Lead Bank Scheme

The Lead Bank Scheme was introduced by RBI in December, 1969 based on the recommendation of the Study Group, headed by Prof. D. R. Gadgil. The Study Group drew attention to the fact that commercial banks did not have adequate presence in rural areas and also lacked the required rural orientation. As a result, the banking needs of the rural areas in general and the backward regions in particular, could not be adequately taken care of by the commercial banks and the credit needs of rural sector of the economy, particularly agriculture, small-scale industry and services sectors remained virtually neglected. The Study Group, therefore, recommended the adoption of an �Area Approach� to evolve plans and programmes for the development of an adequate banking and credit structure in the rural areas.

A Committee of Bankers appointed by RBI in 1969 under the Chairmanship of Shri F. K. F. Nariman endorsed the idea of area approach. The Scheme emphasised making specific banks in each district the key instruments of local development by entrusting them with the responsibility of locating growth centers, assessing deposit potential, identifying credit gaps and evolving a co-ordinated approach to credit deployment in each district, in concert with other banks and credit agencies.

The Scheme, significantly, did not envisage a monopoly of banking business by the Lead Bank in the district. The Lead Bank is expected to assume leadership role and act as a consortium leader for co-ordinating the efforts of the credit institutions and accordingly the various districts in the country were allocated among the public/select private sector banks, as the lead bank for the district. As at the end of March 2009, 26 banks (public and private sector) have been assigned lead responsibility in 622 districts of the country. The scheme presently does not cover the metropolitan cities of Mumbai, Delhi, Kolkata, Chennai and certain Union Territories.

In 1989, the Service Area Approach (SAA) was adopted wherein service area villages were identified and assigned to bank branches based on their proximity and contiguity and by adopting a cluster approach. Credit plans were prepared on an annual basis for the service area of each branch which involved co-ordination between the various developmental agencies and credit institutions. Due to allotment of villages to designated bank branches, the activities of the �service area branches� were restricted to the allotted villages and they were unable to provide financial assistance outside their service areas, despite being in a position to do so. Similarly, borrowers belonging to these villages were required to approach the �designated bank branches� for their credit needs and were not in a position to avail of services of any other bank branches, irrespective of whether they were satisfied with the services provided by the designated bank branches or not.

To review the Lead Bank Scheme with focus on financial inclusion and recent developments in the banking sector, a High Level Committee was constituted in 2007 under the chairpersonship of Smt. Usha thorat, Deputy Governor, Reserve Bank of India. Major recommendations of this Committee were:

  • The Lead Bank Scheme (LBS) is useful and needs to continue.
  • The overarching objective of LBS shall be to enable banks and State Governments to work together for inclusive growth.
  • It is necessary to broad base the scope of the scheme to cover initiatives for financial inclusion, role of State
  • Governments, financial literacy and credit counselling as also �credit plus� activities, formulate action plans to facilitate �enablers� and remove/minimize �impeders� for banking development for inclusive growth, develop grievance redressal mechanism, etc.
  • A banking outlet may be accessible to each village having population of over 2000, at least once a week on a regular basis.
  • The services may not necessarily be through a brick and mortar branch but can be provided through various forms of branchless banking including through business correspondents (BCs).

State Governments to ensure road and digital connectivity to all centers where penetration by the formal banking system is required. Full advantage may be taken of the special scheme offered by Reserve Bank to provide satellite connectivity through small VSATs in remote areas. Lead banks are expected to open a Financial Literacy and Credit Counselling Centre (FLCC) in every district where they have lead responsibility.

Each lead bank is expected to open a Financial Literacy and Credit Counselling Centre (FLCC) in every district where it has lead responsibility by following the recent guidelines issued by RBI in this regard. In urban areas, the State government machinery may assist in the opening of bank accounts where there are large settlements of households and obtaining proof of address and identity may be difficult. The Committee would urge that RBI and GOI may together work on ways to simplify KYC norms for opening bank account for small value accounts, viz. where balances do not exceed Rs.50,000/-, annual credits do not exceed Rs.1,00,000/- on the basis of a affidavit and photograph.

Written by princy

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