries.
Lack of infrastructure and utilities such as road, electricity, drinking
water, schools, hospitals, communication systems etc. in rural areas lead most
of the heavy industries and non-farm job avenues to urban areas, and this has
forced the majority of countrymen to depend mainly on agriculture for their
livelihood.
Seasonal rainfall, obsolete technology, inadequate support such as
transport, storage, processing and marketing; and lack of market information
lead to underemployment in agriculture. Added to this, the exploitation of
money lenders due to the absence of formal financial institutions and also the
reluctance of these financial institutions to lend money to the rural farmers
aggravated the situation further. Thus, these severe problems lead the rural
inhabitants to their migration which ultimately ends up in city slums and adds
to urban poverty. To improve the economic and social conditions of the rural
mass, there have been many policy and administrative initiatives called “rural
development programme” in both developed and developing countries.
Recently, there has been a shift of focus in rural development programmes
The Role of South Malabar Gramin Bank in the Rural Development of Northern Kerala
32
from providing direct employment to empowering people by providing with
low cost credit in order to assist them in creating employment and wealth. In
fact rural people are not less intelligent, less hard working or less ambitious,
but lack of capital resources and information in rural areas lead to low
productivity, low income, low savings, and resultant poverty. To help people to
come out of this vicious circle, the need of capital infusion and availability of
information and market intelligence to ambitious rural individuals and groups
cannot be over emphasized. Today banks can act as a vehicle to carry,
distribute and administer this most essential ingredient of rural development.
Even though banking as an industry has grown to sky heights in the
world, in no country their doors are open impartially to all. Due to economic,
social and geographical reasons, vast majority of the rural poor have not
received much attention and care of the formal banking sector until recently.
Now even in developed countries there is a greater awareness as to the role
which financial institutions can play in empowering the low income groups.
With this end in view, United Kingdom has constituted a Financial Inclusion
Fund in 2004 and banks and credit unions have been given responsibilities of
specific areas. Similarly United States of America has Community
Reinvestment Act (CRA) and Home Mortgage Disclosure Act (HMDA).
Though both these Acts are comparatively older, a recent amendment to these
Acts made them some more strong. As per the provisions of these Acts, banks
are prohibited from discriminating against low and moderate income
communities and further the banks are obliged to disclose the details as to
whom the services are offered. Now Philippines, Brazil, Indonesia, China,
Thailand, Nigeria, Bangladesh, Pakistan, Ghana apart from India are some of
the other countries focusing on rural banking in this manner.
2.1 Concept of Rural Banks
Banking in its most simple form is as old as authentic history of human
being. As early as in 2000 BC, Babylonians had a system of banking which
was the oldest trace of banking. It was done by private individuals in the early
The Role of South Malabar Gramin Bank in the Rural Development of Northern Kerala
33
years; later on they established public banks to facilitate commercial activities
and to serve the governments. The Bank of Venice (1157) is considered to be
the first ancient bank followed by Bank of Barcelona (1401) and Bank of
Genoa (1407) (Vaish, 2002). In the initial period, the activities of these banks
were confined to satisfying of the individual needs of a few influential people;
but later on, through various stages, it developed in to the present state.
Presently, banking industry hand in hand with Information and Communication
Technology (ICT) has grown to the length and breadth of the world.
Banks worldwide are broadly classified as Central banks, Commercial
banks, Development banks, Co-operative banks and Specialized banks. With
regard to the importance, the share of Commercial banks is so large that the
term bank itself is to mean a commercial bank unless otherwise specifically
stated. Despite the physical presence of banks of varied nature in the rural,
semi urban and urban areas; their urban origin, commercial orientation, pro-
rich policies and profit motivation have marginalized a greater portion of the
population, i.e., the rural poor, from accessing the banking services. Though
the reasons like economic, financial, geographical conditions and lack of
awareness can also be pointed out, the lukewarm attitude of the banks mainly
force the marginalized people to source their credit needs from informal,
indigenous, exploitative sources which made them more and more
marginalized.
To address the pressing need of providing formal credit to rural people,
another form of banking “Rural Banking” came into being across the world
(Shekhar and Shekhar, 1998). These were public or private, commercial or co
operative banks, regionally based, and rural oriented with specially designed
service schemes to suit the needs of agriculture, micro and small industries,
petty and small traders, artisans, and even landless labourers in the rural areas.
