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Anant Bhushan (082600024)

3rd Year Section-B

The Banking industry in India has made considerable progress especially during the last 3
decades, to emerge as one of the accredited agencies of rural development. The orientation
towards rural economy gained momentum only after nationalization of major commercial
Banks. For various reasons, they took roots mainly in the urban and metropolitan centers and
bulk of loans and advances was directed to large and medium scale industries. No serious
attempt was made by banks to finance agricultural sector.
The Co-operative Banking structure was assigned the main task of meeting credit
requirements in the rural areas. Yet, the credit gap remained unfilled even after
supplementing the efforts of co-operatives. In fact, it started widening further especially after
green revolution in mid 60’s in view of the larger and increasing credit needs of Indian
Agriculture. The above process necessitated commercial banks to join the force. This
envisaged increasing lending to sectors like Agriculture, SSI and Services with emphasis on
borrowers of small means. The Lead Bank Scheme was formulated as a model for facilitation
of economic development through the banking system, there was phenomenal growth in bank
branches and their outreach, greater emphasis on lending to the priority sectors, schemes for
alleviating poverty, impressive strides in microfinance, etc. The period also saw the
emergence of financial institutions such as NABARD, SIDBI, UTI, and NHB, which have
played a useful role in this context.


• The National Credit Council was set up in Dec. 1967 to determine the priorities of
bank credit among various sectors of the economy.
• The NCC appointed a study group on the organizational framework for the
implementation of social objectives in Oct.’68 under the Chairmanship of Prof. D R
• The study group found that the Commercial Banks had penetrated only 5000 villages
as of June’67 and out of the institutional credit to agriculture, at 39%, the share was
negligible at 1%, the balance being met by the co-operatives.
• The Banking needs of the rural areas in general and backward in particular were not
taken care of by the Commercial Banks.
• Besides, the credit needs of Agriculture, SSI and allied activities remained neglected.
Therefore, the group recommended the adoption of an area approach for bridging the spatial
and structural credit gaps. Later, All India Rural Credit Review Committee 1969 endorsed the
view that Commercial Banks should increasingly come forward to finance activities in rural
Introduction of the Scheme: Lead Bank Scheme (LBS) was introduced in 1969, based on
the recommendations of the Gadgil Study Group. The basic idea was to have an “area
approach” for targeted and focused banking.
• The banker’s committee, headed by F. S. Nariman, concluded that districts would be
the units for area approach and each district could be allotted to a particular bank
which will perform the role of a Lead Bank.
Lead Bank as Consortium Leader:
Under the Scheme, each district had been assigned to different banks (public and private) to
act as a consortium leader to coordinate the efforts of banks in the district particularly in
matters like branch expansion and credit planning. The Lead Bank was to act as a consortium
leader for co-ordinating the efforts of all credit institutions in each of the allotted districts for
expansion of branch banking facilities and for meetingthe credit needs of the rural economy.

Allotment of districts:
All the districts in the country excepting the metropolitan cities of Mumbai, Kolkata, Chennai
and Union Territories of Chandigarh, Delhi and Goa were allotted among public sector banks
and a few private sector banks. Later on, the Union Territories of Goa, Daman and Diu as
also the rural areas of the Union Territories of Delhi and Chandigarh have been brought
within the purview of LBS.

District Consultative Committees (DCCs):

The next important development in the history of LBS was the constitution of DCCs in all the
districts, in the early seventies to facilitate co-ordination of activities of all the Banks and the
financial institutions on the one hand and Government departments on the other. The DCCs
were constituted in the lead districts during 1971– 73.

District credit plan (DCP):

The second and most important phase of the LBS was formulation of DCPs and their
implementation. Although certain structural credit gaps were identified earlier, positive
measures were introduced only after nationalization of the banks. Certain sectors which were
hitherto neglected were given a priority status and banks were asked to provide credit to these
sectors in a more concerted way.

Village adoption scheme (VAS):

Under this, bank adopted some villages in their command area for intensive lending. The area
approach was not so much aimed at development of a chosen area as for avoiding the pitfalls
of scattered and unsupervised lending. In the initial stages of VAS, RBI has encouraged
banks to adopt villages as well as to avoid scattered lending.

