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									                   FUNCTIONS & POLICIES OF RBI IN RURAL BANKING

Though the Indian financial system has made impressive strides in resource mobilization,
geographical and functional reach, financial viability, profitability and competitiveness, vast
segments of the population, especially the underprivileged sections of the society, have still no
access to formal banking services. The September 2008 report of The High Level Committee on
Financial Sector Reforms, constituted by the Government of India in August 2007 under the
chairmanship of Dr. Raghuram G. Rajan, has recommended allowing more entry to private well-
governed deposit-taking small finance banks with stipulation of higher capital adequacy norms,
a strict prohibition on related party transactions, and lower allowable concentration norms
(loans as a share of capital that can be made to one party). Such measures would also increase
financial inclusion by reaching out to poorer households and local small and medium

In connection the above a discussion paper on Entry of New Banks in the Private Sector
released by RBI in August 2010 suggests an option of allowing industrial and business houses to
take over RRBs in addition to other options like permitting industrial and business houses to
promote banks or allowing Industrial and business houses that have predominant presence and
experience in the financial sector

Further RBI guidelines on entry of new banks in the private sector issued in 2001 stipulated the
new bank will have to observe priority sector lending target of 40 percent of net bank credit as
applicable to other domestic banks and a new bank was also required to open 25 percent of its
branches in rural and semi-urban areas to avoid over concentration of their branches in
metropolitan areas and cities on the same lines as new private sector banks established under
guidelines laid down by RBI in January 1993. The discussion paper suggested one of the options
to maintain the status quo of this stipulation and the other option suggested is business model
oriented thrust on financial inclusion. The business model could be required to clearly articulate
the strategy and the targets for achieving significant outreach to clientele in Tier 3 to 6 centers
(i.e. in populations less than 50000) especially in the under banked regions of the country either
through branches or branchless models.

The RBI is yet to come out with new guidelines on this.

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