At the beginning, these banks were organized in co-operative sector and
later on spread to the public sector also. As regards the functions, these banks
The Role of South Malabar Gramin Bank in the Rural Development of Northern Kerala
34
were expected to cover not only agricultural needs, but all aspects of rural life
such as trade, small manufacturing, retailing, and other self employment
initiatives. Apart from providing credit and collecting savings, these were also
envisaged to take up the task of implementing poverty alleviation programmes
of the governments, ancillary banking services such as supplying inputs and
providing assistance in marketing and thus generally helping the overall
development of the area of operation. The idea of rural banks was found
appealing to the governments as well as the rural people despite many practical
difficulties in the beginning, and eventually it helped rural banking to get wider
acceptance across the length and breadth of the globe (Shekhar and Shekhar,
1998).
2.2 Rural Banking in India
Despite a long tradition of banking there is no satisfactory history that
goes back beyond the Mughal period and covers all of India (India
Infrastructure Data Base, 2005). The evidences that are available suggest that
there were money lending operations in India during Vedic period (2000-1400
BC) and the importance of interest rate was recognized by all Hindu law givers
such as Manu, Vasishta, Yajnavalkya, Gautama etc. (Indian Central Banking
Enquiry Committee, 1931 and Reddy, 1999).
The developments during the early 18th Century laid the foundations for
the Indian Banking System (RBI, 2006), and the western type joint stock
banking was brought to India by English Agency Houses of Calcutta and
Bombay (Mumbai). Further The Bank of Bombay (1720) was the first joint
stock bank in India, established in Mumbai (Bombay). Besides, during the
early nineteenth Century, East India Company’s trade was concentrated in
Calcutta, and there was a growing need for uniform currency to finance foreign
trade and remittances by British Army and civil servants. This led to the
establishment of the first Presidency Bank, The Bank of Bengal in 1806. The
Bank was given powers to issue notes in 1823. Following this, the Bank of
Bombay (1840) and the Bank of Madras (1843) were also set up as Presidency
The Role of South Malabar Gramin Bank in the Rural Development of Northern Kerala
35
Banks. They were known as Presidency Banks as they were set up in the three
Presidencies that were the units of administrative jurisdiction in the country for
the East India Company and these banks were governed by the Royal Charters
of the British.
During the same period, the Swadeshi Movement (1906) in the country
gave a call for the Indian owned joint stock banks and also for setting up of co-
operative societies to cater to the needs of rural people. In response to the call,
many commercial banks of Indian ownership like Punjab National Bank
(1895), Bank of India (1906), Indian Bank Ltd (1907), Bank of Baroda (1908),
Central bank of India (1911), Canara Bank etc. were set up in a row.
A major development in Indian banking that happened during the
period was the formation of the Imperial Bank of India in 1921 merging the
three Presidency Banks to act as banker’s bank, banker to the Government and
as a commercial bank. Simultaneously during the same period, co-operative
movements also began to grow, initially in the urban areas and then in to rural
areas as well. In 1913 the number of reporting banks had raised to 56 (Report
on Currency and Finance, RB, 2006) and by 1915, there were 602 urban co
operative credit societies and 13745 agricultural credit societies in India. The
history of modern banking, from a rural perspective can be summed into two
broad time spans: Pre-independence period and Post-independence period.
2.2.1 Pre-independence Phase
The pre-independence period was characterized by the existence of large
number of money lenders and small private banks, organized as joint stock
companies. They were largely localized and were maintaining their own credit
instruments (RBI, 2006). As there was no ceiling on interest rates, usurious
money lending practices were rampant. The Central Banking Enquiry
Committee Report (1929) and it’s associated Provincial Reports like Madras
Provincial Banking Enquiry Committee Report (MPBEC, 1930), explain the
then practices:
The Role of South Malabar Gramin Bank in the Rural Development of Northern Kerala
36
“Frequently the debt is not repaid in full and a part of the loan persists
and becomes a pro-note debt. In the course of time, it may with a lucky year be
paid off or it may become a mortgage debt. By the existence of this heavy
persisting debt the creditor takes the bulk of the produce and leaves the debtor
unable to repay short term loans. But equally the short term loans have
produced long term debts and there is a vicious cycle. The farmers cannot clear
his short term debt because of the mortgage creditor and he cannot cultivate
without borrowing because his crops goes largely to the long term creditor. If
he pays his long term creditor his current debts swell and overwhelm him.”
