Lead Bank Scheme

Lead Bank Scheme (LBS) was introduced in 1969, based on the recommendations of the Gadgil Study Group.

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 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 CBs should increasingly come forward to finance activities in rural areas.

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

Area Approach

• The basic idea was to have an “area approach” for targeted and focused banking.
• The banker’s committee, headed by 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.

Why the Scheme became inactive?

• The Lead bank Scheme was not fully able to achieve its targets due to shift in policies, complexities in operations and issues shifting to the Financial Inclusion.
• 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 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 Recommendations on LBS

The Government of India had constituted a High-Power Committee headed by Mrs Usha Thorat, Deputy Governor of the RBI, to suggest reforms in the LBS.

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. 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.

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.

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:

• LBS should be continued to accelerate financial inclusion in the unbanked areas of the country.
• Private sector banks should be given a greater role in LBS action plans, particularly in areas of their presence.
• 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.

Points for Critical Examination

• 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.
• This can bring about greater participation among banks and financial institutions in achieving full financial inclusion.
• 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.
• 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
• 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.
• There is a need for revamping the District-level Consultative Committees (DLCC) and it should be a result oriented rather than a titular organisation.
• Lead bank Scheme should be an effective instrument in bringing about full and active involvement of all member banks in all efforts and schemes.