Rural and Co-operative Credit: NABARD and the RRBs

In one line

Rural credit in India is delivered by three separate structures built at different times: the co-operatives, the regional rural banks, and the commercial banks, with NABARD sitting above all of them.

In the wording a student can write in an exam: rural credit is delivered through the three-tier short-term co-operative credit structure of primary agricultural credit societies, district central co-operative banks and state co-operative banks, together with the long-term structure; through regional rural banks established under the Regional Rural Banks Act, 1976, sponsored by commercial banks with capital shared between the Central Government, the State Government and the sponsor bank; and through the commercial banks under their priority sector obligation; with the National Bank for Agriculture and Rural Development, established under the NABARD Act, 1981, as the apex refinancing and supervisory institution.

Why there are three structures and not one

Because each was built when the one before it was found wanting, and none was abolished. That single sentence explains the whole confusing map, and it is the frame an examiner wants.

The co-operatives came first, from the Co-operative Credit Societies Act, 1904, on the theory that farmers would lend to each other better than an outside institution would lend to them. They spread widely but were chronically weak: undercapitalised, politically captured in many States, and dependent on Government support.

The commercial banks were brought in next, by nationalisation in 1969 and the priority sector obligation, on the theory that large well-run banks could do what the co-operatives could not. They opened branches in enormous numbers, but a commercial bank's staff, costs and procedures were built for urban lending, and reaching the small rural borrower remained expensive.

The regional rural banks were the third attempt, in 1975 and 1976, and their design is a deliberate compromise between the two failures: the local feel and low cost of a co-operative, combined with the professional discipline and capital of a commercial bank. Hence the sponsorship structure.

NABARD came in 1982 because all three needed refinance and supervision from one place, and because the Reserve Bank wanted to hand that work to a dedicated institution.

The co-operative credit structure

The short-term structure has three tiers.

At the bottom, the primary agricultural credit society, in the village, whose members are the farmers themselves. It is a society, not a bank, and section 3 of the Banking Regulation Act excludes it from that Act altogether provided it does not use the banking words, as chapter 50 records.

In the middle, the district central co-operative bank, whose members are the societies of the district.

At the top, the state co-operative bank, the apex for the State, which is where NABARD's refinance enters the structure.