Articles from General Knowledge Today

Lead Bank Scheme

2010-01-03 04:01:00 GKToday

Background:
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 Gadgil.
The study group found that the Commercial Banks had penetrated only 5000
villages as of June67 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 CBs should increasingly come forward to finance
activities in rural areas.
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 bankers 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 meeting the 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.
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 society
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

3.
4.
5.
6.

empowering the plan team at the district level appropriately.

Over the period the system of lead bank scheme and associated district-level
coordination committees of bankers has apparently become inactive.
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 targets.
Various committees like Block Level Bankers Committee, District
Coordination Committee and District Review Committee seldom function with
all seriousness.
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:

1. 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.
2. 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.
3. 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.
4. 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.
5. 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 schemes.
The following were the recommendation of Usha Thorat Committee:
1. LBS should be continued to accelerate financial inclusion in the unbanked
areas of the country.
2. Private sector banks should be given a greater role in LBS action plans,
particularly in areas of their presence.
3. Enhance the business correspondent model, making banking services
available in all villages having a population of above 2,000, and relaxation in
KYC (know your customer) norms for small value accounts.
" The review on LBS has been made with a focus on financial inclusion
and in view of the recent developments in the banking sector. The
scheme has been found useful to promote financial inclusion in the
country. Hence it should be continued" - Usha Thorat May 22, 2009
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 inclusion
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.