The MPBEC found that repayment of prior debt was by far the single
most significant reason for borrowing in 1929. The mechanism of mortgage
was very beneficial to the landlords, by which they got control over large tracts
of land (MPBEC, 1930). Grain loan was another form of loan which was
commonly repayable in kind at harvest season. Rates of interest on these were
generally twice compared to cash loans. When cash loans cost between 12 and
24 per cent, grain loans costs between 24 and 48 per cent and further there were
no transparency in keeping the accounts by the lenders. For tenant farmers, in
addition to the loans and interest, they had to pay the rent also on land. If the
rents were not paid in time the crops would be withheld in the field until the
rent was cleared and high rate of interest would be charged on the unpaid
balance (MPBEC, 1930).
a) Major Legislations on Rural Banking
The colonial government brought about much legislation to tackle the
serious situation prevailed among the rural agrarians. The enactment of
Deccan Agricultural Debt Relief Act (1879), and similar Acts in Punjab, Berar
(also known as Hyderabad Assigned Districts) and Central Provinces
empowered the courts to stop usurious interest and resultant land grab by
money lenders. Coming up of Land Mortgage Banks and enactment of two
legislations such as Land Improvement Loans Act 1883, (for long term loans),
and Agriculturists Loans Act 1884, (for short term loans) for providing low
The Role of South Malabar Gramin Bank in the Rural Development of Northern Kerala
37
interest loans for agriculture were the major interference by the legislature. But
these laws did not help to mitigate the situation (Chandavarkar, 1984).
The enactment of the Co-operative Societies Act 1904, and of 1912,
enabled the entry and regulation of co-operative credit in India. By 1930,
Provincial Co-operative Banks were set up in all provinces. But the severe
socio economic divisions that existed in the society disappointed the
visionaries. Most of the banks were run by the high caste landlords and money
lenders. Outcaste men found it impossible to get a loan from a co-operative
bank unless he promises his labour to the landlords at a low wage (Royal
Commission on Agriculture, 1929).
The introduction of Usurious Loans Act (1918) was indented to apply
the damdupat principle (interest never exceed principal) to debts. Between
1933 and 1936 there were a number of Debt Conciliation Acts in central
provinces of Berar, Punjab, Assam, Bengal and Madras. These Acts were to
deal with the wave of legal suits against debtors for land attachments following
the situation emerged out of the Great Depression of thirties. Debt
Reconciliation Boards stemmed out of these laws, were abolished after a few
years finding that they lack any coercive powers (Naidu, 1946).
To regulate the money lenders, The Punjab Regulation of Accounts Act
1930, and Debtors Protection Act 1935 were passed which made licensing,
registration and proper accounting of transactions compulsory to money
lenders. But these laws were also ineffective due to the reluctance of the
debtors to sue the money lenders being their sole source of funds in
emergencies (Chandavarkar, 1984). But the Madras Agriculturists Debt Relief
Act 1938 attracted the hostility of creditors, leading to many instances of
litigation (Naidu, 1946).
Despite all these regulations, the money market continued to be deeply
imperfect. The fixing of interest rate, fixing of price for the produce, fixing of
The Role of South Malabar Gramin Bank in the Rural Development of Northern Kerala
38
time of its sale, were beyond the discretion of debtors, added with this is the
oppressive caste system, asymmetrical power balance among different castes
and occasional drought led to the pauperization of peasantry in colonial India.
b) Reserve Bank of India
During the early twentieth Century, major socio economic events like
First World War (1914-1918) Great Depression (1930) and World War II
(1939-1945) etc. led to continuous bank failures in India (India Infrastructure
Database, 2005). The high mortality rate among Indian banks and low support
to agriculture and rural credit by them felt the need for a central bank to the
country. The Indian Central Banking Enquiry Committee (ICBEC, 1929),
appointed to study the problems in the Indian banking sector recommended that
a central bank be established for the country and a special legislation be made
to regulate banks by amending the existing Companies Act (1913).
The Reserve Bank of India Act, 1934 brought the RBI in to existence.
The issue of bank failures and need to support to agriculture were the two
prime reasons for the emergence of RBI (RBI, 2006). Almost the entire finance
required by agriculture and rural sectors were provided by the money lenders at
that time, and also, the role of co-operatives and other agencies were
negligible. The legislation made agriculture credit a special responsibility of
RBI. During the period from 1935 to 1950, RBI continued to focus on
agriculture and rural finance by encouraging co-operative societies through the
provision of financial accommodation to them. Besides, RBI played a central
role in building a well differentiated structure of co-operative credit institutions
for catering, both short term and long term needs of agriculture and allied
activities (Mohan, 2004).
