Rbi Cracks Down On Local Area Bank

The cancer in the Indian banking sector is spreading fast. From new private, old private and cooperative banks, the disease has spilled over to local area banks (LAB). The Reserve Bank of India is set to close Vinayak Local Area Bank Ltd in Sikar, Rajasthan.

According to sources familiar with the development, the bank had extended loans to companies in Delhi, Chennai and other places outside Rajasthan, violating the spirit of a LAB whose area of operation is supposed to be confined to a maximum of three geographically contiguous districts.

This will be the first case of a LAB being shut for large-scale funds diversion.

LABs were conceived by former finance minister P Chidambaram as a means of providing an organised source of finance for rural India in place of the traditional and unorganised funding sources. In his Budget for 1997, Chidambaram had announced that LABs would be set up. The Reserve Bank of India in August 1996 allowed the establishment of new local banks in the private sector to encourage rural and semi-urban savings and to provide institutional credit for viable economic activities in local areas.

The central bank has already slapped a show-cause notice on the bank and the bank may fold up over the next few weeks. An RBI spokesperson confirmed the development. However, depositors