Emergence of service area approach:

There was a need to have a close look at the quality of lending was observed that during the
five years ended 1985-86, the gross value added in agricultural sector registered a growth rate
of 2.70% per annum. With this objective in view, the Governor of RBI suggested to the Chief
executives of Public Sector Banks at a meeting held on 17.10.87 that a field study should be
carried out in different districts all over the country. Accordingly, studies were conducted in
88 districts spread over 21 states in November / December 1987and reports were submitted to
RBI. The findings of the field studies were discussed in a seminar convened by RBI on 9th
and 10th January 1988. It was attended by the Chairman of Public Sector Banks, top
executives from the Government of India and the national level institutions. Hon’ble Finance
Minister and Minister of State for Finance addressed the Seminar. The findings of these
studies threw up a major deficiency in the rural credit system viz., weak link between bank
credit and production, productivity and income levels. Scattered lending over wide area
diluted the quality of lending. Post disbursement supervision was paid little or no attention.
Several suggestions were made at the seminar for strengthening the existing rural credit
delivery system with a view to improving the quality of lending in rural areas. The most
important suggestion by all the participants was the endorsement of the new approach to rural
lending viz., SERVICE AREA APPROACH, whereby each rural and semi-urban branch of a
Commercial Bank (including RRB) would be assigned a designated area in which it could
make planned efforts towards area development in co-ordination with all the extension and
development agencies of the State Government. Large scale expansion of branches in rural
and semi-urban areas facilitated the shift.
The suggestion was formalized when the Union Finance Minister announced in his budget
speech on 29th Feb.’88 about the new scheme. The operational aspects of implementing this
approach were examined in depth by a Committee appointed for the purpose under the
Chairmanship of Dr. P.D Ojha, Deputy Governor of RBI.

Important recommendations of Dr. Ojha committee:

The Committee opined that the Lead Bank Scheme has helped in bringing a great deal of co-
ordination between Banks and Government departments through forums established at the
district and state levels. Firstly, it enabled the branches to pay concentrated attention on the
development of the area. Secondly, as the multi-agency approach has to some extent, resulted
in duplication of efforts, a new approach may help in avoiding the same. Thirdly, the
scattered lending over wide areas would give way to organized lending. Fourthly, it would
make it easier for the Branch Managers to effectively monitor the end-use of credit and assess
the impact on increase in then levels of production, productivity and incomes of the
beneficiaries. Fifthly, as the plans would be drawn up by the branch manager, he would
develop a sense of pride, motivation and involvement in the success of these plans. Forums
under lead bank scheme for co-ordination and monitoring

Lead Bank Scheme (LBS) was evolved as a framework to be more responsive to the needs of
the rural economy. The objectives of the scheme cannot be achieved unless rural lending is
properly tied to well designed programmers of development. This calls for effective co-
operation and co-ordination not only between credit institutions but also between the credit
institutions but also between the credit institutions on the one hand and the concerned
Government and other development agencies on the other. Appropriate forums had to be
created where these two agencies can meet periodically to discuss operational issues arising
from the implementation of scheme evolved by both Government and the Banks. Initially
forums were set up at the District and State Level.

Genesis of Regional Rural Banks:

Nationalisation of banks was not able to bridge the entire credit gap in the rural areas. A vast
majority of the small and marginal farmers and rural artisans remained untouched by the
banking system. Therefore, the range of institutional alternatives was widened in 1975 by
adding Regional Rural Banks (RRBs) to the banking scene which would exclusively cater to
the credit demands of the hitherto neglected segment of the rural economy. Thus, with Co-
operatives Commercial Banks and RRBs, a multi-agency approach was adopted in the rural
credit system.