2.2.2 Post-independence Period
Independence brought big changes in many spheres of economic
activity, and banking was one of the crucial areas where a phenomenal
transformation took place. Following the partition and related turmoil, bank
The Role of South Malabar Gramin Bank in the Rural Development of Northern Kerala
39
failures became common and started to cause hardships to the savers. Among
many administrative and legislative measures to curb this, the enactment of
Banking Companies Act (1949), the first legislation on banking in free India,
and an amendment to it in 1961 were made to check the troubles in the banking
sector.
When the country attained independence, Indian banking industry was
entirely under private sector, which had neither penetrated in to rural and semi
urban areas and nor had any interest too. Further, most of the bank credit went
to industry and commerce and very little to agriculture, regardless of its huge
(55%) contribution to the nation’s GDP (RBI, 1952). Since the rural credit
markets were isolated and rather unregulated, the money lenders, who were
also the buyers of agricultural produce most often, acted as monopolists and
charged exorbitantly high rate of interest. To have a ground report of the rural
credit situation, RBI constituted a committee, The All India Rural Credit
Survey Committee (AIRCSC) in 1951, which rendered its report in 1954. As
per its report, the total debt of the farmers in India was estimated to be around
Rs.750 crore during the period of study, out of which the commercial banks’
share was 0.9 per cent. While the share of the informal sources, such as
agricultural money lenders and professional money lenders were 24.9 and 44.8
percent respectively (AIRCSC, 1954 and RBI, 2006). In relation to this, the
committee also observed that, there were 551 commercial banks, the bank
office to population ratio was at a staggering one branch for 136000 persons
and the savings rate of the country was at 10 per cent of national income (RBI,
1998). Another observation was that the co-operatives, though they lack
facilities and guidance, are the best suited to the rural needs. To this end, the
amalgamation of imperial banks and major state associated banks were thus
recommended to have a nationwide machinery to assist and control the co-
operatives credit institutions. Accordingly Imperial banks were amalgamated,
nationalized and converted in to State Bank of India in 1955 with an objective
The Role of South Malabar Gramin Bank in the Rural Development of Northern Kerala
40
of spreading banking facilities on a large scale to rural and semi urban areas.
With this a large number of branches were opened in hitherto unbanked areas.
Despite an increase in the number of rural branches of commercial
banks, the quantum of rural credit was inadequate throughout the 1950s and
1960s (Mohan, 2004). Further, the setting up of Agricultural Refinance
Corporation (1963), indented to provide funds by way of agricultural refinance
to commercial and co-operative banks also failed to achieve the desired results
(Mohan, 2004). The other important movements in this direction include bank
nationalization and the adoption of a series of other social banking strategies.
a) Bank Nationalization
Despite the AIRCS Committee’s insistence, the commercial banks role
in rural credit remained minimal and indirect all through 1950’ and 60s. Even
after the RBI directive to commercial banks to open one rural branch for every
branch in the banked urban and semi-urban area, the number of rural branches
remained very few in number (Meyer and Nagarajan, 2000) and the situation
did not improve even up to 1971, when the percentage of rural credit to total
bank credit stood at 2.4 per cent, most of which were given to plantations.
Further, to achieve rural credit target, the main strategy of banks of those days
was to finance agro-processing firms and purchase of bonds floated by land
development banks.
Until the end of 1960s, the majority share in the total bank credit was
enjoyed by industries, especially large ones (62%) followed by trade and
commerce (26%), (Sen and Vaidya, 1997). It has also been alleged that
advances by private banks were diverted to sister companies of the banks or to
companies in which their directors had an interest (Chandrasekhar and Ray,
2005).
Thus, twenty years after independence, the co-operatives functioning in
the rural regions were dominated by the rural elite and commercial banks were
The Role of South Malabar Gramin Bank in the Rural Development of Northern Kerala
41
under strong urban bias which drove 50 per cent of India’s town and all of its
villages without a bank branch (India Population Census, 1961). Thus, in 1969,
the National Credit Council was instituted to guide the branch expansion
programme of banks; meanwhile it also found that, not even one percent of
India’s villages served by bank branches. Further, bank credit to agriculture,
which contributes 50 per cent to GDP, was negligible while industry which
contributes only 15 per cent of GDP had cornered 67 per cent of total bank
credit. Consequently to acquire a more direct and activist role to RBI in
deciding banking policies, 14 largest commercial banks were nationalized in
1969. The Banking Companies (Acquisition and Transfer of Undertakings)
Act, 1969 that empowered the state to nationalize the banks, emphasized the
need to preserve national priorities and objectives such as rapid growth of
agriculture, small industries, and exports, rising of employment levels,
encouragement of new entrepreneurs and development of backward areas.
After nationalization the branch expansion was deliberately focused on the
previously unbanked rural and semi urban locations.
b) Social Banking Strategies
There were many efforts by the RBI and GoI., to widen and to make
effective the banking services in India. Important among them having a bearing
on the rural banking include Lead Bank Scheme, branch licensing policy of
RBI, formulation of priority sector, setting up of National Bank for Agriculture
and Rural Development (NABARD) and adoption of Service Area Approach
(SAA).
Adoption of Lead Bank Scheme (LBS) mooted by Gadgil Study Group,
in December, 1969 as part of “Area Approach” by RBI, enabled banks to
assume leadership of districts in bringing about banking developments
especially, branch expansion and credit planning in the respective districts. The
Lead bank has no monopoly of banking in the district but to lead other banks in
the district. The main theme of the scheme was to familiarize the banks with
The Role of South Malabar Gramin Bank in the Rural Development of Northern Kerala
42
the district economy so as to identify the banking and credit gaps and to
mobilize savings to bridge such gap.
The credit planning exercise under this scheme primarily aims at the
overall development of the districts by the coordinated efforts of the banks
acting in unison with the developmental organs of the state government at the
district level. To co-ordinate all banks and financial institutions in the district
and government departments, District Consultative Committees (DCCs) have
been formed. With the help of the representatives of DCCs, commercial banks
having wide network of branches in the district, and of district planning
officials of the government, lead bank prepares the District Credit Plan (DCP).
Further, for effective implementation of DCP, Annual Action Plans are
formulated as a separate document since 1980. It is considered that the lead
bank scheme was successful in branch expansion and in providing access to
credit to farmers and small enterprises (Thingalaya, 2010), and need to be
continued for taking the challenges of financial inclusion (Usha Thorat, 2009).
The branch licensing policy of RBI adopted in 1970 was the first major
step towards social banking since nationalization. As per which, for every new
branch in an already banked area, the commercial banks would have to open at
least 3 branches in unbanked rural and semi urban areas. Again, this ratio was
further revised to 1:4 in 1976. Following this movement, the bank branches in
unbanked locations really exploded especially between 1977 and 1990 when
around 80 per cent of all new bank branches were in rural unbanked areas
(Burgess and Pandey, 2002).
Priority sector lending was another measure adopted to further the
banking services to the countrymen. A target of 33 per cent lending to the
priority sector was set in 1975, the target was then raised to 40 per cent in 1979
and again in 1980 sub targets for agriculture (16%), and weaker sections (10%)
were also set in. As a result, until 1990, there has been manifold increase in the
The Role of South Malabar Gramin Bank in the Rural Development of Northern Kerala
43
priority sector lending both in terms of amount and the number of accounts
(Chavan, 2005 and Narayana, 2000).
Setting up of National Bank for Agriculture and Rural Development
(NABARD) in 1982 by taking over the Agricultural Credit Department (ACD)
and Rural Planning and Credit Cell (RPCC) of RBI and Agricultural Refinance
and Development Corporation (ARDC) was another important step to improve
rural outreach of formal finance. It aims to promote sustainable agriculture and
rural prosperity through effective credit support, institutional development,
supervision, capacity building and training of personnel. Within a short span of
time, NABARD occupied an indisputable position among the country’s
development finance providers. Now it is widely considered as the engine
puller of rural development.
Adoption of Service Area Approach (SAA) based on the
recommendation of Ojha Committee (1989) was to close the loopholes of LBS.
As per SAA, each bank branch was allocated 15 to 25 villages around it. On
the basis of an elaborate survey of the area, the bank will prepare a credit plan
and such plans were discussed at the Block Level Bankers Committee (BLBC)
before finalization. The annual credit plans prepared by all branches in the
block are then consolidated to form the block credit plan. The various credit
plans from the district are then consolidated to form the Annual Credit Plan of
the District. Again, the district credit plans will be aggregated in to state credit
plans. In the light of the above information the branch will prepare separate
credit plans for each village allotted to it and then combine all those plans to
prepare the credit plan for the service area. In 2004, the RBI relaxed the area
restrictions and now a rural or semi urban branch can lend to non-service areas
also, except for government sponsored schemes.