Objectives of Lead Bank Scheme:

1. Eradication of unemployment and under employment
2. Appreciable rise in the standard of living for the poorest of the poor
3. Provision of some of the basic needs of the people who belong to poor sections of the
Why the Scheme became inactive:
1. The Lead bank Scheme which was launched 3 decades ago has not been fully able to
achieve its targets due to shift in policies, complexities in operations and issues
shifting to the Financial Inclusion.
2. Lack of coordination between district planning authorities and banking institutions
operating in a district on one side and between NABARD and the Lead Bank on the
other is the prominent reason which required attention. Duplication of efforts in credit
plan preparation should be avoided by empowering the plan team at the district level
3. Over the period the system of lead bank scheme and associated district-level
coordination committees of bankers has apparently become inactive.
4. There was a strong need felt to revitalize the scheme with clear guidelines on
respecting the bankers’ commercial judgements even as they fulfil their sectoral
5. Various committees like Block Level Bankers Committee, District Coordination
Committee and District Review Committee seldom function with all seriousness.
6. LBS Information System does not have any checks and balances and does not agree
with several other returns relating to Priority Sector Credit.
Usha Thorat Committee:
The Government of India constituted a High-Power Committee headed by Mrs Usha Thorat,
Deputy Governor of the RBI, to suggest reforms in the LBS.
1. The task of this penal was recommend how to revitalize the LBS , given the
challenges facing the banking sector, especially in an era of increasing privatisation
and autonomy.
2. The committee recommended the enhancing the scope of the scheme and suggests a
sharper focus on facilitating financial inclusion rather than a mere review of the
government sponsored credit schemes.
3. The committee said that most forums to monitor the implementation of LBS are being
used for routine review of the government-sponsored schemes, credit deposit ratio,
recovery performance, among others.
4. Lending under such schemes constitute 0.4 per cent of the total priority sector
lending. As such, the State Level Bankers’ Committee (SLBC) / District Consultative
Committee (DCC) could utilise its time to discuss specific issues inhibiting and
enabling financial inclusion rather than those concerning government-sponsored
Some More Points & Issues:
1. There is a strong need to revamp and revitalise the Lead Bank Scheme so as to make
it an effective instrument for bringing about meaningful co-ordination among banks
operating in a district.
2. This can bring about greater participation among banks and financial institutions in
achieving full financial inclusion.
3. The Operation problems are the major hurdles of the Lead bank Scheme. Obviously ,
financial inclusion calls for united action on the part of all banks and financial
institutions operating in a district.
4. An approach on the lines of area approach can be adopted and in each area or location
a particular bank can be given responsibility for achieving meaningful financial
5. Full computerisation and data management in all banks must be in order and the
banks involved should be able to periodically prepare and review reports, yearly draft
plans, and financial inclusion plans, from time to time.
6. There is a need for revamping the District-level Consultative Committees (DLCC)
and it should be a result oriented rather than a titular organisation.
7. Lead bank Scheme should be an effective instrument in bringing about full and active
involvement of all member banks in all efforts and schemes.
The recent review of priority sector requirements and fresh guidelines to banks issued by the
RBI has to be reinforced with appropriate review mechanisms. In the broad scheme of things
what it omitted to review was the working of Lead Bank Scheme (LBS), which had its focus
in the 1970s on branch expansion in rural areas and in the 90s on Service Area Planning that
was given a go-by post-2000.
The focus is shifting fast to ensuring financial inclusion and a host of other issues pertaining
to credit for the farm and SME sectors. But the way the LBS is currently under
implementation is not different from what it was two and half decades ago. The district
collector as chairman witnesses a laborious and routine review of the targets set for
government programmes like the Swarnjayanti Gram Swarozgar Yojana (SGSY), credit
targets under SC/ST action plan, Tribal Sub-Plan, identification of target groups by various
agencies and non-implementation of targets for various reasons that get repeated meeting
after meeting and with similar excuses. The District Collector depending on the situation
exhorts the concerned agencies to show better performance for the next review meeting. The
Credit Plans prepared invariably reflect a target hike from the previous year by certain
minimum percentage. These plans are supposed to be dovetailed with the Potential Linked
Plans (PLP) of NABARD introduced since the mid-1980s. But the Annual Credit Plans of the
Lead Bank and the PLPs of NABARD are two independent exercises. The District Planning
Officer of the state government outlines the plan for sectoral and infrastructure development.
Plan preparation in isolation by different agencies is a wasteful exercise. As a first step, it is
necessary to reinforce close coordination between district planning authorities and banking
institutions operating in a district on one side and between NABARD and the Lead Bank on
the other. Duplication of efforts in credit plan preparation should be avoided by empowering
the plan team at the district level appropriately.
The system of lead bank scheme and associated district-level coordination committees of
bankers has apparently become inactive. The lead bank scheme needs to be re-invigorated
with clear guidelines on respecting the bankers’ commercial judgements even as they fulfil
their sectoral targets.
Expectation from Lead Bank Scheme: Access to Banking Facility in Every Village
The key driver of our vision of an inclusive society and an inclusive economy is Financial
Inclusion. Over the years, multiple definitions of Financial Inclusion have been given
including the one given by Rangarajan Committee on Financial Inclusion (2008). To define
e-Financial Inclusion, one could extrapolate the above and state as “innovative applications
of Information and Communication Technology for delivery of financial & payment services
and adequate credit where needed, at an affordable cost to the vast section of is advantaged
and low-income groups, who currently are unbanked.”