2.3 Rural Banking in Kerala
The history of Kerala’s banking development is different from the rest
of the country. Unlike other parts of the country where initial banking activities
The Role of South Malabar Gramin Bank in the Rural Development of Northern Kerala
44
thrived in port towns, banks in ancient Kerala started in rural agrarian
heartlands and eventually spread to other urban areas. Further, the available
literature suggests that the region was devoid of caste based money lenders like
Chettiars and Banias found in some other parts of the country (Government of
Travancore, 1930). The places of agrarian centers like Thiruvalla, Thalavadi,
Chengannur, Kozhanchery, Kottayam, Palai etc. are deemed to be the cradle of
banking in Kerala (Oommen, 1976).
Until 1947, the Princely States of Travancore and Cochin and the
Malabar District of the erstwhile Madras Presidency of British India were the
three political entities in the region. When princely states abolished,
Travancore and Cochin were merged to form a single state and later on in
1956, when the linguistic states were formed, Malabar was added to form
unified Kerala. Despite separate political identity, the banking system was
identical and integrated to the all India system prevailed at that time.
In Kerala, in the absence of professional money lenders, lending
business was done by landlords and rich peasants of Kerala and also by hundi
merchants of thirunelveli (Nagam Aiyah, 1906 and Velu Pillai, 1940). It has
been estimated that there were 264 money lenders operating in the region in
twenties (Government of Travancore 1930). Chit funds, commonly known as
Chitti or Kuri, a deposit-advance-lottery combine-was prevalent around the
same period among agriculturists, small traders and salary earners. Initially
they were grain chitties, eventfully they became money chits (Nayar, 1973).
The amount collected from subscribers in one installment is the capital.
Depending upon the amount of capital, it may be registered or unregistered.
There were innumerable small unregistered chitties with capital less than
Rs.100, distributing silver vessels, ornaments, furniture etc. as prize money
(Government of Travancore, 1930). The chitties are still popular and the
refined versions of the chitties have become a big business in Kerala involving
even government and corporate firms.
The Role of South Malabar Gramin Bank in the Rural Development of Northern Kerala
45
2.3.1 Commercial Banks in the Rural Sector of Kerala
Commercial banking in Kerala was started in the last quarter of
nineteenth Century. Most of the first banks were either a growth or a
transformation of the erstwhile chit funds. Compared to Malabar, Travancore-
Cochin was far ahead for intensity and density of banks, though most of the
early banks were short lived. The occurrence of bank formation and failure
Source: RBI 1954b.Online data base. Note: (1) Up to 1936, only offices of class A and Class B banks were considered. There after
Offices of class C banks are also considered (2) Offices situated at places with population less than 50000 are not considered.
(3) Banks with capital and reserves of Rs.5 lakh or above are class A; between 1 and 5 lakh are class B banks, and between 50000 and one Lakh is class C. banks
The Travancore Bank started in 1883, with a capital of Rs.15000, in
Central Travancore by Eapen, a Pleader by profession, is considered to be the
first organized banking institution in Kerala (Oommen, 1976). In 1900, the
bank went in to liquidation. Around in the same period, T.C. Poonen started a
bank at Kottayam, that also failed after a short period. The Thiruvalla bank
founded in 1900 was the first joint-stock bank in Travancore and Cochin area,
which also failed after 12 years (Jeffry, 1976). While in Malabar region, The
Nedungadi Bank, started by Appu Nedungadi in1899 was the earliest bank.
Perhaps this would be the only bank in its genre that survived twentieth
The Role of South Malabar Gramin Bank in the Rural Development of Northern Kerala
46
Century. Later recently, Nedungadi bank caught in a financial crisis and
following the Government intervention, the bank was taken over by Punjab
National Bank in 2003.
In short, the growth in bank registration was remarkably slow until the
first word War (1914-1918). Since then, in Travancore-Cochin and also in
Malabar it increased, especially between 1927 and 1933. But, following the
Great Depression, a high percentage of these banks, particularly small ones,
went in to liquidation (GoI, 1956). At the same time, the surviving banks
expanded their business by adding new branches.
The falling trend in bank registration started in 1952 continued through
the thirties and early forties. The survey by TCBIC in 1956 found that there
were 163 banks in Travancore–Cochin region in total and 136 out of these were
small ones set up in hamlet and infested with the problem (poor level of
reserves, working capital, and high per cent of unsecured loans). The
committee found that some banks are beyond repair and 18 banks were refused
license. Notably, at all India level there were only 21 such cases during that
period. Even some bigger banks like Palai bank were also failed (1960) during
the period (RBI, 2006). In the wake of these developments, amalgamation was
seen as a solution. The moratorium and consequent amalgamation of the Kerala
banks brought in a new era of rapid consolidation of the Indian banking system.
Accordingly, Banking Companies (Amendment) Act, 1961 was passed, which
enabled compulsory amalgamation of ailing banks with the State Bank of India.
Consequent on this, in the following decade, there has been a big wave of
amalgamations and acquisition.
Nationalization of leading commercial banks in 1969 and 1980 also had
their impact on Kerala’s rural banking. Both total number of bank branches and
rural branches improved considerably though not proportionately. As a
common knowledge, since 1990, there has been a decline in the number of
The Role of South Malabar Gramin Bank in the Rural Development of Northern Kerala
47
rural bank branches. Table 2.2 portrays the development of the banks since
nationalisation.
Table 2.2: Number of Bank Offices in Rural Areas since NationalisationMonth &
YearIndia Kerala
Total Rural Per cent Total Rural Per centJune 1969 8262 1833 22.18 601 157 26.12 June 1975 18730 6807 36.34 1306 446 34.15 June 1980 32419 15105 46.59 2152 843 39.17 Mar.1985 51385 30185 58.74 2741 N/A - Mar. 1990 59752 34791 58.22 2906 573 19.71 Mar. 1995 62367 33004 52.91 3108 550 17.60 Mar. 2000 65412 32734 50.04 3318 347 10.45 Mar.2005 68355 32082 46.93 3609 347 9.60 Mar.2010 87768 32528 37.06 4390 342 7.79
Source: Basic statistical returns RBI, various issues Note: Includes administrative Offices also.
At the time of nationalisation of banks 26.12 per cent of the bank
branches were in rural Kerala, which increased to 39.17 per cent by the next
decade and then, by the next two decades, declined to 19.71 per cent. This
falling trend was somewhat opposite to the national figures up to the year 1990,
since then both national and state figures have been declining fast. Presently
Kerala’s rural branches are only 7.79 per cent of the total bank branches. It is
partly due to increased urbanization and the general trend of retreat of banks to
their urban home lands.
This improvement after bank nationalization in branch expansion was
truly reflected in the rural deposit mobilization also. The share of rural deposit
increased manifold. It is observed that (Table 2.3) the trend of rural deposit in
the country was in a rising mode though at a decreasing rate. While in Kerala,
though the total deposit has been increasing, the percentage of rural deposit to
total deposit was sharply declining from 8.55 per cent in 1969 to touch 4.6 per
cent in 2010.
The Role of South Malabar Gramin Bank in the Rural Development of Northern Kerala
48
Table 2.3: Deposit of Scheduled Commercial Banks from Rural Kerala
The Role of South Malabar Gramin Bank in the Rural Development of Northern Kerala
64
Board of directors consists of nine members (Table 2.11) out of which
seven are official directors and the remaining is non-official. The term of office
is two years or as determined by the appointing authority, and are eligible for
re-nomination. The general superintendence, direction and management of the
affairs of the bank are vested in the board. Further, the chairman is appointed
by the sponsoring bank in consultation with NABARD. The appointment is for
a period of three years and could be re-appointed if necessary. The chairman
will be a fulltime director of the bank, and he has to preside over the board
meetings and oversee the affairs of the bank. To facilitate easy governance,
various committees and sub committee’s viz., Executive Committee, Audit
Committee, Risk Management Committee etc. consisting of directors or non
directors or both are constituted.
Table 2.11: Composition and Types of Directors Sl.No Type Designation Nominated by Number
1. Official Chairman Sponsor Bank with NABARD 1 2. Official Director State Government 2 3. Official Director Sponsor Bank 2 4. Official Director RBI 1 5. Official Director NABARD 1 6. Non-Official Director Government of India 2
TOTAL 9 Source:Annual Report, NABARD.
2.10.1 Staff Norms
The staff norms for RRBs are formulated by the Central Government.
As per the existing staff norms, at head office there can be 13 to 40 persons
including the Chairman, General Manager and others. As per the existing
branch licensing policy of RRBs, there could be one area office for every 25
branches. The area office is generally attached to one of the main branches.
The Area manager is in the rank of a scale III officer.
After the amalgamation of RRBs in 2006, the controlling offices also
have started to function. As per the existing norms one controlling office is
The Role of South Malabar Gramin Bank in the Rural Development of Northern Kerala
65
operated (for the first 75 branches), and thereafter, one controlling office for
every additional 50 branches.