Private sector banks need to involve themselves more actively in the lead bank scheme (LBS)
by bringing in their expertise in strategic planning and leveraging information technology.

Role and Set-up of LDM’s Office:

The Committee recommended strengthening of the office of Lead District Managers (LDMs),
posting persons of appropriate level and attitude as also providing appropriate infrastructural
support, it being the focal point for successful implementation of the Lead Bank Scheme.

Financial Literacy and Credit Counselling:

Each Lead Bank should open a Financial Literacy and Credit Counselling centre in each
district by following the guidelines issued by the Reserve Bank.

Quarterly Public Meeting at District Level for Awareness and Feedback:

The Lead District Manager may convene a quarterly public meeting at various locations in
the district where the Reserve Bank, banks having presence in the area and other stakeholders
are present to generate awareness of the various banking policies and regulations relating to
the common person, obtain feedback from the public and provide grievance redressal to the
extent possible at such meeting or facilitate approaching the appropriate machinery for such

Initiative for Urban Areas:

Banks having the largest presence in each city with more than one million population (to start
with) may take the leadership in convening a meeting of bankers and allocating responsibility
for various wards to different banks, to ensure that all urban households have easier access to
banking services.
Greater Role for Private Sector Banks:

Private sector banks should involve themselves more actively by bringing in their expertise in
strategic planning and leveraging on information technology. The Lead Banks, on their part,
should also ensure that private sector banks are more closely involved in the Lead Bank
Scheme, both while drawing up and in implementing the Annual Credit Plans

Financial Inclusion:

Of the nearly six lakh inhabited villages in the country, 1.09 lakh villages have a population
of over 2,000.The Reserve Bank of India should ask banks to establish linkages with NGOs
for facilitating and channelling credit to low income households. It should also ask banks to
use well-run primary agricultural credit societies (PACS) as business correspondents (BCs).
District Consultative Committee (DCC) may draw up a road map to provide services through
a banking outlet, such as, brick and mortar branch, mobile banking, extension counters,
satellite offices or Business Correspondents -- at every village with a population of over

Setting up Rural Credit Bureau:

Rural credit bureaus may be set up at district level by lead bank offices and credit rating of all
rural customers may be targeted.

LBS in Urban Areas:

The urban areas are largely outside the Lead Bank Scheme. The concept of tackling financial
inclusion in these areas is different. In urban areas, like in Mumbai, there are migrant
labourers. These migrant labourers lack the knowledge of banking facilities. What they are
looking for besides opening up an account is the facility of remittance. They either make use
of these informal methods of remittance or carry cash themselves when they go home. Now
that core-banking solutions have come, anywhere, anytime banking is possible; there is a
need to spread this message especially in the urban metropolitan areas.
Manpower in Lead Bank Scheme:
Adequately qualified officers with flair for co-ordinating and development work must be
identified and posted as Chief Lead District Manager. The RBI must give adequate
importance to the scheme and its revamp and revitalisation. The Regional Director of the RBI
in each State must take the scheme seriously so that all banks can involve themselves fully in
the scheme and its implementation