The permissible staff strength of an RRB including officers, clerks and
messenger, is 4.00 per unit, which includes Head office, Area office and branch
excluding the extension centers and satellite centers. The RRBs with CD ratio
above 60 per cent are allowed to have additional officers at the rate of
0.1 staff per 10 per cent increase in CD ratio.
2.10.2 Branch Classification
The branches of RRBs are classified according to volume of business as
small branch, medium branch and large branch. A small branch is one with a
business of up to one crore, for a medium branch, there should be a business
between one crore and 12.5 crore and for a large branch it must be above 12, 5
crore. A small branch will be under the charge of a scale one officer, a medium
branch under a scale two officer and a large branch will be taken care of by
scale III officer.
2.11 Activities of RRB
The Regional Rural Banks Act, 1976 allows RRBs to transact any
business which a commercial bank is allowed to carry on. However the Act
entrust with them the special responsibility of lending to small and marginal
farmers, agricultural laboures, artisans, small entrepreneurs, agricultural
marketing and processing societies, primary agricultural credit societies and to
persons engaged in small scale commercial activities within the area of
operation of the bank. In fact, they can lend to anybody provided that the
priority sector advance should not be less than 60 per cent.
a) Branch Expansion
Over the years, RRBs have taken deep roots and have become an
inseparable part of the rural credit system. They have been playing a key role in
rural institutional financing in terms of geographical coverage, clientele,
The Role of South Malabar Gramin Bank in the Rural Development of Northern Kerala
66
outreach and thus contributing to the development of rural economy. A
remarkable feature of their performance over the past years has been the
massive expansion of their retail network in rural areas. Moreover the GoI have
fixed a target for RRBs that at least 2000 new branches should be opened by
*Branches Exclude Administrative Offices. Source: (1) Annual Report of NABARD, Various issues. (2) Basic Statistical Returns of Scheduled Commercial Banks in India, Various Years.
It is observed that the number of RRBs have remained constant from
2001 to 2005, and thereafter as a result of the sponsor bank wise amalgamation,
it started to decline (Table 2.12). Despite a standstill or decline in number of
banks, the number of branches kept increasing though at a slow pace. At the
same time, during the period of 2008-09, there has been a remarkable increase
in the number of branches. Further, an unbroken and continuing decline of 10
per cent in the number of rural branches is also visible during the period. In the
year 1993, RBI had given permission to RRBs to relocate those rural branches,
which were consistently in loss for more than three years, to more
commercially promising areas. This, coupled with the restructuring and
consolidation process in the RRBs, has led to the fall in the number of rural
branches. However, it can be said that the decline in the number of rural
branches shows a shift from the rural orientation of RRBs (Table 2.12).
The Role of South Malabar Gramin Bank in the Rural Development of Northern Kerala
67
b) Deposits
There is no restriction in respect of avenues for mobilization of deposits
by RRBs. Also, the interest rates are to be fixed by the bank itself. But the cost
of getting term deposit is higher hence it focuses on demand and savings bank
deposits, which are less costly but seldom sufficient. Being in rural area, small
deposits dominate the portfolio.
Table 2.13: Deposit of RRBs in India (Rs. in crore)
Source: (1) Annual Report, NABARD, Various issues. (2) Basic Statistical Returns of Scheduled Commercial Banks in India, Various issues. (3) Compiled from Statistical Tables Relating to Banks in India.
2.12 RRBs in Kerala
In Kerala, there are two RRBs, South Malabar Brahmin Bank (SMGB)
and North Malabar Gramin Bank (NMGB). Both were established in the year
1976. Today, the combine covers the entire state of Kerala. With 229 branches,
SMGB operates in eight districts while NMGB with 205 branches covers the
remaining six districts.
Over the last ten years RRBs in Kerala have issued a credit of 23650
crore (Table 2.17). On a sector basis, the finance for agriculture has registered
an increase of 4 per cent from 48 to 52 per cent during the period between 2001
and 10. While the share of industry and service sectors have decreased from
5.96 per cent to 3.21 per cent and from 4.2 per cent to 3.23 per cent
respectively. Further the finance for other purposes like personal loan for
housing, consumer durables, vehicles, education and retail trade have
The Role of South Malabar Gramin Bank in the Rural Development of Northern Kerala
71
increased. The average of advances outstanding during the period is Rs. 2365
crore out of which 52.11 per cent is for agriculture, 5.37 per cent for industry,
3.46 per cent is for services and 39.06 per cent is for other category of loans.
Table 2.17: Advances of RRBs to Different Sectors (Rs. in crore)